George Thoreson

About the Author George Thoreson

I'm a bottom-up value investor and invest in companies selling below their intrinsic value, often because they are out of favor, ignored or in a special situation. Searching for value leads to interesting companies that are out of favor for many possible reasons. Studying successful value investors and learning from my own mistakes the merits of value investing, over the long term, became apparent. After becoming a value investor my results improved. Sure, I still make mistakes, but on average I’ve been fortunate in getting more right than wrong. My investing approach is covered on my blog; The share price of a company often have nothing to do with the underlying value of the company the shares represent. So, I look for investments that are priced low relative to their true or intrinsic value so they provide a margin of safety. Then we must patiently wait, as an owner of the company, until the share price catches up to reflect the underlying value.

George Thoreson: Our Investment Thesis On Kinder Morgan Is On Track

We bought Kinder Morgan Inc. (NYSE:KMI), in October 2014 after it announced the consolidation merger bringing all of its publicly traded segments into one company. We expected good things from KMI and the 29% gain in 2014 was a nice start for the 2½ months we owned it.

We are expecting more good things over the years and the keys to assuring the investment thesis plays out are discussed below. Our thesis anticipates KMI’s total return will be realized from dividend income, dividend growth and the resultant share price appreciation. The details are in the company’s year-end and 4Q14 results [here]. We’ll follow the financials over time, but focus more on the drivers of our investment thesis posted [here].

Challenging Environment:

The oil industry had a tough year and over the last six months oil prices fell to the lowest levels since the financial crisis. Demand softened worldwide, especially with Europe and China both facing economic slowdowns, and increased supplies from North America and Iraq contributed to an oversupply. At one point crude oil was down nearly 60% percent from the summer highs and investors abandoned the energy sector.

As would be expected, KMI showed some decline in the carbon dioxide segment that produces crude oil and natural gas liquids offset with a hedging program. The majority of the business, however, showed solid volumes and cash flow growth. KMI is primarily a midstream infrastructure company that receives a fee for transporting products and largely insulated from the volatility of commodity prices. The company’s 2014 cash flow increased 9% over 2013 to $7.5 billion in segment earnings before depletion, depreciation and amortization (DD&A) and certain other items. This cash flow growth during the severe drop in crude oil prices attests to the advantages of the “toll road” business model.

Significant Progress:

Key to our investment thesis was the November 2014 completion of the consolidation merger. It simplifies the company and lowers the cost of capital for the needed growth in investment, cash flow and dividends.

The backlog of expansion projects and investments is a leading indicator of future returns on investment to ensure growing cash flows, and projects need to be continually added to the backlog. KMI reported a $17.6 billion backlog for the 4Q14. Since the prior 3Q14 earnings release $730 million of projects were completed and placed into service, $785 million in projects were removed — primarily delays in the CO2 segment due to lower commodity prices — and $1.24 billion in new projects were added to the backlog for a net $275 million decline.

More than offsetting the net decline/delay in the projects is KMI’s announced [Source] acquisition of Hiland Partners for approximately $3 billion, including the assumption of debt. Hiland’s assets are mostly fee-based, consisting of crude oil gathering and transportation pipelines and gas gathering and processing systems serving production from the Bakken formation in North Dakota and Montana.


The company announced an increase in its quarterly cash dividend to $0.45 ($1.80 annualized). This represents a 10 percent increase over the 4Q13 dividend of $0.41 per share ($1.64 annualized) and is up from $0.44 per share ($1.76 annualized) for the 3Q14.

Management Change:

KMI also announced that Steve Kean will become CEO of Kinder Morgan effective June 1, 2015 and Rich Kinder, the current CEO, will become Executive Chairman:

“This will be a seamless transition, and we will continue to operate the company with the same philosophy and in the same manner,” Kinder said. “Good leadership includes taking steps to assure that the future of the company is in good hands and involves detailed and thoughtful succession planning…As for me, I’m not going anywhere and will remain involved in all major company decisions, including acquisitions and capital projects. As the largest shareholder of KMI, I remain very enthusiastic about the future of the company. I have never sold a share of stock and don’t intend to now…”


Kinder Morgan Inc. had a good year in 2014 showing a total return of 22.2% (consisting of 17.5% gains and 4.7% dividends) comparing favorable to the S&P 500’s 14.0% total return. The cash flow growth during the severe drop in crude oil prices attests to the advantages of the “toll road” business model and the announced acquisition and project backlog is encouraging. Our investment thesis is on track and I don’t think we could have expected much more in this environment.

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