Kinder Defends $3 Billion Payout Cut That Shocked Investors

  • Investment hurdles raised for prospective new projects
  • Correlation of Kinder stock to oil prices `unwarranted'

Almost two months after Kinder Morgan Inc. slashed investor payouts by 74 percent to avoid a credit downgrade to junk status, the pipeline operator’s chairman and biggest shareholder defended the move as beneficial in the long term.

The $3.19 billion dividend cut coincided with an increase in the profit threshold new projects must meet before Kinder Morgan will greenlight them, Executive Chairman Rich Kinder told analysts and investors during a presentation in Houston on Wednesday. The company is also choosing investments that will pay off quickly over projects with longer timelines, he said.

Kinder, the 71-year-old Texas billionaire who owns 11 percent of the company’s stock, said correlating Kinder Morgan’s fortunes to the fall in the price of crude oil is misguided. Kinder shares plunged 65 percent in 2015. The operator of North America’s largest network of oil and natural gas pipelines secured $2 billion in additional liquidity on Tuesday in the form of a term loan and an increase in an unsecured credit line.

The dividend cut “obviously came as a shock to some people, and obviously was deplored by some people,” Kinder said on Wednesday. But as a result of the reduction, “it doesn’t take a genius to figure out we have more than enough cash” to cover expenses, Kinder said.

About-Face

Kinder Morgan’s Dec. 8 announcement that it would shrink annual dividends to 50 cents a share from 2015’s $1.93 level was an about-face from a pledge less than a month earlier to boost 2016 payouts by as much as 10 percent. It was the first time since 2011 that the pipeline titan Kinder co-founded in 1997 reduced its dividend.

“The equity is being priced as if it’s going to be dead money forever,” said Charlie Smith, chief investment officer at Fort Pitt Capital Group Inc., whose holdings include Kinder stock. “Rich Kinder in the last 18 months has had to eat some crow, but he’s taking the right steps.”

Kinder Morgan will consider selling assets if it can get a good premium, Chief Executive Officer Steve Kean said during Wednesday’s event. The company also is looking for joint-venture partners to invest in its 100-percent owned Elba Island liquefied natural gas export project in Georgia, he said.

‘Relatively Rare’

If asset sales occur, they will be “relatively rare and probably not very large,” Kean said.

Kinder fell 5 percent to $14.22 Wednesday in New York.

Prior to 2015, Kinder said investors didn’t see any correlation between crude markets and the company’s ability to make money. That changed last year, even though oil production only accounts for about 10 percent of Kinder Morgan’s earnings, he said.

“When the price of crude oil fell, there was a rush to the exits to get rid of all your energy investments,” Kinder said. “We are certainly not impacted by low commodity prices to a great extent.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE