The big shock in the pipeline world last year was when mega-midstream firm Kinder Morgan Inc. (KMI) decided to devour itself and buy out its master limited partnership (MLP) subsidiaries.
The idea was that KMI would have an easier time raising capital in order to fund acquisitions to add to its massive girth.
After all, you need some pretty big deals when you already have over 80,000 miles worth of pipelines and gathering lines in your system. And KMI stock just struck one.
Partnering with another oil tycoon, Richard Kinder and crew have made a purchase of a private pipeline system in the prolific Bakken shale — one of the only pipeline gigs in town. The buy promises to continue making KMI some steady coin over the next few years — no matter what the price of oil is doing.
For investors, it just goes to show that KMI stock is focusing on the longer term and is still a great buy.
KMI Calls Up A Billionaire Friend
Energy investors may not have heard of Hiland Partners, but they certainly have heard of its chief owner and founder Harold Hamm. Hamm is also the founder and CEO of Bakken superstar Continental Resources Inc. (CLR). When it comes to producing oil in Bakken, CLR is basically the top dog. And when it comes to pipelines and gathering systems in the shale formation, Hiland Partners currently takes the cake.
With that in mind, KMI decided to purchase the private midstream firm from Hamm and various family trusts for roughly $3 billion, including assumption of $1 billion worth of Hiland’s debt. For that price, KMI is getting some pretty sweet assets.
Kinder Morgan basically had zero exposure to Bakken, but with one fell swoop it now gains access to the region’s prime production spots and low-cost producing customers including Continental and Hess Corp. (HES). Hiland operates a series of oil pipelines, gathering lines and natural gas processing systems primarily in North Dakota and Montana, but its “crown jewel” could be its new Double H trunk line.
The new Double H will move 84,000 barrels of crude oil per day from Bakken towards Wyoming. The line will hook up with Tallgrass Energy Partners’ (TEP) Pony Express pipeline and flow into the “pipeline crossroads of the world” in Cushing, Oklahoma, where the Bakken’s crude will be sold. The Double H is scheduled to begin shipping crude oil by the end of this month and will expand capacity to reach to 108,000 barrels per day within a year.
That upsized capacity should be filled rather quickly because the region’s plethora of already-drilled wells need to find homes for their production. All in all, it gives the nation’s largest midstream firm a strong presence in one of the biggest contributors to rising U.S. oil production — production that will continue to grow over the long term.
It also helps KMI stock investors on the cash flow and dividend fronts.
The deal should be instantly accreditive to Kinder Morgan’s cash flows as Hiland operates the steady tollbooth-like assets that midstream investors crave. These fee-based pipelines should slightly increase the cash KMI has available for dividends this year and next. However, by 2017, the Hiland deal should really get cooking. By then, it will help KMI raise its dividend by six to seven cents.
And more could be in store for KMI and Hiland. The midstream system allows for easy expansion in the region. More oil-focused pipelines can be added as well as natural gas pipeline and processing assets. The Bakken produces a ton of natural gas; however, the vast bulk of it is still flared or burned off due to a lack of sufficient midstream infrastructure in the region. KMI now has an easy inroad to add it.
KMI Stock Is Still A Long-Term Buy
For investors, KMI’s decision to make a relatively big deal during a time of lower oil prices shows that it is thinking about the long term. And that’s exactly why you buy a pipeline midstream firm — long-term cash flows and dividends.
Ultimately, the Hiland’s deal will help strengthen KMI’s payouts and provide it an avenue for growth in the prolific region.
It also helps continue to reduce Kinder Morgan’s exposure to commodity prices. KMI does own some oil-producing wells, in which it uses CO2 injection to produce oil. That unit struggled in the firm’s latest earnings report. However, the continued rising cash flows from its fee-based assets — which Hiland is now a part of — have more than made up for the drop in commodity prices.
On the firm’s conference call, Kinder reiterated that, despite the fall in oil prices, it will have “significant excess coverage” when it comes to its dividend and still plans to increase its dividends by 10% each year from now until 2020. The Hiland’s deal will help make that come true.
Bottom line: KMI continues to prove itself as one of the best midstream firms around. Investors should take note and buy KMI stock.
As of this writing, Aaron Levitt was long KMI.
