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Why the Pipeline King is Making Out Like a Bandit

Kinder Morgan Inc. (KMI) is the undisputed king of pipeline companies.

Commanding 75,000 miles of pipeline, KMI is the largest midstream energy company in North America – a position that gives it unrivaled access to the continent’s newfound energy bounty.

The strength of Kinder Morgan’s position was recently demonstrated by its fourth-quarter earnings statement.

The company’s results were up across the board…

Natural gas liquid volume was up 22%. Overall natural gas traffic rose 11%, driven primarily by demand for electricity generation. And ethanol and biofuel volume jumped 11%, as well.

With that, Kinder Morgan’s fourth-quarter earnings more than doubled, with net profit surging to $349 million from $155 million a year ago. Revenue rose 59% to $3.08 billion.

And is it any wonder, considering the record amounts of hydrocarbons being pumped out of the United States and Canada?

Indeed, natural gas production climbed to a record high for a third-straight month in November, reaching 73.88 billion cubic feet (bcf) per day, according to the Energy Information Administration (EIA). Consumption climbed 7% from a year earlier to 2.154 trillion cubic feet (tcf) – also a record.

At this rate, it’s a virtual certainty that both natural gas production and consumption hit new all-time highs in 2012.

The last time that happened was 1972.

U.S. oil production is up, as well.

Output jumped to 6.4 million barrels per day last year – the largest amount since 1997 – according to the American Petroleum Institute.

In fact, since 2008, U.S. oil production has surged a stunning 28% thanks to new, unconventional supplies. And the numbers aren’t going anywhere but up.

The EIA predicts U.S. crude oil production will grow by 900,000 barrels per day (bpd) in 2013 – the largest amount on record – to 7.3 million bpd.

The increase in production has actually been so stellar that it’s poised to overwhelm the nation’s transport network, if new investments aren’t made.

Indeed, if the United States is truly going to become a net energy exporter, as analysts predict, we need new power plants, more refining capacity, larger storage fields, new export facilities and, most of all, more pipelines.

That’s where Kinder Morgan comes in

Long Live the King

Interstate pipeline companies have already received approval to construct over 16,000 miles of interstate pipelines, with total combined capacity exceeding 100 bcf per day. But that’s not enough. The United States will require another 50,000 miles of pipeline capable of transporting oil, natural gas and natural gas liquids if it’s going to maximize its energy potential.

For that reason, more than half a trillion dollars ($533 billion) will have to be spent on pipelines and infrastructure over the next 20 years.

And Kinder Morgan is leading the charge.

Last year, the company made a huge move by acquiring El Paso Pipeline Partners, more than doubling the size of its pipeline network and gaining access to key natural gas development sites.

That decision is already paying dividends. El Paso generated a $178-million fourth-quarter profit, up from $139 million a year earlier. Its operating margin widened to 63.6%, from 54.4%.

Additionally, Kinder Morgan has over $2.7 billion in expansion projects underway and has identified another $12 billion more of potential expansions that could contribute to the bottom line.

And speaking of dividends, Kinder Morgan is a distribution magnate.

It’s raised its dividend in each of the past five quarters, most recently to $0.37 a share. KMI stock now yields about 4%.

That payout is in good standing, too.

Kinder Morgan reported fourth-quarter cash available to pay dividends of $439 million, up 81% from $243 million a year earlier. For the full year, KMI reported $1.41 billion of cash available to pay dividends, up 62% from 2011 and far exceeding its published annual budget of $985 million.

That means more dividend hikes are bound to come. So are higher earnings, and thus, more profits for investors.

No doubt, Kinder Morgan is poised to dominate the bourgeoning midstream sector for the next several decades – just as North America grows into a full-blown energy superpower.

So don’t miss your chance to cash in on that potential, or the company’s lofty dividend.

And “the chase” continues,

Jason Simpkins

Jason Simpkins

, Energy Editor

View More By Jason Simpkins