Kinder Morgan May Bleed 2016 Dividend to Conserve Cash Flow

  • North America's biggest pipeline owner squeezed by oil slump
  • After largest energy merger of '14, company facing junk status

Kinder Morgan Inc., the weakest pipeline operator in the S&P 500 this year, may divert cash from dividend payouts as the worst oil-market collapse in a generation threatens its investment-grade rating. The company’s shares plunged 13 percent to an all-time low.

The company’s board "will be reviewing the dividend policy and financing plans in the coming days," Kinder Morgan said in a statement Friday. The company said it expects to generate $5 billion in distributable cash flow next year that would be sufficient to support a dividend increase. “Alternatively, this cash flow can be used to fund some or all of KMI’s equity needs for 2016.”

Pipeline operators have been hit especially hard as the 63 percent swoon in crude prices from their peak June 2014 prompted cash-squeezed oil producers to cancel expansion projects that pipeline companies were relying on to fund investor payouts. An index of 50 energy-infrastructure companies lost 42 percent of its value this year, twice the declines racked up by oil explorers and drilling-rig owners.

As recently as Nov. 18, Kinder Morgan was promising investors a 6 percent to 10 percent increase from the $2 per share it budgeted for this year. In today’s statement, Kinder Morgan pledged to “take required action” to avoid a downgrade to junk status.

Moody’s Warning

Analysts have been split on whether Kinder Morgan’s dividends are sustainable as the pipeline industry’s ability to tap equity and debt markets to finance growth dimmed. The company’s shares slumped 30 percent this week to $16.82 in New York. Moody’s Investors Service warned on Tuesday that Kinder Morgan’s bonds were on the verge of tipping into junk.

“Dividend growth is unrealistic,” Vivek Pal, a managing director at Jefferies LLC in New York, said in a note to clients before the announcement. The company needs a 50 percent dividend cut to avoid being downgraded to junk, he said.

Stock analysts have yet to turn pessimistic, despite the share price’s tumble from an all-time high of $44.57 in the space of 7 1/2 months. The stock had 15 buy ratings, six holds and zero sells among analysts on Friday; that compared to 16 buys, four holds and zero sells when the shares touched a record close on April 23.

Dividend Expectations

Prior to today’s announcement, Kinder Morgan had been expected to lift its 2016 dividend to $2.14, according to Bloomberg Dividend Forecasts. Companies across the oil and gas industry have been slashing or freezing dividends to conserve cash as plunging energy prices choked off money needed to drill wells, pay debts and purchase drilling rights.

Transocean Ltd., Chesapeake Energy Corp. and Linn Energy LLC are among those whose investors have seen payouts halted amid the crunch that began 18 months ago. The pain has been felt across the board as supplies swelled and demand growth faltered for commodities as diverse as coal and gold; Glencore Plc, Peabody Energy Corp. and Anglo American Plc have all cut or halted dividends to shore up balance sheets.

Kinder Morgan’s $40 billion-plus debt burden exceeds the economic output of entire nations, including Bolivia and Bahrain. The company co-founded by Texas billionaire Rich Kinder in 1997 had raised payouts every quarter since its 2011 initial public offering. In 2014, Kinder orchestrated the biggest energy-industry takeover of the year with the $44 billion consolidation of a splintered empire of partnerships under the Kinder Morgan umbrella.

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