M C I NTIRE I NVESTMENT I NSTITUTE A T THE U NIVERSITY OF V IRGINIA Kinder Morgan (NYSE: KMI) – Long Shreyas Hariharan | Adam Rathgaber | Naveed Mostaghimi | Nick Galdos | 10/28/2014 M c I n t i r e I n v e s t m e n t I n s t i t u t e 1
A GENDA Business Overview Misperception Thesis Points Macro Tailwinds Risks & Catalyst Comps & Valuation M c I n t i r e I n v e s t m e n t I n s t i t u t e 2
B USINESS O VERVIEW • Kinder Morgan Inc. is the largest midstream and 3 rd largest energy company in North America. • Owns and operates 80,000 miles of pipelines that transport natural gas, gasoline, crude oil, carbon dioxide and other products • Over 180 terminals that store petroleum products and chemicals “ We’re a company run by shareholders for shareholders. ” -Richard Kinder Founder, Kinder Morgan KMI has exceeded dividend target in each of the last 3 years. M c I n t i r e I n v e s t m e n t I n s t i t u t e 3
S TOCK P ERFORMANCE • Current: $38.93 • EPS: $1.20 • 52 week: 30.81 - 42.49 • DivYield: 1.76 (4.60%) • Market Cap: $40.21B • P/E: 35.25 M c I n t i r e I n v e s t m e n t I n s t i t u t e 4
M ISPERCEPTION #1: OVER-LEVERAGED Misperception: KMI has been over-aggressive in acquisitions and is over-leveraged. REASON THE MARKET BELIEVES THIS KMI INDUSTRY MEDIAN Assets to equity 5.74 3.30 Debt to equity 2.59 1.18 EVIDENCE THAT THIS MISPERCEPTION IS MANIFESTED IN THE MARKET 14.6% of float is short despite gross and operating margins way higher than industry average. KMI INDUSTRY AVERAGE Gross Margin 47% 43% Operating Margin 29% 13% M c I n t i r e I n v e s t m e n t I n s t i t u t e 5
M ISPERCEPTION #1: OVER-LEVERAGED WHY ARE KMI’S ACQUISITIONS ARE ACTUALLY VERY BENEFICIAL? • Industry is going through natural phase of market consolidation. • Small players are going to be bought out in pipeline industry because: Ø Operating revenue doesn’t cover costs when operations are small scale Ø Economies of scale kick in only after certain miles of pipelines are owned M c I n t i r e I n v e s t m e n t I n s t i t u t e 6
M ISPERCEPTION #2: NATURAL GAS AND CRUDE OIL PRICES Misperception: KMI’s revenue is affected by natural gas and crude oil prices. REASON THE MARKET BELIEVES THIS Ø Fall in natural gas prices reflect a decrease in demand for natural gas Ø This will reduce total revenue of natural gas pipeline companies (elastic demand) EVIDENCE THAT THIS MISPERCEPTION IS MANIFESTED IN THE MARKET KMI’s stock prices have fluctuated with fluctuating oil and natural gas prices, driven primarily by market sentiment about the pipeline industry. M c I n t i r e I n v e s t m e n t I n s t i t u t e 7
M ISPERCEPTION #2: OIL AND NATURAL GAS PRICES WHY IS KMI RELATIVELY UNAFFECTED BY NATURAL GAS AND OIL PRICES IN THE SHORT-MEDIUM RUN? § KMI has long-term contracts (4-5 years) with its clients. § These are take-or-pay contracts. § KMI’s fee structure involves minimum payments irrespective of whether customer chooses to use the pipelines over the period of the contract. § Hence, demand for KMI’s pipelines is relatively inelastic in the short-medium run. KMI INDUSTRY AVERAGE Gross 47% 43% Margin Operating 29% 13% Margin M c I n t i r e I n v e s t m e n t I n s t i t u t e 8
M ISPERCEPTION #3: RENEWABLE ENERGY Misperception: Renewable energy will significantly impact conventional energy market in the near future. § “Two factors that prevent investment in renewable energy in the short- medium run: 1) load factor, because we don’t have it all the time and 2) renewable energy sources are not profitable yet because net present value is still negative.”- Carlos Pascual, Special Envoy, International Energy Affairs and Former United States Ambassador to Mexico and Ukraine. M c I n t i r e I n v e s t m e n t I n s t i t u t e 9
M ISPERCEPTION #3: RENEWABLE ENERGY § Natural gas is still growing § Domestic coal consumption is switching to other sources Coal and Natural Gas US Total Output (in thousand mega-watt-hours) 2000000 1500000 1000000 500000 0 2007 2009 2011 Coal Natural Gas Renewables Linear (Coal) Linear (Natural Gas) Linear (Renewables) M c I n t i r e I n v e s t m e n t I n s t i t u t e 10
M ISPERCEPTION #3: RENEWABLE ENERGY The ability to depend on renewable energy is hindered by: § Availability § Peak demand § High investment costs M c I n t i r e I n v e s t m e n t I n s t i t u t e 11
T HESIS POINT #1: C OMPETITIVE ADVANTAGE § Terminal activities provided 13.4% of Kinder Morgan’s revenue in 2012 § Terminal operating margins continue to increase KM Terminal Operating Margins 64 62 60 58 56 54 52 50 2011 2012 2013 2014* *projected 2014 operating margin M c I n t i r e I n v e s t m e n t I n s t i t u t e 12
