This analysis of Kinder Morgan (KMI) was provided to TradingIPOs subscribers in advance of its Thursday Feb.10 IPO. The company raised $2.86 billion selling shares for $30 apiece, above the expected range.
Kinder Morgan plans on offering 92 million shares at a range of $26-$29. Insiders will be selling all shares in the deal. Goldman Sachs and Barclays are leading the deal, BofA Merrill Lynch, Citi, Credit Suisse, Deutsche Bank, JP Morgan, Wells Fargo, Madison Williams, Morgan Keegan, Raymond James, RBC and Simmons co-managing. Post-IPO KMI will have 707 million shares outstanding for a market cap of $19.443 billion on a pricing of $27.50. KMI will receive no proceeds from the IPO.
Richard Kinder and 4 investment funds took KMI private in 2007 for approximately $15 billion. Post-IPO Richard Kinder will own 30% of KMI, Goldman Sachs 20%.
From the prospectus:
We own the general partner and approximately 11% of the limited partner interests of Kinder Morgan Energy Partners, L.P., referred to in this prospectus as the "Partnership" or "KMP."
An outsized version of recent IPO Targa Resources (TRGP). Difference other than size is that KMI was public for a number of years before going private in 2007 at over $108 a share (approximately $15 billion valuation).
KMI's main asset is an 11% interest in publicly traded KMP as well as the General Partner and incentive distribution rights of KMP. Note that KMI is not a master limited partnership, however their (nearly) only business is their stake in the master limited partnership KMP.
In addition, KMI owns a 20% interest in NGPL PipeCo. NGPL is an interstate natural gas pipeline and storage system operated by KMI.
95% of revenues are derived from KMP, 5% from NGPL.
KMP - Owns 8,400 miles of refined petroleum product pipelines in the United States that deliver gasoline, diesel fuel, jet fuel and natural gas liquids, as well as 15,000 miles of natural gas pipelines and gas storage facilities. Also owns 1,400 miles of U.S. carbon dioxide pipelines, stakes in eight West Texas oil fields, 120 fuel terminals and 2,500 miles of pipeline in Canada.
KMP has grown distributions at a 40% compound annual growth rates since 1996.
In the US, KMP is:
- the largest independent transporter of petroleum products;
- the second largest transporter of natural gas;
- the largest provider of contracted natural gas treating services;
- the largest transporter of CO2;
- the second largest crude oil producer in Texas;
- the largest independent liquids terminal operator.
Distributions - KMI plans on paying shareholders $0.29 per quarter. At an annualized $1.16, KMI would yield 4.2% on a pricing of $27.50. Normally I prefer to see a 5%+ yield in the General Partnership deals, however recently TRGP IPO'ed right at 5% and has appreciated to a yield of just 3.5%. KMI's underlying asset of KMP is one of the most successful MLP's in the history of the market, much stronger in every aspect than TRGP's NGLS.
In 2011, KMI expects to receive $1.3 billion in distributions from KMP. In 2010 KMP distributed $4.40 per common unit for the full year.
KMI's interests in KMP:
- The General Partner of KMP, including all incentive distribution rights.
- 21.7 million units, 7% limited partner interest.
- 12.1 million i-units, representing an addition 4% limited partner interest. i-units receive distributions in additional i-units instead of cash.
Growth - KMP has shown an ability for organic and acquired growth over the past 15 years. As KMP continues to grow yield, KMI receives more money quarterly.
$200 million in cash but a lot of debt here at $3.1 billion. I would imagine a portion of this debt was taken on through the going private transaction in 2007. Not thrilled with the debt levels here for an operation that, for the most part, just holds interests in KMP. In contrast, recent IPO TRGP had a pretty clean balance sheet.
Bulk of projected revenues are coming from KMP's General Partner. 86% of projected revenues are a result of KMP's General Partner/Incentive Distribution Rights.
2011 Projections - KMI is projecting $1.363 billion in total distributions from KMP and NGPL. After taxes and interest they are projecting exactly the $1.16 available for distribution in 2011.
Conclusion - Deal will work in range due to the name brand of Kinder. Kinder stocks – KMP, KMR, and KMI (before going private) have made investors a massive amount of money over the past 15 years or so. Really, home run stocks! However, I do not love the debt as a chunk of it was placed there to fund a “going private” deal.
Bottom line is pretty simple: The strong brand name in the MLP space IPO'ing here yielding 4.2% makes this a recommend.