This article highlights the rationale to own Kinder Morgan, Inc. (NYSE:KMI) and sell equities associated with Kinder Morgan. Kinder Morgan's role as General Partner has Incentive Distribution Rights (IDR) which explicitly indicate the shortcomings of not owning Kinder Morgan, the General Partner. Kinder Morgan's incentive distribution rights remove any motive to own Kinder Morgan Energy Partners LP (NYSE:KMP). I will opine why other negatively impacted companies are Kinder Morgan Management LLC (NYSE:KMR), El Paso Corp. (EP), and El Paso Pipeline Partners, L.P. (NYSE:EPB).
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2011 Kinder Morgan IPO
It has been a busy year for Kinder Morgan, Inc., one of the largest pipeline transportation and energy storage companies in the U.S, and, so far, it has worked out especially well for investors. In February, Kinder Morgan completed its public offering, which actually is a re-IPO after its common stock was originally bought up by private equity firms in 2007. It was the second largest energy deal in recent years, outside of the Conoco IPO completed in 1998. And, as expected, its stock performed well and investors have been rewarded this year with dividend yield of 3.9%. Its stock price has been on a small coaster ride of late, but it has recently closed near its IPO price of $30.
El Paso Acquisition
The second big event for Kinder Morgan was its recent acquisition of El Paso Corporation (EP) creating the largest midstream and the fourth largest energy company in North America. The combined company will be the largest owner of natural gas pipelines with nearly 70,000 miles transportation pipelines. It is also the largest independent transporter of petroleum products in the U.S. El Paso is also the second largest oil producer in Texas at 50,000 barrels a day. So, at $38 billion, this was no small deal by any measure.
2012 Dividend Yield
As for the acquisition of El Paso, Kinder Morgan expects natural gas to be a core component of energy production in the future. El Paso has a near monopoly on the oily shale production and distribution in the western U.S. which holds an abundant supply of natural gas. Although KMI also acquired a significant amount of debt with the El Paso purchase, it will be unloading many of its less profitable operations and focusing on those that are now generating significant cash flow. KMI has already had a tremendous history of growth and KMP has demonstrated an almost uncommon ability to produce an increasing stream of distributions, both of which are expected to accelerate with the acquisition of El Paso.
KMI management is now forecasting dividend growth of 12% with an expected doubling of its current dividend by 2015. With that kind of growth, investors could also expect significant capital appreciation as well. For high-yield investors, KMI may not be the perfect stock to own. No stock really is, however, it may be the perfect supplement to a high-yield portfolio over the next five years.
2011 Dividend Yield
So what does the re-emergence of KMI as a listed stock and its new dominance of the energy industry mean for yield-seeking investors? Plenty, if you consider its long range prospects for increasing its cash yield from operations and its master limited partnership (MLP), Kinder Morgan Energy Partners (KMP). For a taste of what’s to come, KMI’s management just announced a 3% dividend increase which brings its yield up to 4.21%.
First, as the general partner of KMP, its highly successful natural gas pipeline company formed as an MLP. Essentially, KMI has increased its stake in KMP and is the largest recipient of its $4.64 dividend yielding 6.1%, which will be distributed to KMI shareholders. KMP has been the chief cash cow for KMI with a solid record. Under this new, more traditional corporate structure, KMP investors who received KMI shares in the IPO will benefit because of the more favorable tax treatment of KMI dividends.
Own Kinder Morgan
Kinder Morgan had its initial public offering (IPO) this year. I address this offering in the article, "Kinder Morgan, Inc.: The Positives and the Negatives". This is the security to buy as it holds financial incentives far outweighing the benefits of Kinder Morgan Energy Partners LP, Kinder Morgan Management LLC, El Paso Corp., and El Paso Pipeline Partners, L.P.
Kinder Morgan operates in the best interests of Kinder Morgan. This operation comes at the expense of associated parties. As discussed in a September 21st investor presentation, page 22, KMI receives a disproportionate amount of distribution income:
Kinder Morgan Energy Partners LP
Kinder Morgan Energy Partners LP is the nation’s largest pipeline master limited partnership. The partnership is suffering due to the high level of Incentive Distribution Rights paid to General Partner Kinder Morgan. The below table highlights the extent in which Kinder Morgan Energy Partners LP is paying Kinder Morgan 45% of its distributions.
This high payout to the General Partner has caused the following problems:
- Kinder Morgan Energy Partners LP is having problems paying its quarterly distributions. The General Partner is extracting 45% at current levels.
- Kinder Morgan Energy Partners LP has a higher cost of equity capital. Companies, without General Partner Incentive Distribution Rights, can operate increasingly more efficient.
Kinder Morgan Management LLC
Kinder Morgan Management LLC shares are legally pari passu with KMP shares. KMP receives distributions in cash. KMR receives distributions in the form of KMR shares.
I believe Kinder Morgan will, upon acquisition completion, engulf El Paso Corp. and El Paso Pipeline Partners, L.P. assets in a business-as-usual manner. This opinion is based upon Kinder Morgan's actions with other non General Partner financial interests. The bottom line is -- own Kinder Morgan shares.
Selected Pipeline and Terminal Cost Structures
This chart shows Kinder Morgan's extraction of Kinder Morgan Energy Partners' current distributions. KMI, as the General Partner, is receiving 45% of KMP's distribution income. This reference can be found on an Enterprise Products Partners LP presentation, page 8:
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Enterprise Products Partners LP
Enterprise Products Partners is an integrated provider of natural gas and natural gas liquids processing, fractionation, and storage services transportation. The company has zero General Partner fees. This allows the company to have a lower cost of equity capital. Dividends have increased for the past 28 quarters.
Markwest Energy Partners (NYSE:MWE)
Markwest Energy Partners is engaged in the gathering, processing and transportation of natural gas; the transportation, fractionation, storage and marketing of natural gas liquids; and the gathering and transportation of crude oil. The enterprise also benefits by the lack of General Partner Incentive Distribution Rights. The equity offers a 5.8% dividend yield. Markwest is recognized as a growing and efficiently run enterprise focused upon shareholder returns.
I recommend that investors consider buying Kinder Morgan. My opinion is to avoid the affiliated Kinder Morgan Partnership equities. The Kinder Morgan General Partner legal structure provides incentives to benefit the General Partner. My advice is to avoid Kinder Morgan Management LLC, El Paso Corp., and El Paso Pipeline Partners, L.P., and Kinder Morgan Energy Partners LP.