When Kinder Morgan Inc (NYSE:KMI) decided to bring its Master Limited Partnerships (MLP) back into the company and trade as one stock, in 2014, analysts cheered.
It didn’t turn out that way. Since the structure change became final, KMI has lost more than 60% of its value, despite a continuing stream of dividends that currently yield 3.26%.
Meanwhile Enterprise Products Partners L.P. (NYSE:EPD) was among those which kept the MLP structure through the downturn and, while it hasn’t exactly prospered, the stock is down only 20%. Its dividend now yields nearly 7%.
But is this all about corporate structure, or is something else going on?
The Structure Story
It helps if you understand the difference between a corporate structure like that of Kinder Morgan and the MLP structure of Enterprise Products.
A MLP is just what it sounds like. You’re a partner. That means profits flow directly to you, but so do losses. It also means you must file additional papers with the IRS every year, namely a complex K-1 form.
In a corporate structure, like that of Kinder Morgan, the corporation can hold the losses, and choose to distribute profits, or not. KMI originally chose this route to control cash. But when things go bad, as they did in 2015, it is scant protection for shareholders. During 2015, the height of the oil crash, KMI cut its dividend by 75%, and the stock just hasn’t recovered. EPD cut its dividend before KMI, but has since been delivering a rising dividend, 42.5 cents per share during the last quarter.
Since MLPs are required to pay out 90% of their income as dividends, they must also fund capital projects with debt, which increases their risk. EPD, for instance, has more debt than equity on its books, and that’s not unusual. KMI’s continuing investment in its network means it also has a lot of debt as the equity has kept falling even while it has tried to reduce debt, by $6 billion since 2015.
KMI Still Essential
One reason you don’t see big headlines about “bomb trains” in 2018 is because falling demand for oil in the middle of the decade moved crude into cheaper, safer pipeline networks, which also condition (pre-heat) the product to extract volatile, valuable liquids. KMI is the biggest pipeline owner around. And it’s called a “midstream” company because its facilities are between oilfield developers and refiners. The liquids can also be used to make crushed bitumen, the “oil sands” of Alberta, transportable by pipeline.
In addition to running crude and natural gas liquids, KMI also runs gas pipelines and “product” lines. These deliver refined gasoline from refineries to terminals from which trucks take it to stations.
Right now, KMI is all over the news again because it wants to expand one of its crude lines, the “Trans Mountain” line that runs from Alberta’s oil sands to refineries and terminals in British Columbia. Alberta wants the new line, but British Columbia does not, and KMI has halted work while the country decides what to do, exerting political pressure.
Assuming the work is resumed, KMI shareholders will benefit, both from the increased volumes and the use of liquids for use in transport.
The Bottom Line for Kinder Morgan
Once it gets past the political rough patch, Kinder Morgan should have strong cash flow. Its current lack of profitability is due mainly to low natural gas prices, which have run below $3 per mcf for three years now.
The hope is that export terminals like that of Cheniere Energy, Inc. (NYSEAMERICAN:LNG) will soak up excess supply and allow for a rebound in prices. Assuming it happens, Kinder Morgan will benefit more than most, and the stock will recover.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at [email protected] or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story.