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February 11, 2011

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KMI: Snap Take

Someone asked me for my general thoughts on KMI today, thought it would be appropriate to offer them here as well. We are (as of today) owners of KMI, in the interest of full disclosure.
KMI is currently trading at a 3.76% yield, KMP is currently trading at a 6.4% yield. If we assume that KMP grows it’s distribution 4.5% per year for the next 5 years, KMI will be able to grow its distribution around 8.8% per year. If you add those numbers together for each, KMP offers around 10.9% total return, and KMI offers around 12.6% total return.
So, its a turbo charged KMP and it is an opportunity to own the whole equity structure (if coupled with KMP ownership), which KMP has not offered you the option of in the past 4 years. Because KMI is a corporation (allowing for most institutions to own KMI) and there aren’t many public GPs out there (just TRGP, ETE, NSH, AHGP, AHD), institutions will be very eager to own and to buy KMI, and I bet it will do very well in the next few months, particularly when research analysts start to come out with positive reports on KMI.  That will continue until the private equity guys want to sell the remainder of their stakes.
What is really great about GP interests is that they get more cash even without raising distributions just by having its MLP issue more shares. As we all know, KMP issues tons of shares every year, providing extra juice for the GP cash flow. That equity issuance is the wildcard in the valuation of KMI, but if you are comfortable with 3.7% yield and 8.8% growth (which assumes no equity issuance), then you just have option value on KMP issuing a bunch of equity. If KMP issues 5mm units every year for the next 5 years, KMI will be able to grow its distribution at 13.6% a year (as opposed to 8.8% if they don’t have more units).
So, today the stock closed around $31, up $1 from its IPO price, after trading as high as $32.14, on a day when MLPs finished slightly higher.  Volume was more than 50 millions shares.  It faded into the close, so we’ll see where it goes next week….

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