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Major Midstream Oil and Gas Consolidation

Kinder Morgan (NYSE: KMI) Acquiring Three Companies

Written by Briton Ryle
Posted August 11, 2014

If you have ever felt like consolidating all your accounts and debts across multiple banks into one profile at just one institution, then you know why Kinder Morgan is doing the same with its companies.oil pipes joint

“Kinder Morgan, Inc. (NYSE: KMI), Kinder Morgan Energy Partners, L.P. (NYSE: KMP), Kinder Morgan Management, LLC (NYSE: KMR) and El Paso Pipeline Partners, L.P. (NYSE: EPB) today announced that KMI will acquire all of the outstanding equity securities of KMP, KMR and EPB.”

Whew! That’s a mouthful. In a nutshell, Kinder Morgan Inc (KMI) is buying out the other three companies (KMP, KMR and EPB), as announced in yesterday’s press release.

“All shareholders and unitholders of the Kinder Morgan family of companies will benefit as a result of this combination,” Chairman and CEO Richard D. Kinder joyfully announced. “Everyone will hold a single, publicly traded security – KMI.”

KMI is doing some restructuring, which should result in a good deal of cost savings through synergy, as well as saving a good deal of expenses associated with having so many publicly traded stocks.

And there’s one more great benefit to make note of… KMI “will have a projected dividend of $2.00 in 2015, a 16 percent increase over the anticipated 2014 dividend of $1.72,” Richard Kinder revealed. “We expect to grow the dividend by approximately 10 percent each year from 2015 through 2020.”

KMI’s family of companies are all involved in the oil and gas pipeline business, a sector which has been most generous with its investors through bountiful dividend disbursements that are among the highest available on the stock market. The company is committed to continuing its exceptional dividend rates (yielding from 4.70% to 7.50%) after the consolidation.

Let’s take a little look at what the new monster company will be comprised of, and how it might fair compared with its peers.

Greater Than The Sum of its Parts

The soon-to-be combined Kinder Morgan Inc. will become “the largest energy infrastructure company in North America, and the third largest energy company overall,” informs CEO Kinder.

Here’s a simple break-down of what each company will be contributing to the whole:

• Kinder Morgan Energy Partners (KMP), operates pipelines and energy storage facilities in the U.S., delivering gasoline, diesel fuel, jet fuel, and natural gas liquids through approximately 8,600 miles of petroleum pipeline and 33,000 miles of natural gas pipeline. It operates 62 terminals and transmix processing facilities, 7 oil fields, 113 liquids and bulk terminal facilities, and 35 rail transloading and materials handling facilities. Additionally, the company owns 2,500 miles of crude oil and refined petroleum pipeline linking Alberta, Canada, to refineries on the Pacific and in the central U.S.

• El Paso Pipeline Partners (EPB) owns and operates interstate natural gas transportation and terminaling facilities serving the Rocky Mountain, midwest, and southeastern regions, as well as liquid natural gas storage and regasification terminals near Savannah, Georgia. The company owns some 13,000 miles of pipeline, with some 100 billion cubic feet of gas storage capacity.

• Kinder Morgan Management (KMR) holds interests in the above mentioned KMP and EPB.

• Kinder Morgan, Inc. (KMI), which will become the new parent company of the above three, operates various segments including Natural Gas Pipelines, CO2—KMP, Products Pipelines—KMP, Terminals—KMP, and Kinder Morgan Canada—KMP. In all, the company has an interest in approximately 80,000 miles of pipelines transporting such products as natural gas, gasoline, crude oil, and carbon dioxide (CO2), as well as in 180 terminals storing petroleum products, chemicals and other products which include ethanol, coal, petroleum coke, and steel.

When combined by the end of 2014, KMI will have an “enterprise value of approximately $140 billion,” Kinder estimated. “Additionally, we will have a leading position in each of our business segments, and operate in the rapidly growing North American energy infrastructure sector.”

The Benefits of Synergy

Contributing to that leading position will be a more efficient use of financing and credit “by eliminating the incentive distribution rights and structural subordination of debt”, the press release explains. When financing a particular project in one of its segments, the company will be able to draw upon all its combined assets when negotiating investments and loans, resulting in better terms.

As such, KMI’s board expects the combined company “will be a valuable acquisition currency and have a significantly lower hurdle for accretive investments in new energy infrastructure”.

What do they mean by “valuable acquisition currency”? Essentially, more clout with which to purchase new interests and continue growing the company. The company sees the “opportunity-rich environment of today’s energy infrastructure sector” as presenting plenty of growth potential. By pooling all companies’ operations and assets together, the company expects the new structure will give it “the ability to grow KMI for years to come”.

Pooling all companies’ operation together will also provide “significant tax benefits for KMI shareholders from depreciation deductions associated with the upfront purchase and future capital expenditures,” the release informs.

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Survival Better Assured in Numbers

While each of the individual companies has been quite profitable to investors through huge dividends (KMP = 6.9% annual yield, KMR = 7.2%, EPB = 7.5%, KMI = 4.7%), the consolidation may be something of a rescue plan to stimulate growth as a group where individually growth appeared to be slowing.

EPB, for instance, posted -1.7% quarterly revenue growth and -16.1% earnings growth year-over-year. Net income of $131 million for Q2 of 2014 was the lowest income of the last four quarters. While this may be blamed in large part to unseasonable weather this Q2 as compared to Q2 of 2013, future earnings projections aren’t very promising either.

Analysts expect EPB to continue lagging, projecting a shrinkage in Q3 of -5.00% (which is still better than its sector’s expected -87.30%), and another shrinkage in Q4 of -4.20% (as compared to its sector’s expected growth of +21.40%). For 2015, analysts estimate EPB’s earnings to grow a measly 0.60%, with the sector growing at 7.60%.

KMP has been stagnant as well. Although posting very nice quarterly revenue growth of 18.60%, its earnings year-over-year shrank -33.90%. While 2013’s annual income of $3.281 billion beat the pants off of 2012’s $1.383 billion and 2011’s $1.258 billion, the company generated only $661 million in net income for Q2, the lowest of the last four quarters, similar to EPB.

Analysts expect KMP’s earnings to fair a little better than EPB’s going forward, but still well behind its sector. Growth for Q3 is expected to be 31.40% (compared to its sector’s growth of 113.20%), and 6.50% for Q4 (compared to its sector’s growth of 118.80%). For 2015, KMP is expected to continue trailing its sector with growth of 3.60% as compared to the sector’s 8.10%.

As for the management arm with interests in both EPB and KMP, Kinder Morgan Management (KMR) has faired worst of all, posting quarterly revenue shrinkage of -67.10% and quarterly earnings shrinkage of -49.30% year-over-year. However, as the management segment, it is probably not supposed to be making much in the way of profit anyway, operating as something of a back-office service shared by EPB and KMP, which are the main income generators for the company.

Pooling everything into KMI looks like a wise move. If KMI can be taken as a proxy for the entire family of companies, its future prospects look good, with quarterly revenue growth of 16.40% and quarterly earnings growth of 2.50%, with returns on assets and equity of 3.65% and 8.24% respectively.

Analysts expect KMI’s 2014 growth of 7.00% to almost match its sector’s 7.10%, with its 2015 growth of 18.70% to far out perform its industry’s 11.80%, its sector’s 7.60%, and the S&P broader market’s 12.10%.

With the addition of KMP and EPB under its roof, KMI should prove itself to be a valuable dividend payer and capital appreciator for years to come.

Joseph Cafariello

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