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The Enron and Kinder Morgan Tell


Kinder takes a $1 per year salary, owns no stadium deals or even suites inside a stadium, uses coach class airline tickets, and put his own name only on his own door.

The Kinder Morgan (KMI) announcement on Monday was more than just a buyout offer if you ask me. It offers a reminder and a prediction.

I had second row seats to the "tragic Enron saga" down here in Houston which had barely come to an end last week before Kinder put his own punctuation mark on this chapter. I believe they should share in textbooks for our kids and investment books for their parents. I have bitten my lip and keyboard on the Enron part of the story for a long time, and one day I'll share my opinion that the co-conspirator was acquitted which will have longer lasting repercussions. But for now…here is the good side of this chapter and a "tell" that may come along only every decade or so if you are watching closely.

Rich Kinder was Ken Lay's second in command at Enron in the 1990's before leaving to start his own little company with a partner, called Kinder Morgan. Kinder and Lay were fraternity brothers running a growing empire at Enron. Yet Kinder's departure was notable to very few and his new company was (and still is) unknown to many, even here in Houston. My partner and I thought the move was a "tell" describing more about what was going on at Enron than we ever needed to hear from a courtroom almost ten years later. It was a departure and a story we have studied and learned from greatly as money managers and one which I believe offers something for everybody, from an amateur making their first investment or a grizzled vet making their last (yeah, it cost some fund managers their jobs).

It was announced on Monday, that only one week after his former boss became a convicted felon, Kinder will attempt to orchestrate one of the largest management-led buyouts of all-time. The seeds were likely planted for each dramatic conclusion years ago during legendary meetings where Kinder reportedly held nothing more than a yellow legal pad and a list of questions. As the stories (and there are plenty) go, he didn't get enough answers so he did something about it – he voted with his feet.

He left behind soaring salaries and options, first class tickets everywhere, any seat at a ballpark named after his company, and being treated as close to royalty as you're gonna get down here in Texas. He traded all of that for virtual anonymity and a pile of boring pipelines that Enron wanted to throw away. Kinder takes a $1 per year salary, owns no stadium deals or even suites inside a stadium, uses coach class airline tickets, and put his own name only on his own door. He set everything up so that if he benefits, it will be only as a shareholder. In short, he does what you'd like a partner of yours to do if he ran your business while you were away for several years. Isn't that what an investment was always supposed to be?

In the interest of the fiscal literacy mission of the 'Ville I think Kinder offers a powerful reminder to analyze both people and data. You can look at data all day long, but it is based on an assumption that you can trust the people behind it. There are times when investors should give themselves and their instincts more credit. When something doesn't feel right it probably isn't; no MBA is needed to throw that last sentence together. When you can find somebody to trust, it makes everything else easier. Not easy, just easier. As a money manager, I could get blindsided tomorrow but if I've stacked the odds in my favor by owning some businesses run by some people whose track records are clearer than most numbers ever could be, I will take that risk.

We all, myself included, get easily swept up into short-term thinking and trading – which can work and work quite well. But, in our experience, being a true shareholder of core holdings underneath this trading adds a significant foundation (and cash flow) that can allow and finance even more aggressive trading than many will ever realize.

Sometimes, some things really can be simple in our business. But the price of admission is steep, it's called patience. There were plenty of folks who thought we were far too patient with this boring pipeline company, especially in the late 90's. Actually, some of them thought we would make better patients in other institutions. We continued to patiently hold KMP, which is Kinder's master limited partnership. The $3 dividend on our partner's original shares bought in the late 90's works out to a 16% current annual yield on those dollars invested, and that's not even counting the appreciation in share price. I am of the opinion they each continue to increase based on my own homework. The next time a partner wants me committed at least they will be able to afford to give me a ride.

Kinder's boring pipelines offer me a chance to dispel another myth that Wall Street is a rigged game played by insiders. I went to school with the President, my best buddy as a kid works there and his sister is CFO, yet I have not ever spoken to any one of them about the company. Not once. I will get plenty of disagreement from folks I respect immensely who believe in talking to management which works well for them, but for me this is about objective and original thinking. Buffett may have said it best, "managers lie like ministers of finance on the eve of devaluation." One of the best money management shops in the world is able to speak to management MUCH more easily than I ever could, yet they were a big seller of KMI just before the buyout news, selling over 2 million shares last quarter alone according to recent filings. Sometimes one yellow legal pad and the right questions are worth more than the best data.

My prediction is not about this stock, I think Kinder offers a bigger "tell" once again just like he did a decade ago. Many sharpies have called for the end of the energy cycle. "We have peaked," many have said and written. I disagree. I think prices go much higher over the next decade, but I also believe there is substantial short-term risk. My stronger feeling is that while energy may currently be over-traded and over-done, the infrastructure may be under-invested and under-built.

Kinder apparently agreed when he said about KMI over the weekend, "At $84, investors are saying, 'There are risks to these projects so we're putting a heavy discount on it,'" Kinder was referring to aggressive expansion plans announced in the past year such as building a new natural gas pipeline out of the Rocky Mountains and a $5.6 billion acquisition of a Canadian pipeline company. "But we're confident we can make these commitments come to fruition. We're willing to take the risk away from the shareholders."

I believe his instincts are better than most about the energy markets, and his knowledge of the pipeline business may be unsurpassed. If I'm right, he knows better than the sellers what he's getting for the announced $100 per share offer. That is…if he can get them for that price. He may no longer be alone in thinking the infrastructure business makes a good investment.

He has taken undervalued assets away from impatient traders before.
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