Highlights From Kinder Morgan’s Earnings Release

Kinder Morgan (KMI) released disappointing earnings last night that sent the stock lower after hours. But the stock is rallying hard today, as there seems to be a light at the end of the tunnel. Here are some highlights.

From Richard Kinder:

We are pleased with KMI’s business performance for the year especially in light of a tremendously challenging commodity environment, and we are glad to have generated the greatest amount of annual distributable cash flow in the company’s history along with a 7 percent increase in our DCF per share year-over-year,” said Richard D. Kinder, executive chairman. “However, we were disappointed by KMI’s stock performance, which declined 65 percent during 2015.

Disappointed? You and me both, Richard!

As Kinder continuesL

“The decision to reduce our dividend was very difficult and was a direct result of the rapid and significant disconnect between the performance of our business and the performance of our stock. We believe this bold move is in the best interest of the company and our shareholders. We expect the reduced dividend has completely eliminated our need to access the capital markets to fund growth projects in 2016. This insulates us from challenging capital markets and significantly enhances our credit profile. Moreover, by reducing the dividend and high-grading our backlog, we do not expect to need to access the capital markets to fund our growth projects for the foreseeable future beyond 2016.

“Additionally, as our future cash flow exceeds our investment needs, we are in an improved position to return value to shareholders. While the markets appear to have begun 2016 on the same sour note on which they left 2015, we are confident that we are one of the best positioned companies to withstand these headwinds.”

While 2015 was a miserable year for shareholders, I agree that management did the right thing in slashing the dividend. It’s in the long-term best interest of the shareholders. I have no idea when the credit markets will return to “normal,” and neither does Kinder’s management team. This takes that question out of the equation.

I also found this interesting:

“As a result of the current challenging capital markets, we are focused on high-grading our backlog to allocate capital to the highest return opportunities, including efforts to reduce spend, improve returns and selectively joint venture projects where appropriate. We have reduced our expected 2016 spend by approximately $900 million, reduced our backlog by $3.1 billion from the third quarter of 2015 and expect further reductions in the coming months as we continue to high-grade our capital investments.

KMI is prioritizing by choosing the best capital projects and leaving the less profitable ones undone. That shows a new discipline we didn’t see in the era of cheap, abundant capital.


The company’s outlook for the next year seems reasonable:

On Dec. 8, 2015, KMI issued its preliminary financial projections for 2016. Since providing this guidance, the company has updated its 2016 budget to reflect current commodity price and foreign exchange rate expectations as well as its high-graded investment plan. As a result, for 2016, KMI expects to declare dividends of $0.50 per share, generate approximately $4.9 billion of distributable cash flow available to equity holders and approximately $4.7 billion of distributable cash flow available to common shareholders (i.e., after payment of preferred dividends) and generate approximately $3.6 billion of cash flow in excess of its dividend. KMI’s revised growth capital budget for 2016 is approximately $3.3 billion which is a reduction of approximately $900 million from the preliminary 2016 guidance. These expectations assume an average 2016 West Texas Intermediate (WTI) crude oil price of $38 per barrel, an average 2016 Henry Hub natural gas price of $2.50 per MMBtu and interest rates consistent with the current forward curve.

The overwhelming majority of cash generated by KMI is fee-based and therefore is not directly exposed to commodity prices. The primary area where KMI has commodity price sensitivity is in its CO2 segment, where KMI hedges the majority of its next 12 months of oil production to minimize this sensitivity. For 2016, the company estimates that every $1 per barrel change in the average WTI crude oil price impacts distributable cash flow by approximately $7 million and each $0.10 per MMBtu change in the price of natural gas impacts distributable cash flow by approximately $1.2 million.

At current prices, I don’t see a lot of risk in KMI stock. It will probably be a few years before we see new highs. But starting at today’s prices, and given the unattractive valuation of the market in general, KMI would seem like a safe bet for outperformance.

Charles Sizemore is the principal of Sizemore Capital. As of this writing, he was long KMI.


Insiders Dumped $100 Million Into Enterprise Products This Week

Founding family of $EPD just dumped $100 million into the stock… http://stks.co/j3i7w …and company announced a 5.2% dividend hike.

— Charles Sizemore (@CharlesSizemore) Jan. 5 at 03:36 PM

Randa Williams, chairman and daughter of Enterprise Product Partners (EPD) founder Dan Duncan, just dropped over $100 million of her own money into EPD stock this week. And it’s not the first major purchase she’s made in the last 12 months:

InsiderDateSharesTrade PriceCost
WILLIAMS RANDA DUNCAN1/4/20163,830,256$26.11$100,008
WILLIAMS RANDA DUNCAN3/13/20153,225,057$31.01$100,009
WILLIAMS RANDA DUNCAN3/2/20151,498,055$34.00$50,933
WILLIAMS RANDA DUNCAN3/2/20155,992,220$34.00$203,735

Over the past year, Williams has invested nearly half a billion dollars of her own money into EPD. Now granted, she’s worth $5 billion, according to Forbes. But that still represents about 10% of her entire net worth.

