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Kinder Morgan May Bleed 2016 Dividend to Conserve Cash Flow

Kinder Morgan Inc., the weakest pipeline operator in the S&P 500 this year, may divert cash from dividend payouts as the worst oil-market collapse in a generation threatens its investment-grade rating. The company’s shares plunged as much as 14 percent to an all-time low.

The company’s board “will be reviewing the dividend policy and financing plans in the coming days,” Kinder Morgan said in a statement Friday. The company said it expects to generate $5 billion in distributable cash flow next year that would be sufficient to support a dividend increase. “Alternatively, this cash flow can be used to fund some or all of KMI’s equity needs for 2016.”

As recently as Nov. 18, the company was promising investors a 6 percent to 10 percent increase from the $2 per share it budgeted for this year. In today’s statement, Kinder Morgan pledged to “take required action” to avoid a downgrade to junk status.

Analysts have been split on whether Kinder Morgan’s dividends are sustainable as the pipeline industry’s ability to tap equity and debt markets to finance growth dimmed. The company’s stock has slumped 27 percent this week to $17.47 as of 12:34 p.m. in New York. Moody’s Investors Service warned on Tuesday that Kinder Morgan’s bonds were on the verge of tipping into junk.

“Dividend growth is unrealistic,” Vivek Pal, a managing director at Jefferies LLC in New York, said in a note to clients before the announcement. The company needs a 50 percent dividend cut to avoid being downgraded to junk, he said.

Prior to today’s announcement, Kinder Morgan had been expected to lift its 2016 dividend to $2.14, according to Bloomberg Dividend Forecasts. Companies across the oil and gas industry have been slashing or freezing dividends to conserve cash as plunging energy prices choked off money needed to drill wells, pay debts and purchase drilling rights.

Transocean Ltd., Chesapeake Energy Corp. and Linn Energy LLC are among those whose investors have seen payouts halted amid the crunch that began 18 months ago. Kinder Morgan’s $40 billion-plus debt burden exceeds the economic output of entire nations, including Bolivia and Bahrain.

The company co-founded by Texas billionaire Rich Kinder in 1997 had raised payouts every quarter since its 2011 initial public offering.

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