Kinder Morgan Inc – So Bad It’s Finally Good? (KMI)

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Another one of the semi-iconic oil names has finally fallen. Pipeline owner and operator Kinder Morgan (KMI), which had held up far better than most of its peers since the meltdown in oil, lost 12% of its value over the course of Tuesday and Wednesday, moving deep into new low territory in the process.

Kinder Morgan Inc - So Bad It's Finally Good? (KMI)KMI stock is now down more than 50% from its April peak, and is presently priced at record low levels — a stretch that extends all the way back to its 2011 IPO, which issued at $30 per share.

The reasons for the pullback are both understandable and plentiful; and if Wednesday’s drubbing is any indication, the proverbial straw has finally broken the camel’s back. The volume behind Wednesday’s selloff was nothing less than enormous.

And yet, that volume surge for KMI may also be a subtle sign that Kinder Morgan shares may finally have a bottom in sight.

Reasons to Hate Kinder Morgan – Take Your Pick

The bulk of this week’s trouble for KMI stems from a pseudo-downgrade of its credit rating by corporate credit rating agency Moody’s.

In short, Moody’s lowered its opinion on Kinder Morgan’s ability to repay debt from stable to negative after Kinder Morgan opted to ramp-up its ownership of Natural Gas Pipeline Company of America LLC from 20% to 50%.

The new assessment did not alter Moody’s specific grade for the bulk of Kinder Morgan’s debt, which still stands at Baa3. But a negative view from Moody’s can still force the pipeline company to pay greater financing costs in the future, one way or another.

As SunTrust analyst Robinson Humphrey explained:

“Given the leverage situation, NGPL will require some sort of infusion and/or recapitalization in the near term. The options to Kinder include additional equity to recap NGPL which the company already has indicated is costly, or debt to recap NGPL… In the case Kinder borrows to recap NGPL, the company exacerbates its largest capital overhang (namely its high leverage). Our projections and $38 price target (based on target yield of 5.7%) for KMI are unchanged; however, we expect the call on capital is likely to increase with the transaction.”

It wasn’t a point of view held by everyone. The pro-KMI crowd was quick to point out that the additional stake in NGPL will improve Kinder Morgan’s ability to continue paying its attractive dividend and making its interest payments. The market as a whole, however, was not impressed.

Further, KMI stock was deep in the red Wednesday because it owes $171 million back to shareholders after overpaying for a deal done last year, and the U.S. currently has more oil stockpiled than we need or know what to do with.

Yeah, But…

Truth be told, all of the concerns surrounding Kinder Morgan have merit. It’s also true, however, that the worst-case scenario rarely materializes. KMI isn’t likely to be an exception to that rule.

In other words, today’s visit to jaw-dropping new lows wouldn’t be a horrible time to step in.

It’s not a trade for the faint of heart, mind you. A bet on any oil and gas player right now is a bet that oil and gas are ready to recover — a difficult idea to embrace on the same day crude oil lost 4% of its value on oversupply concerns.

Kinder Morgan (KMI) Capitulation
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The flipside is, with Thursday’s news, and subsequent setback for crude, oil prices are still holding above their long-term low hit in late August. It’s entirely possible we may be at or near the market’s absolute “uncle” price on oil, where the supply immediately starts to dry up and production grinds to a halt.

And we can’t discount the distinct possibility that the bulk of the recent pullback from KMI is more psychological than fundamental. If that is indeed the case, then Wednesday’s volume surge may well become the pivotal point where the last of any would-be sellers have finally dumped their shares (a capitulation) leaving only the bulls behind.

Bottom Line on KMI Stock

In all fairness, KMI’s dividend is probably at least partially vulnerable. Its ability to make interest payments is likely to face pressure sooner rather than later.

That’s OK, though.

Even a portion of the current dividend yield of 10% is still better than average, and the company will find some way to deal with its debt servicing requirement. And if oil perks up at all, that could be huge.

In other words, there’s a chance the bears overshot with this one. Just keep KMI stock on a short leash if you’re willing to take a swing.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/12/kmi-stock-kinder-morgan-energy-stocks/.

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