Kinder Morgan does have some problems:
However, I think that the 60%+ drop in the share price YTD is a little overdone. Kinder Morgan’s problems don’t seem that bad compared to other companies.
I find that ranking stocks is a useful analytical tool. Ranking stocks against each other helps me be more realistic about how good or how bad a stock is.
I have some extreme and unconventional viewpoints. Many “value investors” would have a list that would be the opposite of mine. Many of the stocks I have shorted have been mentioned on ValueInvestorsClub.com as longs or potential longs. Many of these people are quite intelligent and eloquent. In my opinion, the longs do not understand how they are being bamboozled and misled by stock promoters. I’ve written about this many times on this blog (e.g. “How would a sociopath fleece investors in oil and gas?” and “Beating Wall Street in oil and gas“).
While the independent E&P sector has seen a meltdown in share prices, I don’t see undervaluation. The problem is that many of the companies continue to be run by stock promoters and charlatans (more so in the small caps than the large caps). Until the management teams get better, I don’t think that the independent E&P space will be a good place to look for longs. My prediction is that there will be more pain to come when NGL prices collapse.
The warrants may still be slightly undervalued. However, my instinct is to sell stocks/securities on rallies and to reinvest the proceeds into stocks that have dipped (e.g. ASPS).
I sold slightly below $4 (which is terrible trading on my part because I sold near the day low). I still have a few call options which I plan on riding out to maturity. This trade worked out well.
I may be completely wrong about Kinder’s reasons for merger KMI with KMP/KMR/EPB. Here’s my guess.
Things have gotten to the point where the GP/LP structure is becoming unwieldy. Any investments that the LPs make must be accretive to the LP unitholders. Because of this, the hurdle for new investments is extremely high (?somewhere around 18% EBITDA yield?). Because KMP and EPB are so large, there is a limited universe of investments that make sense for the unitholders after paying the onerous Incentive Distribution Rights (IDRs) to the GP. (In the past, this problem has been avoided by the GP waiving its incentive fees.) By getting rid of the GP/LP structure, the resulting company has more flexibility to pursue opportunities with lower returns that are still attractive.
Wow.
Here’s the press release: “Kinder Morgan, Inc. to Purchase KMP, KMR and EPB; 2015 KMI Dividend to Increase to $2 per Share”
Here’s my Google Drive spreadsheet that calculates the merger spreads.
I may do a follow-up post with thoughts on the merger.
*Disclosure: Long KMI warrants and call options.
Here’s the idea:
Compounding is very powerful over long periods of time. Options are generally a leveraged way of playing a stock. If a stock is mispriced, the options may be even more mispriced.
