The KMI stock price fell 4.3% and hit an all-time low of $15.73 a share on Tuesday. The plunge came after the oil pipeline giant shocked Wall Street with a surprise announcement.
On Dec. 8, Kinder Morgan Inc. (NYSE: KMI) reduced its dividend by 75% from $2.04 a share to $0.50 a share. Officials cited high spending on drilling projects and low cash flow as reasons for the cut.
Kinder Morgan is the largest energy infrastructure company in North America. It operates more than 80,000 miles of pipeline and 180 terminals for the transportation and storage of oil and natural gas.
The company's dividend cut comes at a time when U.S. oil titans are struggling to achieve profitability and float expensive drilling projects. After all, the WTI crude oil price currently trades at a seven-year low of $36.90 a barrel, and the U.S. oil supply stands at an 80-year high of 485.9 million barrels.
But the Kinder Morgan stock drop this week doesn't come as much of a surprise. That's because it has already been one of the worst-performing oil stocks of 2015...
The KMI stock price has cratered 60.3% so far this year. That's significantly worse than some of the most actively traded Big Oil companies. BP Plc. (NYSE ADR: BP), Exxon Mobil Corp. (NYSE: XOM), and Chevron Corp. (NYSE: CVX) are only down 16.6%, 18.2%, and 21.9% in 2015, respectively.
While some investors may see this as the perfect opportunity to buy in at a discount, there's one reason why the KMI stock price will keep falling in 2016...
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One Reason Why the KMI Stock Price Will Keep Falling in 2016
The biggest reason why the KMI stock price will continue to suffer in 2016 is its midstream operations.
Midstream oil companies like Kinder Morgan transport oil and gas rather than produce or refine it. The most attractive quality of these midstream oil stocks is their high dividends.
You see, these firms typically have more money to shell out to investors because they derive most of their revenue from pipelines and storage facilities. They are able to keep making money as long as the oil keeps flowing.
But oil prices have fallen much lower than originally expected. That means midstream companies that considered themselves "insulated" from $50 oil prices in July are now cutting costs. Cutting dividends is one way these companies are able to cover a harsh debt situation. According to Bloomberg, the oil industry racked up $500 billion in debt by the end of the third quarter.
Kinder Morgan's massive dividend cut has already shaken the confidence of income-oriented investors who rely on midstream stocks for their high yields. More investors will be urged to sell their shares of KMI if the company doesn't raise its dividend soon.
That looks extremely unlikely as the company deals with mounting debt. Barron's reported that Kinder Morgan had $42.5 billion in debt at the end of Q3.
Alex McGuire is an associate editor for Money Morning who writes about energy. Follow him on Twitter for all of the biggest updates on oil and gas prices.
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