Kinder Morgan Inc. (NYSE: KMI) reported earnings on Wednesday. While the company did raise its dividend, its dividend growth projection for 2016 was lower than it had previously said. Honestly, this should have been no surprise whatsoever to any investors who understand the current environment and the implications if the current price pressure persists. What was a surprise, on the other hand, was what Kinder Morgan said — and what it did not say — about its access to the capital markets.
Kinder Morgan is no longer classified as a master limited partnership (MLP). That does not mean that its relevance to MLPs has vanished, and many closed-end MLP funds still own Kinder Morgan as a result. It is no secret at all that MLPs have had to rely on access to the capital markets. After all, their distributions are not just based on income. They have a return of capital component to them.
As a result of the Kinder Morgan comments, and being vague about its plans to access new capital, the entire MLP sector has suffered along with Kinder Morgan. It is amazing that the street seems surprised at all that Kinder Morgan’s dividend growth might need some modesty. Still, it now looks as though Kinder Morgan will not be issuing new stock through mid-2016, based on the conference call and on its dividend outlook statement from its press release.
The real issue here is about the access to the capital markets. Here is what Chairman and CEO Richard Kinder said, with key issues emphasized:
While we are largely insulated from commodity price impacts due to our predominately take-or-pay supported cash flows, we are not totally immune.
As a company, we remain focused on our goals to continue to return cash to our shareholders in increasing amounts, to maintain our investment grade ratings and leverage targets while funding our business in the most efficient and economical way possible. We believe an appropriate response to the challenging current equity markets is to identify alternative funding sources that help us meet our goals and have a lower expected long-term cost of capital than our common equity. We have identified alternative sources and have selected one of these to pursue, as appropriate, to meet our equity funding requirements for the balance of 2015 and for the first half of 2016. This would eliminate our need to access the common equity markets through mid-next year. Additionally, while we are at the beginning of our budget process for 2016, we currently expect to increase our declared dividend for 2016 by 6 to 10 percent over the 2015 declared dividend of $2.00 per share. We expect this range will provide the flexibility for us to meet our dividend and have excess cash coverage.
The issue is that the source of the alternative sources, nor what this alternative may cost, was not disclosed in the conference call. On last look, Kinder Morgan shares were down 6.9% at $29.25, within a 52-week trading range of $25.81 to $44.71. The spillover has been significant even in the stronger MLP leaders.
The Alerian MLP ETF (NYSEMKT: AMLP), the key exchange traded fund (ETF) for MLPs, was last seen down 2.3% at $13.31. It has a 52-week range of $11.48 to $19.08, and it is listed at the ALPS website of having over $7.5 billion in net assets.
Enterprise Products Partners L.P. (NYSE: EPD), worth some $52 billion, was last seen down 3.7% at $26.14. It has a 52-week range of $22.01 to $40.12 and a consensus analyst price target of $37.05.
Energy Transfer Equity L.P. (NYSE: ETE) is worth $22.7 billion, and Energy Transfer Partners, L.P. (NYSE: ETP) is worth $21.4 billion. The Energy Transfer Partners was suffering more on Thursday, with a drop of 3.8% to $43.80. It has a 52-week range of $36.84 to $69.66 and a consensus price target of $60.85.
Plains All American Pipeline L.P. (NYSE: PAA) was last seen down 2.5% at $30.91, with a 52-week range of $26.71 to $56.98. Plains All American also has a market cap of $12.3 billion and a consensus price target of $43.69. Its distribution rate (yield equivalent) now screens out at 9% or so.