Kinder Morgan Stock: The Ruby Pipeline Bankruptcy (NYSE: KMI)

todamo/iStock Editorial via Getty Images

Kinder Morgan (NYSE: KMI) Ruby Pipeline subsidiary filed for bankruptcy, seeking to reorganize its debts after failing to pay nearly $500 million in debt. The company has already been sued by creditors, after arguments that the company could would have avoided bankruptcy if it had not transferred more than $400 million to the owners of the company.

Across corporate America, with the effects of COVID-19 and bankruptcies such as PG&E, the model of moving money to owners and then filing for bankruptcy with the subsidiary has constantly under attack.

The fiasco

Honestly, the fiasco shouldn’t have been a fiasco. It’s a pretty simple business model, you put the asset in a subsidiary, that asset borrows money based on how strong the asset is, and so on. The argument here, the same sort of thing that has happened elsewhere, is what happens when the affiliate can pay the debt but spends all the money.

However, in our view, this reflects a delicate part of bankruptcy law, which is not well defined. If debt does not impose certain capital standards for the company, apart from the fact that bankruptcy is supposed to be a move of last resort, it leads to controversy over shareholder payments leading to bankruptcy.

Until it is well defined, we expect it to lead to prosecution.

Disadvantage of Kinder Morgan

The downside for Kinder Morgan here is debt attributable to bankruptcy, should it be found liable due to distributions to shareholders. This caps out at several hundred million. Even though creditors have access to the pipeline, the company has clearly determined that the cost is less than the cost of paying off the debt.

For a $40+ billion company, with nearly $6 billion in annualized DCF, that’s a pretty negligible downside in our view.

Kinder Morgan Asset Portfolio

Kinder Morgan has a unique portfolio of assets.

Kinder Morgan Asset Portfolio

Kinder Morgan Asset Portfolio – Investor Presentation

Kinder Morgan has one of the largest asset portfolios in the industry. The company owns over 70,000 miles of natural gas pipeline with 1,200 miles of liquid natural gas pipeline and significant storage capacity. The company has a DCF yield of about 15% and about $30 billion in long-term debt, costing it nearly $2 billion in annual interest.

The company’s irreplaceable portfolio of assets is critical to our modern standard of living, and as a result, we expect to deliver cash flow over decades.

Kinder Morgan Capital order book

Kinder Morgan Capital Order Book – Investor Presentation

Kinder Morgan continues to invest in growth. The company has an order book of nearly $1.5 billion, a substantial portion of which is “low carbon.” The company’s capital expenditures have a build multiple of 3.3x, adding more than $400 million to EBITDA. The business conversion factor here will support increased DCF and shareholder rewards.

Return potential for Kinder Morgan shareholders

Kinder Morgan has the ability to generate substantial long-term returns for shareholders.

Returns to Kinder Morgan shareholders

Kinder Morgan Shareholder Returns – Investor Presentation

Kinder Morgan has strong management ownership, showing both confidence in the business and confidence in its dividend. The company pays an incredibly high dividend yield of over 6%, and that’s a dividend yield the company can afford to continue to modestly increase in the future. This dividend also encourages share buybacks.

The company announced a $2 billion share buyback program with $1.4 billion remaining. This is enough for the company to buy back about 5% of its outstanding shares. The company’s debt is no longer growing and at $30 billion it is manageable. The business can continue to pay down debt slowly by saving on interest expense.

Overall, the company’s impressive commitment to shareholder rewards makes it a valuable investment.

Thesis risk

The biggest risk to our thesis is regulation. Kinder Morgan has a unique portfolio of assets; however, it still operates in the fossil fuel market. The company seeks to reduce emissions and focus on renewable energy; however, it could still face regulation that harms its business and, therefore, cash flow and shareholder returns.

Conclusion

Kinder Morgan has one of the most unique portfolios in the midstream industry. Increased regulation means that the portfolio of assets, essential to our modern standard of living, is incredibly difficult to replace. This means reliable cash flow for decades to come, cash flow that can be used for a variety of shareholder rewards.

The company has a high single-digit dividend yield and has sought opportunistic share buybacks. The company continues to invest in growth. Its debt load is incredibly manageable at around $30 billion. The company has many levers to pull to reward shareholders, making it a valuable investment.