Kinder Morgan’s market performance
Kinder Morgan’s (KMI) shares rallied as high as 17.9% during early trading on Thursday, following the 4Q15 earnings announcement. But KMI has lost over 70% of its market value in the last year. The Alerian MLP ETF (AMLP), which comprises 22 midstream MLPs, has fallen 50.6%. This indicates general negative sentiment in the midstream sector. But KMI’s underperformance relative to AMLP may be due to its higher commodity exposure versus some of AMLP’s holdings.
Kinder Morgan’s direct commodity exposure
Kinder Morgan is directly exposed to crude oil and natural gas prices through its CO2-based crude oil production and natural gas midstream businesses.
- KMI estimates that every $1 per barrel change in West Texas Intermediate crude oil price will affect its distributable cash flow by ~$7 million in 2016.
- KMI estimates that every $0.10 per MMBtu change in natural gas prices will impact its distributable cash flow by ~$1.2 million in 2016.
Cone Midstream Partners (CNNX), DCP Midstream Partners (DPM), and Enable Midstream Partners (ENBL) are among the midstream companies that have exposure to natural gas prices through their natural gas midstream assets.
Kinder Morgan’s indirect commodity exposure
Midstream companies are indirectly exposed to commodity prices through production levels. If crude oil and natural gas prices stay low, upstream producers might cut their production or even go bankrupt. This could result in lower throughput volumes and earnings for these midstream companies.
On counterparty risk, Steven Kean, KMI’s CEO, said, “We have a large customer base with only about 20 customers accounting for more than 1% of our annual revenues, and the great majority of our customers remain solidly investment grade. The largest of those 20 customers is about 5% of our revenue, and that customer is rated AA minus.”