Pipeline Giant Kinder Morgan Rebounds After Cutting Dividend

  • Biggest North American pipeline owner moves to avoid downgrade
  • Company says no need to tap equity markets through end of 2018

Kinder Morgan Inc. slashed its full-year dividend by 74 percent to preserve cash it needs to keep growing while it repays $41 billion of debt, stemming a six-day stock slide that erased one-third of its value.

Kinder Morgan stockholders will receive payouts totaling 50 cents per share in 2016, the biggest North American pipeline owner said Tuesday in a statement. As recently as Nov. 18, the company was promising investors a 6 percent to 10 percent increase next year, but the freefall in oil prices cut cash flow and raised questions about Kinder’s ability to repay its debt.

The announcement, which will save Kinder Morgan $3.19 billion, capped an eight-day period that saw the company threatened with a credit downgrade to junk status and an investor exodus that wiped out $14 billion of Kinder Morgan’s market value. Co-founder and Executive Chairman Rich Kinder’s personal stake in the company lost as much as $2.1 billion in value this month.

The size of the reduction exceeded the expectation of many observers, said Spencer Cutter, a Bloomberg Intelligence analyst. “There were expectations out there for a 25 or 50 percent cut so I think the 75 percent cut may have caught some people a bit by surprise,” Cutter said in a telephone interview.

Kinder Morgan rose 6.9 percent to $16.81 at the close in New York, for the biggest daily gain in 16 months. The stock is down 60 percent for the year.

Retain Cash

The dividend reduction will keep enough of the cash generated from operations in-house to help the company retain its investment-grade credit rating, Kinder Morgan said in the statement. Retaining cash also will forestall any need to issue new shares to raise capital through at least 2018, the company said.
“We applaud the strategy of cutting to the point that prevents the need for capital funding through 2018,” Jefferies LLC analysts said in a note to clients.

The Houston-based company raised its capital budget for growth projects by 20 percent for 2016 to $4.2 billion, Chief Executive Officer Steve Kean said Wednesday during a conference call with analysts. The company’s spending plan for next year assumes an average oil price of $50 a barrel.

Kinder Morgan directors set the new dividend at 50 cents to achieve a yield that would be above the average of the companies in the Standard & Poor’s 500 Index, Kean said.

The company “anticipates enough retained internally generated cash flow to fund all of the required equity contribution projected for 2016 and a significant portion of its debt requirements,” according to the statement.

Positive Reaction

Standard & Poor’s lauded the move, affirming its ratings on Kinder Morgan debt and saying its outlook for the company is stable. “We believe this move will enable the company to continue to execute on its future growth plans and maintain a total net debt to EBITDA ratio around 5.5x for the next several years,” the rating company said in a note to clients on Tuesday.

Moody’s Investors Service upgraded its outlook to stable from negative, reversing a Dec. 1 warning that Kinder Morgan’s debt could be headed for non-investment grade.

Under the revised payout plan announced last month, investors would have received $2.12 to $2.20 per share in 2016. Actual payouts to Kinder Morgan holders totaled $1.93 this year, according to data compiled by Bloomberg.

First Cut

It’s the first time since 2011 that the pipeline giant co-founded by Texas billionaire Kinder in 1997 has reduced its dividend. The stock has plunged by half since Oct. 21, when the company began scaling back promises to raise dividends in 2016. On Dec. 4, Kinder Morgan said $5 billion in expected 2016 distributable cash flow may be diverted to operations from dividends.

For Kinder, 71, the financial blow isn’t limited to the paper value of his stock. Under the dividend cut announced on Tuesday, his share of payouts will drop by $350 million compared with 2015.

Energy and commodity companies from oil drillers to rig owners to coal miners have sacrificed dividends to conserve cash amid supply gluts and collapsing markets.

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