Co-Founder, Chairman, and CEO
Rich Kinder officially reached “irked” status on Friday with the recent stock performance of Kinder Morgan, Inc. (NYSE: $KMI). The gargantuan (or mucho for my Texas friends) GP hit a 52 week low of $30.93 the day before, as analysts again raise concerns over $KMI’s ability to grow distributions from such a large base ($100+ Billion enterprise value for the family of $KMI companies) in a rising interest rate environment. Mr. Kinder is an investors CEO, often in the market buying the stock on dips. In the month of February 2014 alone he made three separate purchases that totaled 400K shares at a cost of $12.7 million (not bad for a guy that takes in a salary of just $1 a year) for an average price of $31.70 per share. His open market purchases are normally enough to encourage investors to get behind the stock and establish a floor on the price, but instead it’s been the case of “how low can she go.”
The company’s Friday press release was entitled “Kinder Morgan Expects to Meet or Exceed 2014 Financial Expectations.” The presser seems to be completely market / steam coming out of Rich’s ears driven as it provides no new information. It simply reiterates the companies $14.8 billion backlog and budgeted dividend growth of 8% over the prior year ($1.72 per share), both of which were well telegraphed back at the $KMI analysts day on January 29. The fact that $KMI emphasizes “exceed” is also not news, as Rich is known for fully deploying the UPOD (under promise and over deliver) theory when it comes to distribution growth.
The stock reacted positively to the Friday news, up more than 2% in a down market tape. The fact remains though that presser’s alone will not solve $KMI’s tired stock performance. Over 50% of the company’s backlog is tied to a single Canadian pipeline project and it’s also concerning that just two years after $KMI absorbed El Paso the growth story is gone. However, investors get paid a 5% yield to wait around and if history tells us anything its to never bet against Mr. Kinder.
Yesterday Anadarko Petroleum ($APC) filed an S-1 registration statement to take the General Partner of Western Gas Partners $WES public. The GP will be named Western Gas Equity Partners, LP and trade under the ticker $WGP. $WGP will own the 2% GP interest in $WES, all of the Incentive Distribution Rights (IDR’s), and a 47% limited partner interest in $WES. Basically the GP’s only asset will be its investment in $WES and its preferential right to a larger portion of the cash distributed.
This is a great potential long term investment for those yield hungry investors. $WES is only 5 years old and $APC has billions in midstream assets for potential drop drowns, which 2013/2014 could see significant growth in distributions. The table below represents the “hypothetical” distributions for $WGP over the next six years. Basically this table tells investors you can buy $WGP and if management executes on the plan in the next six years we plan to increase distributions by 60%. That does not include the likely rise in the equity value of $WGP as the units increase in value in harmony with distribution growth. Of course no one can predict what will happen in six years, but this is pretty good picture for investors to knaw on.
S-1 Projected Growth of $WES Distribution: LP & GP Portion
The only downside in my view in this announcement is that $WGP is not a C-Corp or an LLC, but rather an LP. This means the owners of the GP will also receive a K-1 at year end for tax purposes, instead of the simpler 1099-DIV. $KMI, $WMB, and $SEMG chose the C-Corp route for GP ownership. The C-Corp route is preferred by institutional investors and friendly to tax deferred accounts.
$WGP should be a great investment for yield investors, but after last nights US election all investment decisions should be re-evaluated. The US is likely to go over the fiscal cliff, receive another downgrade from rating agencies, and face a shrinking GDP. All of those factors are recipe for a recession and likely put pressure on equity values in the short-medium-long term time period.
Lot’s of MLP’s talk about consistent and significant distribution growth, but Western Gas Partners, LP (WES) actually delivers. Exhibit A: On Friday the partnership declared a cash distribution of $0.50 per unit for the third quarter of 2012, representing a 4-percent increase over the prior quarter (yawn) and a 19-percent increase (WOW) over the third quarter of 2011. Where else can you buy an income stream that increases 19-percent a year? Bueller? Anyone? Did I mention that income stream was also tax deferred?
The distribution increase does not come cheap though, the units are up 45% YoY, and even with the increased distribution yield only 3.9%. WES had projected 15-20% distribution growth over the next two years, and the market has priced in that growth buy rewarding unit holders with higher equity value. If you missed jumping on the WES distribution super high way (your not in the stock), than you are probably kicking yourself. If you have a longer investment time frame, it may be time to take another look at WES.