Kinder Morgan Gets Bigger and Better

by Aaron Levitt | February 1, 2013 7:00 am

Kinder Morgan Gets Bigger and Better

The midstream sector continues to prove why it’s the industry du jour for investors. Deals keep getting done, new capacity is getting added and returns for the pipeline players have been strong. Overall, investors have plenty of opportunities to add master limited partnerships (MLPs)[1] to their portfolios as more and more firms look toward this tax structure for portions of their assets.

However, not all midstream companies are equal. And one of the best keeps getting better.

Fresh off of its $23 billion deal for El Paso, industry giant Kinder Morgan Energy Partners (NYSE:KMP[2]) has set its sights on smaller natural gas-focused Copano Energy (NASDAQ:CPNO[3]). At the same time, its general partner Kinder Morgan (NYSE:KMI[4]) has united with Royal Dutch Shell (NYSE:RDS-A[5], RDS-B[6]) to build a new facility to begin exporting liquefied natural gas (LNG) in Savannah, Ga.

The two deals highlight just why Kinder Morgan is one of the best of the best and why it should be your first stop in the midstream sector[7].

With more than 46,000 miles of pipelines[8], 180 storage terminals and numerous processing facilities, Kinder Morgan is the giant in the midstream industry. And it’s about to get much bigger.

Offering $3.2 billion to $5 billion, if you include debt, for Copano Energy, KMP will add to its mix 6,900 miles more of natural gas pipelines and nine more processing plants. The deal will be a 100% unit-for-unit transaction with an exchange ratio of 0.4563 KMP units per Copano unit. That works out to be a 24% premium for CPNO[9] shareholders.

While adding immediately accreditive pipeline capacity is always nice for an MLP, the key for the deal is just where those 2.7 billion-cubic-feet-per-day pipelines are located. The buyout will give Kinder Morgan instant exposure to some of the nation’s richest unconventional resources. KMP will become sole owner of a joint venture it already had with Copano in the Eagle Ford[10]. Additionally, the deal gives KMP access to three other liquids-rich areas in Texas’s Barnett Shale and Oklahoma’s Mississippi Lime and Woodford Shales.

Currently, there’s a shortage of pipelines to move gas and gas liquids such as ethane and propane in these regions. However, stricter regulations and environmental concerns have delayed the completion of several projects. For KMP, the deal helps the necessary trunk lines and processing capabilities expand easily and take advantage of what the Eagle Ford, Barnett and Mississippi Lime[11] have to offer.

Kinder Morgan also has a plan in place to deal with all of that gas it’s producing.

KMI-owned subsidiary El Paso Pipeline Partners (NYSE:EPB[12]) and Shell will form a limited liability company[13] to develop a natural gas liquefaction plant at an existing terminal. Once completed, the project is expected to have a liquefaction capacity of about 2.5 million tons a year and has already received Department of Energy approval to begin exporting. The proposed export expansion should achieve substantial time and cost savings relative to building a new facility. Given all the LNG projects in the works, first-mover advantage is critical.

Ultimately, that will help producers realize a higher price for their fuel flowing through Kinder Morgan’s pipelines — which could lead to higher volumes and revenues for the midstream firm. Not to mention the additional profits from running the export terminal.

Both the Copano and Shell LNG deals prove why Kinder Morgan is the midstream firm[14] investors need to own. Management has been focused on making sure its various expansion projects and deals are in the very best interest of its shareholders.

For example, the Copano acquisition is expected to add 10 cents per share to KMP’s earnings for at least five straight years. Currently, KMP’s targeted annualized distribution is $5.28. Starting next year, investors can expect to receive a 2% increase in their dividend based on this extra 10 cents.

However, that doesn’t even take into account other boosts from the MLP’s other pipelines, storage and terminal assets[15]. At the same time, KMI will receive higher incentive distribution rights from the deal as well. That will boost its 3.9% dividend even further.

Kinder Morgan generally trades at a slight premium to many others in the MLP[16] and midstream category. However, it’s justified because KMP really is the pipeline king. I expect future deals will only stand to strengthen its kingdom further against rivals like Enterprise Products (NYSE:EPD[17]).

As I would use any sort of general market pullback to add shares — whether it’s KMP, KMI or Kinder Morgan Management (NYSE:KMR[18])  — to a portfolio.

As of this writing, Aaron Levitt is long RDS-A, RDS-B and may initiate a position in KMI within the next 72 hours.

Endnotes:
  1. master limited partnerships (MLPs): http://investorplace.com/2013/01/love-mlps-youve-got-2-new-fund-options/
  2. KMP: http://studio-5.financialcontent.com/investplace/quote?Symbol=KMP
  3. CPNO: http://studio-5.financialcontent.com/investplace/quote?Symbol=CPNO
  4. KMI: http://studio-5.financialcontent.com/investplace/quote?Symbol=KMI
  5. RDS-A: http://studio-5.financialcontent.com/investplace/quote?Symbol=RDS-A
  6. RDS-B: http://studio-5.financialcontent.com/investplace/quote?Symbol=RDS-B
  7. midstream sector: http://investorplace.com/2013/01/all-eyes-on-mlps-for-2013/
  8. pipelines: http://investorplace.com/2013/01/the-hottest-thing-in-natural-gas-steel/
  9. 24% premium for CPNO: http://dealbook.nytimes.com/2013/01/30/kinder-morgan-to-buy-copano-energy-for-3-2-billion/
  10. Eagle Ford: http://www.investorplace.com/2012/05/energy-independence-fracking-the-eagle-ford/
  11. Mississippi Lime: http://www.investorplace.com/2012/03/tapping-the-mississippi-lime-for-oil/
  12. EPB: http://studio-5.financialcontent.com/investplace/quote?Symbol=EPB
  13. limited liability company: http://www.reuters.com/article/2013/01/28/us-shell-lng-idUSBRE90R0LP20130128
  14. midstream firm: http://investorplace.com/2013/01/look-beyond-the-rocky-start-for-qeps-mlp/
  15. terminal assets: http://investorplace.com/2012/12/refiners-prepare-for-the-worst-with-mlps/
  16. MLP: http://investorplace.com/2012/12/pipelines-prove-where-the-real-action-is/
  17. EPD: http://studio-5.financialcontent.com/investplace/quote?Symbol=EPD
  18. KMR: http://studio-5.financialcontent.com/investplace/quote?Symbol=KMR

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