Despite a Dividend Hike, How Kinder Morgan Is Weighing on MLPs
Any MLP that is raising a distribution, or an MLP-like company raising its dividend, is impressive in the current energy climate. That being said, if the access to capital is now having to be from alternative sources (rather than equity interests or traditional debt offerings) that might spook even the most sturdy MLP investors, if that remains a key issue ahead.
Janney Capital Markets has no rating on Kinder Morgan, and it said:
Because of the decline in their share price, Kinder Morgan now has no plans to issue equity over the next 9-12 months and will instead use alternative sources of financing… The market may already be pricing in slower growth given the 30% pullback in the last 6 months. In addition, the elimination of the equity issuance overhang was an unexpected positive.
Here were some of the comments from the Merrill Lynch report. Again, the firm has a Buy rating:
We view higher dividend coverage as arguably prudent, but think new guidance a significant departure from Kinder Morgan’s historical preference to maximize dividend growth at the expense of dividend coverage.
Kinder Morgan announced it expects to execute on an alternative source of equity funding that has lower expected long-term cost of capital than KMI common shares – although a lack of details on the form, timing, or scope of the alternate financing is frustrating. As a result of this alternative financing, management does not expect to tap the equity markets through the first half of 2016 in any form (At-the-money or marketed offerings). This move could alleviate technical pressure on Kinder Morgan’s stock, in our view. We do not incorporate any lower-than-market source of equity funding in our estimates and, depending on specific terms, this source of alternative funding could provide upside to our revised estimates.
Kinder Morgan has taken several downgrades or seen lowered price targets so far on Thursday:
- Barclays retained its Overweight rating, but it slashed the price target to $36 from $46.
- Bank of America Merrill Lynch maintained its Buy rating but lowered its price objective to $42 from $44.
- Stifel Nicolaus downgraded it to Hold from Buy.
- Credit Suisse downgraded Kinder Morgan to Neutral from Outperform with a $39.00 price target.
- RBC Capital Markets maintained its Outperform rating but lowered its target to $36 from $39.