Note: This is not intended to be a detailed analysis of Kinder Morgan. It is a blog post in the truest sense: I’m simply thinking out loud, looking for answers admist the noise. 

Barron’s really did a number on Kinder Morgan (KMI) this past weekend (see Kinder Morgan Could Fall Another 20% or More).Barron’s has been down on Kinder Morgan for more than a year and a half now, and some of their caution has certainly proved to be warranted in light of the share price declines of the past year. Kinder Morgan has a lot more commodity-price sensitivity than any us bulls realized. But after the thrashing the stock has already taken, is more downside likely?

My instinct would say “no.” But let’s take a real look at Barron’s numbers to see if they hold water.

Barron’s Beef With KMI

Much of the arguments against Kinder Morgan focus on its use of non-GAAP accounting, which is typical of MLPs. Of course, Kinder Morgan is not an “MLP,” per se, but a corporation that happens to be in the same line of work, in this case midstream oil and gas pipelines.

Following MLP convention, Kinder Morgan bases its dividend payout on “distributable cash flow” as opposed to net income or free cash flow. Distributable cash flow (which is a metric unique to MLPs) takes net income, adds back in depreciation and other non-cash expenses, and then subtracts maintenance capital expenditures. The idea is that this is the cash profit thrown off by existing operations that can be paid out to shareholders. Capital expenditures for expansion are funded by new debt and equity issuance.

In contrast, the more conservative “free cash flow,” which (though also non-GAAP) is a more traditional way to measure a company’s ability to pay a dividend, makes no distinction between maintenance capex and expansion capex. Free cash flow is the cash left to payout to investors after all capital expenditures. (There are also other accounting differences, but for our purposes here this is sufficient.)