As evidence of the continuing bull market, Kinder Morgan, Inc.’s (KMI) massive acquisition of its partnership companies is a significant sign that business conditions remain strong in the energy industry.
Kinder Morgan surprised the marketplace by announcing plans to purchase Kinder Morgan Energy Partners, L.P. (KMP), Kinder Morgan Management, LLC (KMR), and El Paso Pipeline Partners, L.P. (EPB) in an enormous $70.0-billion consolidation.
The wealth effect from the news was immediately significant, with all partnership units rising substantially on the stock market.
Kinder Morgan Energy Partners is the largest master limited partnership in the United States and has been a top choice among income-seeking investors. The partnership was worth approximately $80.0 billion, or $80.00 per unit, with a 6.9% yield before news of its acquisition. It opened 20% higher, close to $100.00 per unit, on news of the deal.
Investors can choose cash or take up new shares in Kinder Morgan, Inc., which plans to increase its dividend 16% in 2015 to $2.00 a share. The company also plans to increase its dividend by at least 10% per year until 2020, and it’s likely that there will be a number of smaller divestitures over the coming quarters.
Once the company acquires all its related corporate entities, it will be the largest energy infrastructure company in North America. Management expects its debt to be investment grade, and the combined company should be able to garner a lower cost of capital.
The current environment is a great time to be in energy infrastructure. Transportation and storage of hydrocarbons is a growth business with rising domestic production.
And it’s tough to find double-digit annual growth in dividends. Unit holders in Kinder Morgan limited partnerships should do well taking up shares in the newly consolidated company.
Kinder Morgan Energy Partners had been under pressure by institutional investors to lower its costs and to create more wealth over and above its high rate of income to unit holders.
Consolidation of Kinder Morgan’s partnerships is a renunciation of the master limited partnership business model; but in this specific case, the new company will be easier for investors to understand. It’s the right move at the right time for these corporate entities.
Domestic energy infrastructure is a top investment theme and should continue to be a strong wealth creator throughout this decade. (See “How to Profit from the Surge in Domestic Oil Production.”)
I think the new Kinder Morgan, Inc. can be a good wealth creator and income provider going forward. The company will be able to shed non-core assets and be much more nimble in its financing activities.
Big oil has a problem trying to grow production, which is why big oil with a strong dose of transportation and storage assets should make for an attractive holding.
Kinder Morgan, Inc. will become the fourth-largest U.S. energy company by market capitalization. Unit holders of Kinder Morgan Energy Partners will get 2.1931 shares of Kinder Morgan, Inc., plus $10.77 in cash for every unit held. This is a good business for investors to be in at this time.