Cutting Kinder Morgan (KMI) Estimates But Closer to a Ratings Upgrade - UBS
UBS analyst, Shneur Gershuni, cut estimates on Kinder Morgan (NYSE: KMI) after it announced a 22% ($0.9B) reduction to 2016 growth capex to $3.3B from $4.2B. However, CapEx for 2016 and beyond is expected to be completely funded from internal cash flow which is an incremental positive. Also, this change is likely to lead to multiples that are closer to a debt rating upgrade which is also the threshold to return capital to shareholders.
The incremental capital reduction (from the dividend cut) and net backlog reduction of $2.1B (adj. For in-service in 4Q) helps move KMI closer to a 5x Net Debt/EBITDA, a level at which one of the agencies suggested that KMI could be eligible for a rating upgrade and the point in time where KMI will begin to consider returning capital to shareholder (dividend, buybacks…).
Questions Remaining for the Analyst Day: In the prepared remarks for the analyst day, KMI noted an expectation to return value to shareholders, further clarity as to whether that is dividend or buybacks. Are acquisitions, off the table? It would appear that was part of the backlog reduction. Can we expect divestitures as KMI undergoes a high grading of its expected capex?
The analyst cut '16/17/18 EBITDA estimates to $7.9/$8.4/$9.1B from $8.4/$8.9/$9.7 on the flow through of weaker operating results and reduction in capex. However, due to the FCF yield of 5%, no change to the Buy rating or $18 PT.
For an analyst ratings summary and ratings history on Kinder Morgan click here. For more ratings news on Kinder Morgan click here.
Shares of Kinder Morgan closed at $12.01 yesterday.