I have no way of knowing when MLPs will officially bottom. It’s possible that they already have…or they may well take another leg down. But I can say this: The people running them are backing up the proverbial truck, so they clearly see brighter prospects ahead.

Oh, and by the way. Amidst all the talk of distribution cuts, EPD just announced that it planned to raise its distribution by about 5% in the coming quarter.

Disclosures: Long EPD.

Charles Lewis Sizemore, CFA, is the chief investment officer of investment firm Sizemore Capital Management. 

Best Stocks for 2016: Energy Transfer Equity is Beaten Down and Ready to Rally

This piece first appeared on InvestorPlace as part of its Best Stocks for 2016 contest. There are several excellent picks this year, and the competition promises to be fierce!

If you’ve read my work for any length of time, you know I’m not a major risk taker. In my experience, slow and steady wins the race.

That was my rationale for recommending Prospect Capital (PSEC) in last year’s Best Stocks contest. I reasoned that a diversified private equity portfolio trading at a deep discount to book value was a low-risk investment with a high probability of generating a market-beating return. Between a return to book value and the high dividend, I expected total returns of as high as 40% within 12 to 18 months.

Well, we didn’t quite get there, or at least not yet. The value investor’s eternal problem is that a cheap stock can stay cheap for a lot longer than you expect. But at least we were paid handsomely to wait with PSEC’s dividend.

This year, I’m recommending another beaten-down value stock with a high dividend (technically a “distribution” in this case), MLP general partner Energy Transfer Equity (ETE).

A look at Energy Transfer Equity’s stock chart will give you heartburn. Serious heartburn. ETE shares lost more than half their value between July and December, as the entire midstream MLP space got hammered. But at today’s prices, Energy Transfer Equity gives us exposure to one of the world’s premier energy transportation company at prices I do not expect to see again in our lifetimes. Furthermore, I believe that much of the drop we saw in December was due to indiscriminate selling by investors fleeing the entire sector rather than due ETE’s prospects.




Energy Transfer Equity is an MLP, but it’s a peculiar kind in that, rather than own pipeline interests itself, its primary role is to serve as a general partner to a collection of other MLPs. In this sense, ETE has a lot more in common with Kinder Morgan (KMI) before its reorganization late in 2014 than it does with most other “traditional” MLPs.

You can explain Energy Transfer’s company structure with two words: “It’s complicated.” Energy Transfer Equity is the head of a sprawling energy empire consisting of six companies that are currently traded today: Energy Transfer Equity, Energy Transfer Partners (ETP), Williams Partners (WPZ), Sunoco LP (SUN), Sunoco Logistics Partners LP (SXL), and Williams Companies (WMB), which is not shown in the chart below because it is in the process of being rolled into ETE. A final entity — Energy Transfer Corp (ETC) — is to be formed in 2016 and will be similar in structure to other corporations operating in the midstream MLP space, such as Kinder Morgan and OneOk (OKE).



Taken together, the consolidated Energy Transfer empire will has bigger network of pipelines that either Kinder Morgan or Enterprise Products Partners (EPD), at 104,000 miles. It’s the largest transporter of natural gas in the U.S. (moving 35% of all natural gas in America), the third-largest natural gas liquids business, the third-largest MLP crude oil transporter, and has the second-largest liquefied natural gas export facility planned. Quite simply, Energy Transfer is the proverbial 800-pound gorilla in the midstream energy space.

Looking at ETE Stock

When I evaluate a stock, I like to have four basic criteria in place:

  • The stock should be on the right side of a durable macro trend.
  • The stock should be cheap.
  • The stock should be shareholder friendly.
  • Management should have “skin in the game” in the form of insider ownership and buying.

Not every stock I buy will have all four criteria in place, but ETE most certainly does.

I’ll start with the most controversial point: That ETE is on the right side of a durable macro trend. That might sound like an odd thing to say given that crude oil prices are in free fall and the entire energy industry is in a state of crisis right now. While ETE has virtually no direct exposure to falling crude oil prices, some of its subsidiaries have at least indirect exposure in that a prolonged depression in energy prices would affect domestic energy production and the volume of oil and gas flowing through their pipelines.

I consider this exposure manageable. Meanwhile, I still consider U.S. natural gas exportation to be one of the major macro themes of the years ahead, as importers look to lessen their dependence on Russia and the volatile Middle East. (I’m not alone in this belief. Consider Seth Klarman and Carl Icahn’s massive investments in Cheniere Energy (LNG), which I highlighted here.)

