MLPs Are Getting Killed On Kinder Morgan Fears

• A new note by Jefferies suggests that Kinder Morgan Inc KMI should reduce its dividend to $0.01/quarter through 2017.
• The note has prompted a widespread sell-off in the MLP space.
• Credit Suisse believes that the possibility of a Kinder Morgan dividend cut means high-leverage MLPs are now at risk of a similar move.

Shares of Kinder Morgan were plunging in Monday's session after Jefferies analyst Christopher Sighinolfi released a new report calling for the company to reduce its dividend to $0.01 per quarter through 2017. The report has also triggered a sell-off throughout the MLP space as fears of a wave of yield cuts have spread throughout the market.

The Proposal

Sighinolfi believes that Kinder Morgan should take a page from the book of 2012 acquisition El Paso, which reduced its dividend to $0.01 per quarter to weather the previous downturn in oil process back in 2009. “Specifically, we believe a reduction in KMI’s dividend to 1 cent/qtr through 2017, reinstated to $2 in 2018 with 5% annual growth through 2020, will enable KMI to fully fund its capex without any equity issuance, de-lever its BS & retain IG credit,” he explained.

Jefferies maintained its Hold rating on the stock, but drastically reduced its price target from $33 to $15.

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Market Reacts

Shares of MLP stocks throughout the market were plummeting following the Jefferies report. Energy Transfer Equity LP ETE was down 17.2 percent, Enterprise Products Partners L.P. EPD was down 6.3 percent and Plains All American Pipeline, L.P. PAA was down 13.5 percent in Monday’s session.

Kinder Morgan A Leading Indicator

According to Dan Willard, executive director and portfolio manager at Pointe Capital Management, MLP investors still view Kinder Morgan as a quasi-MLP. “While KMI is no longer an MLP, it is viewed as a leading indicator for MLPs,” Willard told Benzinga in November. “If times are challenging for KMI, then many assume it is for all.”

Credit Suisse analyst John Edwards certainly sees it that way. In response to the possibility of a Kinder Morgan dividend cut, Edwards has downgraded the MLP space and named Plains All American, Williams Partners LP WPZ and Energy Transfer Partners LP ETP as the three names most at risk of a dividend cut due to their high leverage.

Disclosure: the author holds no position in the stocks mentioned.