T HESIS POINT #1: C OMPETITIVE ADVANTAGE Continued investment into opening new terminals M c I n t i r e I n v e s t m e n t I n s t i t u t e 13
T HESIS POINT #1: C OMPETITIVE ADVANTAGE Terminals give Kinder Morgan exposure to different energy sources: § Crude oil § Domestic/International coal § Chemicals M c I n t i r e I n v e s t m e n t I n s t i t u t e 14
T HESIS POINT #1: C OMPETITIVE ADVANTAGE Kinder Morgan provides a safer environment overall than its competitors: 1.54 vs 5.7 average competitor TRIR According to the BLS, the industry-wide TRIR is 4.8 M c I n t i r e I n v e s t m e n t I n s t i t u t e 15
T HESIS POINT #1: C OMPETITIVE ADVANTAGE Terminal contracts are relatively long term: § Liquids average: 3.8 years § Bulk average: 3.5 years M c I n t i r e I n v e s t m e n t I n s t i t u t e 16
T HESIS POINT #1: C OMPETITIVE ADVANTAGE New port terminals provide access to vital coal demand around the world M c I n t i r e I n v e s t m e n t I n s t i t u t e 17
T HESIS POINT #2: BARRIERS TO ENTRY 1. High start-up costs § Operating revenue will cover costs only when operations are large- scale § FC will be distributed among large units when operations are large. § Due to over 32 acquisitions, KMI enjoys economies of scale. KMI INDUSTRY AVERAGE COGS/ Miles of Pipeline $0.10 $0.57 Gross Margin/ Miles of $0.406 $0.322 Pipeline 2. Regulation § Environmental and zoning restrictions make new companies building pipelines practically impossible. § In a specific region, competitors cannot build pipelines if they exist. § Regulation promotes monopoly for KMI. *projected 2014 operating margin M c I n t i r e I n v e s t m e n t I n s t i t u t e 18
T HESIS POINT #2: BARRIERS TO ENTRY 3. Customer Loyalty § Region specific customers § Customers are likely to renew contracts with KMI after the 4-5 year period. 4. Competitive Advantage (explained) § Terminals § Safer environment § Terminals and pipelines for crude oil, coal, chemicals, natural gas. M c I n t i r e I n v e s t m e n t I n s t i t u t e 19
M ACROECONOMIC T AILWINDS • Continued increases in demand as natural gas consumption has risen from 22% to 27% of US energy use (mostly at the expense of oil) M c I n t i r e I n v e s t m e n t I n s t i t u t e 20
MACROECONOMIC TAILWINDS • According to the 2015 Farmers’ Almanac , the 2014-2015 winter is expected to be severe with below-normal temperatures for three quarters of the US, resulting in an increased demand for natural gas M c I n t i r e I n v e s t m e n t I n s t i t u t e 21
REGULATION • KMI recently received all of the necessary regulatory approvals for its long-awaited acquisition of all three of its MLPs • New regulations prevent drillers from flaring in the Bakken and Three Forks formations, perpetuating the need for increased pipeline infrastructure M c I n t i r e I n v e s t m e n t I n s t i t u t e 22
RISKS & P OTENTIAL C ATALYSTS RISKS § Investors will face a significant tax burden (losing around 4% of investment value) with Rich Kinder’s $44B consolidation plan POTENTIAL CATALYSTS • The US lifts the ban on exporting oil and gas o Russia/China’s recent 30 year $400 B oil and gas supply deal could be a huge catalyst in lifting the ban o Increased TAM as infrastructure will be needed regardless • Beating Earnings Call 1/15/15 • Berlin v. Kinder Morgan Energy Partners LP lawsuit regarding consolidation of MLPs M c I n t i r e I n v e s t m e n t I n s t i t u t e 23
R ISKS AND POTENTIAL CATALYSTS • VAR 1: “KMI’s big already but earnings should grow around 20% over the next 5 years. Its organizational management is a little complicated and the dropdown to MLPs on pipelines is the in-vogue thing to do these days because it allows for a better valuation and is more tax-friendly.” - Zach Pancratz (DRZ: Alternative Strategies Analyst) • VAR 2: “The energy sector along with the whole market has sold off huge in the past 6 weeks. Underperformance in energy can be attributed to the huge selloff in oil (peak in June at $107 to current levels of $82). The oil names got absolutely smoked and the natural gas names got indiscriminately lumped in with them since most energy names have a mix of oil and gas. With the recent selloff and colder weather on the way you’ll definitely see a bump in natural gas prices.” • - John Race Jr. (Iberia Capital Partners: Institutional Sales) M c I n t i r e I n v e s t m e n t I n s t i t u t e 24
Recommend
More recommend