Moving on, let’s look at value. After losing more than half its value, value investors are bound to start sniffing around ETE. But are the shares truly cheap at these prices?

Yes. I start with the distribution yield, which at 9.6%, is about as high as its ever been in the company’s history. Yes, as we saw with Kinder Morgan, even sacrosanct dividends can be cut. But in ETE’s case, the underlying MLPs fueling the distribution are a lot less levered and thus at less risk of a cut. As an example, Energy Transfer Partners is leveraged about 4.75 times (debt/EBITDA).  Kinder Morgan is leveraged over 6 times, though it is in the process of deleveraging itself.

As of last quarter, ETE’s distribution coverage ratio was 1.09. ETP’s coverage ratio was lower last quarter, at just 0.97 for the first nine months of the year. Yet management was confident enough that cash flows will improve in 2016 that they raised the distribution by 2 cents per share last quarter.

Using the trailing four quarters of distributable cash flow (“DCF”), ETE trades at a price/DCF ratio of 9.9. That is remarkably cheap for any MLP, particularly a general partner growing its distribution at a rapid clip.

That brings me to my next criteria: Shareholder friendliness. ETE has been an absolute monster when it comes to raising its cash payout.


Over the past year, ETE has raised its dividend by a full third, and it’s more than doubled its payout since 2011.

In a recent CNBC appearance, CFO Jamie Welch hinted that distribution growth might slow a little in 2016, owing to the company’s desire to keep leverage under control in this credit environment. ETE doesn’t want to be “the next Kinder Morgan” and be forced to cut its payout later. (I recommend you watch Welch’s interview. It’s gives a decent bit of insight into ETE’s prospects over the coming years.) But Welch makes it clear that ETE will still have “significant” distribution growth in 2016.

We’ll see about that growth. Energy Transfer might decide to play it safe, hoard cash, and keep its payout constant. But even with zero distribution growth in 2016, you’re looking at fantastic potential total returns.

And finally, we come to insider activity. ETE’s executives have a massive amount of skin in the game. Company founder Kelcy Warren dropped over $41 million of his own money into the stock in early December. This is after he already dropped $63 million in July, $19 million in January… and $80 million last fall.

That’s about $200 million in insider buying by just one man. Yes, Warren is a billionaire. Forbes pegs his net worth at $3.2 billion. But that still shows major commitment from one of the smartest men in the energy industry.

What kind of returns do I expect for Energy Transfer Equity in 2016?

Starting at today’s prices, I would say returns of 50%-100% in 12-24 months is possible.

So, what are the risks?

Alas, there are no free lunches in this business. The entire MLP space is currently under attack, and as we saw with Kinder Morgan, bad things happen when the credit markets turn negative on a company. Should Wall Street decide that the entire MLP model needs to be scrapped, and all existing MLPs need to deleverage, then ETE will get hit along with the rest of the sector.

That said, at today’s prices, there is a lot of fear already priced in. ETE is a steal, and I expect it to trounce the competition in InvestorPlace’s contest this year.

Disclosure: Long ETE, EPD, KMI, OKE

Charles Lewis Sizemore, CFA, is chief investment officer of the investment firm Sizemore Capital Management and the author of the Sizemore Insights blog.

Follow Up to “After the Teekay Dividend Cut”

Teekay dividend cut

It’s been about a week and a half since Teekay (TK) slashed its dividend to the bone and the stock price imploded (see “After the Teekay Dividend Cut…Now What?“).

In the aftermath, I recommended holding on to the shares. At the lows for the day, TK was trading at 80% of tangible book value and at about half of accounting book value. This was a company that, as recently as June, was confident enough to raise its dividend by 75%.

The stock price blow up had nothing to do with Teekay’s operations, which are fine. And it really had very little to do with energy prices for that matter. It had everything to do with the health of the capital markets. Teekay — or more accurately its underlying MLPs (TGP) and (TOO) — legitimately feared that, despite its consistent cashflows backed by long-term contracts, it would be locked out of the capital markets. It effectively already had been locked out of the equity market by the collapsing stock price (issuing new shares at current prices would be prohibitively dilutive to existing shareholders). And with the bond markets looking shaky, counting on the good graces of the bond market was a risk that management wasn’t willing to take.

I recommended holding on to any shares of TK until the price recovered to at least $10 per share. Well, we’re there…so now what?

I’m holding on to my shares for now. I expect the entire MLP sector to enjoy a major reflation in the first half of 2016. With the overall market looking pricey and with growth prospects looking pretty grim, I expect value hunting to be the order of the day. And after the beating that the MLP space has taken in 2015, this is one of the few pockets of value out there.

So…I recommend holding on to TK for a while. It may be years…or even a decade…before we see $50 per share again. But I think we may see $15 to $20 within the next year.

Disclosures: Long TK