Kinder Morgan May Need 98 Percent Payout Cut, Jefferies Says

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  • Slashing quarterly payouts to a penny would free up cash
  • Managment `bravado' may forestall dividend-limiting measures

Kinder Morgan Inc. may need to reduce quarterly dividends by 98 percent to a penny to conserve cash for oil-pipeline projects and avoid a downgrade of its credit to junk status, according to Jefferies LLC.

Stung by investor concern that its $41 billion debt load is unmanageable, the company needs to slash the dividend to ensure it can fund operations and follow through with plans for new pipelines, Christopher Sighinolfi, an analyst at Jefferies, said in a note to clients on Monday. The credit and equity markets Kinder Morgan previously relied on to finance expansions have shut because of the collapse in crude prices, leaving the company with little alternative but to cannibalize dividends, he said.

Cutting payouts to 1 cent per quarter would save about $4.5 billion annually, according to Bloomberg calculations. Kinder Morgan, the biggest oil and gas pipeline operator in North America, ought to keep the dividend suppressed at a penny a quarter through the end of 2017, Sighinolfi said. In 2018, the payouts could be raised to the annual equivalent of $2 and thereafter increased by 5 percent annually through 2020, he said.

“While a reduction will be painful in the immediate term, we believe sustaining current payouts will render KMI a persistently high-leverage, high-payout, low-quality cash flow story,” Sighinolfi said in his note. Kinder Morgan’s tendency toward “aggressiveness & bravado” may inhibit such a deep dividend cut, he added.

Kinder Morgan’s stock has plunged 34 percent since Moody’s Investors Service warned on Dec. 1 that it may downgrade the Houston-based oil and gas shipper’s credit rating to non-investment grade. The shares fell 2.4 percent to $16.42 in New York trading.

Christine Cho, a Barclays Plc analyst, said a 50 percent reduction in the 2016 dividend may be sufficient to alleviate Kinder Morgan’s capital concerns through 2018.

“The dilemma for KMI is that anything short of this capitulation is viewed with so much skepticism by investors, their securities fail to recover over the short term,” Cho said in a note to clients on Monday.

Dave Conover, a Kinder Morgan spokesman, didn’t immediately return a phone message seeking comment.