Kinder Morgan Inc (NYSE:KMI) is one of the largest midstream energy players in the U.S. In the energy patch, there are upstream firms (exploration and production), midstream firms (pipelines and storage terminals) and downstream firms (retail, refining and distribution). Big energy companies like Exxon Mobil Corporation (NYSE:XOM) are vertically integrated across all of these sectors.
The midstream players have been interesting for two core reasons: Many were master limited partnerships (MLPs) that treated shareholders as owners, and distributed profits on a regular basis in the form of dividends. And those dividends were very juicy for a while.
The second reason is, midstream players are more like toll booth operators. Unlike their upstream or downstream brethren, the price of whatever commodity is flowing through pipes matters little to midstream players. It’s the volume that matters.
With all this in mind, we can now explore where KMI fits into the picture right now.
KMI Stock Turnaround
In late 2014, KMI announced it was going to buy up its MLPs and consolidate them into the general partner firm Kinder Morgan. This was a $76 billion internal acquisition and made KMI “the largest midstream company and third largest energy firm in the U.S.”, according to its CEO and Chairman Richard Kinder. It now operates 84,000 miles of pipelines in the US and Canada, with 155 terminals.
The goal was likely to consolidate the profits into KMI and not have to distribute so much of the profits to shareholders. That was all well and good, but then the bottom fell out of the energy markets. As the merger was announced, oil was nearly $100 a barrel and natural gas was around $4 per million BTU. Now, oil and natural gas are slightly better than half those prices.
Needless to say, the past couple of years have been tough on KMI in particular and the U.S. energy patch in general. But there is a turnaround under way. Rig counts in the U.S. are up, week after week. Mergers are popping in the midstream space and companies that have cash are looking to gain market share.
U.S. inventories are growing and exports are booming. Shale production is getting back online. The economy is getting back on its feet. Things are looking up.
And even if this increased production keeps prices low, it doesn’t matter to KMI. It will be making money on the increased flow, not the prices. This is why the midstream sector is the best place to get back into the U.S. energy game, since it’s about increasing demand and is slightly agnostic about supply.
While KMI doesn’t throw off a huge MLP-like dividend, it does provide a 2.3% dividend that will at least pay you for your patience as the stock and the sector get back to full capacity.
Richard Band’s Profitable Investing advisory service helps retirement savers outperform the market without losing a minute of sleep along the way. His straightforward style and low-risk value approach has won seven Best Financial Advisory awards from the Newsletter and Electronic Publishers Foundation.