It happened to KMI. Then it happened to Teekay. Now it's threatening to happen to Conoco Oil.
There was little revenue with energy prices in retrenchment to service their debt. That led to dividend cuts and devaluation of the capital value of the stock.
When 3/4 of the dividend is diverted to managing debt and development projects, the market responds with a similar devaluation of the stock price. This may not seem rational, given that cutting the dividend when facing earnings shortfalls is a prudent move that keeps cash for higher priority items, maintains debt ratings and avoids dilution of shareholder value by issuing more stock, avoids taking on more debt to pay a dividend, etc. The market isn't rational.
It IS rational for Saudi Arabia and Iran to produce all the oil they can if they can afford to sell it on the cheap.
So, you either take the haircut or sell and take the haircut, redeploying the reduced capital into another sector. I don't actually want to abandon energy stocks. I know that this time and it's distorted conditions will pass. I hate learning lessons this way, but how else?
If an entire sector melts down, my portfolio will surely take a hit. It won't be 1%; more like 5%.
That's painful. Oil has done similar things in the past. Oil is a commodity and commodity prices can be very volatile at times.
So, what should my response to this turn of events be? Should I take my
lumps like every other investor in the industry? Should I rotate out at
depressed valuations? My basic buy and hold mentality says "take it". My
anxiety says "sell". I experienced this before, with banks. They have
recovered substantially but I left a bunch of money on the table when I
abandoned BAC a long time back. I lost my shirt on WaMu. My basic instinct is to avoid panic and stay the course. I think that's what I'll end up doing.
Wednesday, December 23, 2015
Sunday, December 6, 2015
Panic in the oil patch
I have been watching the story unfold with Kinder Morgan over the last few months. I'm watching a 150% capital appreciation melt like an ice cube on the hot pavement.
It seems the credit rating agency, Moody, is concerned that KMI won't have the cash flow to service it's debt with energy prices in the toilet and many of it's upstream customers on the ropes. I guess the fee-based revenues are at risk if less gas is pumped. I hear that KMI has twice the leverage of it's peers, putting the dividend at risk. The market is rapidly discounting it's shares to account for a potential credit rating cut to "non-investment" status and a freeze or cut in the dividend.
So, here's where the rubber meets the road. Do I believe that KMI's business model is at risk?
Will debt take them down? Is a dividend cut and the valuation haircut that is already occurring enough to make me bail out and purchase something else with what remains of the value in that holding? Do I believe the long term thesis about natural gas? Could Richard Kinder take the company private and wipe out my ability to ride it back up when times change for the energy industry?
Interestingly, the "don't panic" folks point out that KMI's revenue streams are bullet-proof and their cash flow is secure, so the debt and the dividend are both secure. They say that the problem is that KMI can't raise more capital for expansion by either issuing equity at these low valuations, or by issuing more debt with their shaky credit rating, so growing new revenue won't work. They need the cash flow from the dividend to pay down debt. hmm....
I have ridden other companies down when the market got nervous. Actually, several: GE, BAC, LIN and LINCO, some energy storage speculative stocks. This may be another lesson learned about debt and credit rating. KMI has a BBB- credit rating, one tick above junk. When the debt gets too high and the revenue stream is considered to be at risk, down goes the credit rating, up goes the price of rolling over debt that is coming due. Debt service coverage and available revenue to grow the business...I'm continuing to learn, but this kind of learning is always painful.
I won't suffer too much; if KMI goes to zero, this year's dividends from the whole portfolio will more than cover the loss. That's the value of diversifying; a meltdown doesn't hurt you too much, but that's still hard on my future and points out what I don't know about protecting my portfolio from risk.
It seems the credit rating agency, Moody, is concerned that KMI won't have the cash flow to service it's debt with energy prices in the toilet and many of it's upstream customers on the ropes. I guess the fee-based revenues are at risk if less gas is pumped. I hear that KMI has twice the leverage of it's peers, putting the dividend at risk. The market is rapidly discounting it's shares to account for a potential credit rating cut to "non-investment" status and a freeze or cut in the dividend.
So, here's where the rubber meets the road. Do I believe that KMI's business model is at risk?
Will debt take them down? Is a dividend cut and the valuation haircut that is already occurring enough to make me bail out and purchase something else with what remains of the value in that holding? Do I believe the long term thesis about natural gas? Could Richard Kinder take the company private and wipe out my ability to ride it back up when times change for the energy industry?
Interestingly, the "don't panic" folks point out that KMI's revenue streams are bullet-proof and their cash flow is secure, so the debt and the dividend are both secure. They say that the problem is that KMI can't raise more capital for expansion by either issuing equity at these low valuations, or by issuing more debt with their shaky credit rating, so growing new revenue won't work. They need the cash flow from the dividend to pay down debt. hmm....
I have ridden other companies down when the market got nervous. Actually, several: GE, BAC, LIN and LINCO, some energy storage speculative stocks. This may be another lesson learned about debt and credit rating. KMI has a BBB- credit rating, one tick above junk. When the debt gets too high and the revenue stream is considered to be at risk, down goes the credit rating, up goes the price of rolling over debt that is coming due. Debt service coverage and available revenue to grow the business...I'm continuing to learn, but this kind of learning is always painful.
I won't suffer too much; if KMI goes to zero, this year's dividends from the whole portfolio will more than cover the loss. That's the value of diversifying; a meltdown doesn't hurt you too much, but that's still hard on my future and points out what I don't know about protecting my portfolio from risk.
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