NEW YORK (Real Money) --
"In our view, Kinder Morgan is significantly misunderstood and overvalued. Currently Kinder Morgan, a widely held consensus long, but it is so for the wrong reasons as we detail in this report. We believe the Kinder Morgan complex (KMI, KMP, KMR and EPB) has substantial downside to fair value, at least 50% below the combined market cap."
That quote is the preamble to a brutal attack by Hedgeye, a quasi-research firm, on Rich Kinder and his company, titled, "Is Rich Kinder Maintaining his Stock Price Instead of his Assets?" It appeared Sept. 10, 2013, almost one year ago. At that moment, Kinder Morgan Energy Partners (KMP) shares stood at $80.51.
The stock will not ever fall to Hedgeye's $40 target. That's because, as of today, it is being taken over at about $90 a share by an entity controlled by Rich Kinder. It looks like he isn't maintaining his share price -- he's boosting it -- and all along he's creating one of the largest energy companies in the world with the best technology and the most vision.
I remember that Hedgeye report well because it chose to poke fun at me -- or was it spew venom? -- for endorsing the man and his company and emphasizing that it was a consistent toll-road player.
I remember talking to Rich on air not long after the report came out. I commiserated that, amazingly, the man who had helped create one of the great energy companies of all time was somehow now being reviled for running a second-rate pipeline company that skimps on safety and maintenance. Rich had been in disbelief. Like all pipeline companies, Kinder was not without its issues. However, for the last decade his companies have had among the best safety records, and his spending on maintenance has been at the higher end of the industry. He has spent vast sums in order to ensure that that would be the case.
Rich never hid that Kinder Morgan was a substantial energy producer, the eighth-biggest in Texas, producing 55,000 barrels a day, according to the state's 2013 numbers. Sure, that makes it "less" of a toll road, but that oil has been gravy on top of the pipeline steak -- a steak that has only gotten thicker and tastier over the years, given the vast CO2 abilities Kinder has when it comes to getting oil out of the ground. This is a chemical that eases the process and makes it much cheaper to get oil out of old fields.
But Rich had a hard time rebutting the presumption that one of his companies, Kinder Morgan Inc. (KMI), was enriching itself at the expense of Kinder Morgan Energy Partners, the master limited partnership. The argument said that this was because of incentive distribution rights that take a substantial chunk of the earnings from the master limited partnership -- 65% of the net income, according to Hedgeye. The high cost of the incentive distribution rights has raised the cost of capital for the master limited partnership vs. others in the industry. Critics say that this, plus the law of large numbers, has caused the company's growth to slow.
It was a charge that was hard to refute, because Kinder Morgan Energy Partner's stock has been flat for the year and has underperformed the group. That -- and not the safety charges or the oil-production-as-mask-for-poor-performance charges -- was the gravamen of the case against Kinder Morgan Energy Partners. That's why Hedgeye said, "The bull case for Kinder Morgan rests largely upon the logic that this has not mattered in the past therefore it will not matter in the future." Hedgeye said, "That's a dangerous way of thinking."
Now, the report, on the heels of a tough takedown on Linn Energy (LINE), caused the perception to change about the company. Rich Kinder, who has paid himself $1 a share and has never sold a share of his entities, looked like a selfish hypocrite.
But here's the thing about Rich. Here's what makes him a great executive, and one of my bankable 21 CEOs from Get Rich Carefully. He listened to the criticism about how the incentive distribution rights payout was hurting Kinder Morgan Energy Partner's performance. He took to heart how some investors believed he was now losing out to the competition. And he decided to take action, even if in the end he would make less money after the transaction, because the master limited partnership wouldn't be paying out the big bucks to the general partner. That said, I think that, in the end, everyone will make more money because of a newly announced dividend policy that makes for the best growth in the entire sector.
In a real touch of irony, Hedgeye wrote, "The key risk to our thesis (from an investment perspective) is the lack of an identifiable catalyst. We are confident we are right but we do not know when the market will prove us right. Kinder Morgan has been a fantastic investment for many years and consensus opinion could be stubborn and slow to turn."
It turns out we were stubborn and we were right, and Hedgeye was flippant and disrespectful and wrong. We chose to believe in Rich Kinder, and not in his critics, because we believed him when he always said his companies are "companies run by shareholders for shareholders." It looks like it wasn't worth waiting for the market to prove Hedgeye right -- because, alas, when it comes to Kinder Morgan and today's huge bid, it never, ever will be.
At the time of publication, Action Alerts PLUS, which Cramer co-manages as a charitable trust, had no positions in the securities mentioned.
Editor's Note: This article was originally published at 6:12 a.m. EDT on Real Money on Aug. 11.