On August 11, Kinder Morgan (KMI) dropped a bombshell on the market.
The company announced that it was consolidating its partnership ventures – currently trading as master limited partnerships (MLPs) – into a single non-MLP entity.
The news sent all Kinder Morgan-related entities shooting to the moon.
Now, the consolidated entity will become the largest pipeline operator in the United States.
But was the company’s decision a smart move for investors in the long run, or is the stock now set to self-destruct?
Why Consolidate Now?
As the operator of these pipelines, Kinder has made its money as the toll collector. So it has been relatively immune to the ups and downs of energy prices.
After all, the energy that’s being produced still has to make its way to refiners and processing plants – and pipelines are still the cheapest and safest method of transportation.
Since 2006, U.S. energy production has soared, something we write about frequently in these very pages.
And the outlook for energy production in the United States will continue to grow for at least the next couple of decades.
That spells even more opportunity for Kinder.
Now that it has consolidated, the $140-billion company has the resources to go after major new infrastructure deals – like rail terminals, barges, trucking, and (of course) more pipelines.
In other words, Kinder Morgan made the right call. For more reason than one…
You see, as individual entities, the MLPs were becoming pressed to maintain dividend growth.
Granted, revenue, cash flow, and earnings were increasing. But as the partnerships increased in size, that growth wasn’t enough to sustain higher, growing payouts – something that would eventually drive investors out.
By consolidating, Kinder can now “grow” that dividend, as well as provide a strong case for future capital appreciation, something MLPs aren’t known for.
Paving the Pathway to Success
The entities will all trade under the KMI symbol. Starting next year, the shares will pay a dividend of $2 per share, equating to 5% based on the current price.
At 5%, with the possibility of regular annual increases and capital appreciation, Kinder will attract a lot of attention from the investing community. And with the type of asset mix in its portfolio, it will become the blue-chip standard in the energy infrastructure sector.
Kinder has shown itself to be a growth juggernaut. Starting with $40 million in assets – which Richard Kinder and William Morgan purchased from Enron in 1996 – the company has grown to something north of $140 billion. And it has made investors very rich in the process.
One of Kinder Morgan’s most appealing qualities has been the level of inside ownership and insider buying – especially by Richard Kinder. (He will own about 11% of the company once the deal is done.)
Bottom line: Consolidating was absolutely the right move. KMI is a must-own stock for any energy portfolio. It gives you yield, growth, and a stake in the massive energy infrastructure boom that’s taking place right now. Pullbacks should be viewed as buying opportunities!
And “the chase” continues,