Chevron Corporation NYSE:CVX) and Exxon Mobil Corporation (NYSE:XOM), on the other hand, own refineries, trucks, storage tanks, and retail outlets, and capitalize much of their well costs, among other things. It seems reasonable that the capex and D&A issues are entirely different for these companies compared to pipeline operators. In other words, it’s a huge case of apples to oranges comparison.
Kinder Morgan cuts maintenance spending
Kaiser goes to some lengths arguing that Kinder Morgan cut maintenance capex on assets obtained from Santa Fe Pipeline. (He actually addresses maintenance expenses, a different line item . It’s clear, though, that he equates this with maintenance capex.) He then presents a series of pipeline accidents and implies that it was this and similar cuts to maintenance spending that led to the accidents. However, he doesn’t present accident data from the time before Kinder Morgan obtained those assets, nor does he present data from other operators (who presumably keep maintenance spending at proper levels) showing a lack of accidents. In other words, he fails to connect the dots between an argued decrease in maintenance spending and an increase in pipeline accidents.
Further, the numbers do not bear Kaiser out. I looked at six pipeline operators, including Kinder Morgan and El Paso before Kinder Morgan acquired it. I was looking to see how much they all spend on maintenance capex on their pipelines. Here’s what I found for 2012:
| Operator | Miles of Pipeline | Maintenance Capex, 2012 (in millions) | Maintenance Capex, 2012, Per Mile |
|---|---|---|---|
| Boardwalk Pipeline Partners | 14,410 | $79.8 | $5,538 |
| El Paso Pipeline Partners, L.P. (NYSE:EPB) | 12,900 | $91* | $7,054* |
| Enbridge Energy Partners, L.P. (NYSE:EEP) | 17,900 | $123.8 | $6,916 |
| Enterprise Products Partners L.P. (NYSE:EPD) | 50,000 | $365.8 | $7,316 |
| Magellan Midstream Partners | 9,600 | $64.4 | $6,708 |
| Kinder Morgan Energy Partners LP (NYSE:KMP) | 46,000 | $285 | $6,196 |
*Company projection for 2012; El Paso was acquired in May 2012 . Source: Company 10-K filings for 2012 (for 2011 in the case of El Paso).
As you can see, Kinder Morgan Energy Partners LP (NYSE:KMP) lies right within the range of what five other companies spend per mile on maintaining their pipelines. If Kinder Morgan Energy Partners LP (NYSE:KMP) is purposefully keeping maintenance capex low to boost DCF, it should be reflected in much lower amounts per mile spent compared to the others. It’s not.
Given that, how strong is the argument that Kinder Morgan Energy Partners LP (NYSE:KMP) is boosting distributable cash flow by cutting maintenance capex and hiding what should have been spent there in expansion capex?
Not very.
Summing up
• A spate of pipeline accidents after change of ownership could be due to other events or just plain chance. Kaiser does not link cause and effect between presumed cuts to maintenance capex and any increase in accidents.
• Maintenance capex does not have to exceed DD&A expense.
• Kinder Morgan Energy Partners LP (NYSE:KMP) is not spending less than other pipeline operators on maintenance capex on a per mile of pipeline basis.
• Kinder Morgan Energy Partners LP (NYSE:KMP) does not appear, therefore, to be inflating distributable cash flow.
As a result, it is my opinion that Kaiser’s and Hedgeye’s argument is significantly flawed and I would not let it dictate any investing decision.
The article It Isn’t Kinder Morgan That’s a House of Cards originally appeared on Fool.com is written by Jim Mueller.
Jim Mueller is an analyst for Motley Fool Stock Advisor and owns shares of Kinder Morgan. The Motley Fool recommends Chevron, El Paso Pipeline Partners LP, Enterprise Products Partners L.P., Kinder Morgan, and Magellan Midstream Partners, L.P.. The Motley Fool owns shares of Kinder Morgan.
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