3 Ways To Reap The Dividends From Kinder Morgan And El Paso Merger

Mar.22.12 | About: Kinder Morgan, (KMI)

Kinder Morgan (NYSE:KMI) has turned one year old and is making waves in the master limited partnership sector. Kinder Morgan offers investors three ways to invest in the largest midstream oil and natural gas operation. The investor can either invest in the General Partner, the midstream partnership which pays out quarterly cash distributions. Or, the investor can choose quarterly distributions in the form of shares, in lieu of cash distributions. The annual distribution is approximately 5.5%, based upon today's Kinder Morgan prices.

Kinder Morgan Complex

Kinder Morgan Energy Partners, L.P. (NYSE:KMP) owns most of the Kinder Morgan assets. Kinder Morgan is the General Partner and owns the Incentive Distribution Rights. Kinder Morgan Management LLC (NYSE:KMR) is equal to Kinder Morgan Energy Partners, L.P. Kinder Morgan Management LLC pays its dividends in the form of Kinder Morgan Energy Partners, L.P. shares.

El Paso Merger

Kinder Morgan's buyout of El Paso Corporation made the master limited partnership news. As of March 15, 2012, the El Paso merger is expected to be approved by May 15th. The total cost is expected to be $23 billion.

Prior to the takeover, Kinder Morgan owned roughly 37,000 miles of pipelines and exactly 180 terminals. Kinder Morgan is engaged in the transport of refined petroleum products, crude oil, carbon dioxide and natural gas, among many other products. Kinder Morgan also holds 20% equity of NGPL PipeCo LLC, which in turn owns the Natural Gas Pipeline of America.

In so many words, the purchase of El Paso Corporation, which, by itself already owns a sizable network of natural gas pipelines, makes Kinder Morgan the largest owner and operator of natural gas pipelines in North America. The 37,000 miles of pipelines increases to 67,000 miles of pipelines for Kinder Morgan, making the company the natural gas pipeline servicing the entire country.

And this is not even including the 675 mile pipeline still to be constructed by Ruby Pipeline Holding LLC, a joint venture between Global Infrastructure Partners and El Paso. The endpoints of the pipelines are also to be considered: Marcellus Shale, Utica, Eagle Ford, Haynesville, Barnett and Fayetteville are all rich sources of natural gas, and all are within reach of the new network of the bigger Kinder Morgan.

The buyout of El Paso did face stiff resistance, though. Not in principle, but in the price. The deal was brokered by Goldman Sachs which was El Paso's mergers and acquisitions advisor, and which also owns 19% of Kinder Morgan. In terms of the deal, the merger between El Paso and Kinder was just the natural conclusion of the survival of the fittest, but the intrusion of Goldman Sachs colored the proceedings with an interest in both parties. Hence, the almost riotous disagreement over the $23 billion price tag on El Paso, when El Paso shareholders believed it was worth more than the sum.

In 2011, Kinder Morgan transported a volume of 1.9 billion barrels of jet fuel, diesel, natural gas liquids, crude oil and gasoline. But this was before the merger between Kinder Morgan and El Paso. For 2012, Kinder Morgan will be the largest company in operation to transport the same petroleum products. To be more precise about it, Kinder Morgan will be the largest independent transporter of petroleum products in the country. The fact that Kinder Morgan is independent is what is most important.

Kinder Morgan Business Model

And here is something to add to the mix. As a rule, Kinder Morgan does not process or own the petroleum products that it transports. It is a business purely engaged in the transport and storing of petroleum products - an add-on service to the real product. The business of Kinder Morgan will be barely affected by the price changes in oil or gasoline; as long as it transports the product, it is going to earn from the transaction.

Associated Industries

In other aspects, the takeover of El Paso improves Kinder Morgan's performance in other related industries. The transport of CO2, needed for further refining of oil, will rise to 1.3 billion cubic feet per day, making Kinder Morgan the largest transporter of CO2 in the country as well.

The merger will also make Kinder Morgan the independent business with the largest storage facilities in the country capable of more than 107 million barrels for refined petroleum products and ethanol. For dry storage, Kinder Morgan facilities will be able to store more than a hundred million tons after the merger.

Kinder Morgan will also possess the only oil sands pipeline to serve the West Coast. Over 300,000 barrels of crude oil can arrive to Vancouver, BC and Washington State through and only through Kinder Morgan's independent pipelines.

The Price

The merger between Kinder Morgan and El Paso has been pending since October 16, 2011. For five months, the deal was in limbo. This has forced Kinder Morgan to make arrangements to push the merger to its natural conclusion. In the process, Kinder Morgan has had to use its $1 billion revolving credit to aid in the purchase instead of with its operations, has added an addendum to increase the $1 billion to $750M more, has created an acquisition debt facility credit agreement of a one year $6.8 billion, and added a five year $5 billion loan to finalize the purchase.

And still, in spite of the huge liabilities incurred, the purchase of El Paso is worth far more than the debt. As a matter of fact, Kinder Morgan is confident that all liabilities are well in hand, with the conditions of all debts in line with the acquisition of El Paso. As the new owner of the longest accumulated length of pipelines in the country, the price has to be paid, and Kinder Morgan willingly paid it because the future profits from the purchase was in fact more than the assurance its debtors needed for collateral.

For 2012, Kinder Morgan will be at the head of every table needing access to its pipeline network or storage facility for all kinds of petroleum products. For 2012 and onwards, Kinder Morgan is well positioned just to keep on raking the profits through the use of fixed assets, even when Kinder Morgan barely produces 50,000 barrels of oil a day in Texas. Kinder Morgan holds the bottleneck of petroleum product production, and with its transportation and storage facilities running, its debts and even its future is secure.


Kinder Morgan began trading in early 2011. The distributions since its initial public offering are listed below:

Kinder Morgan is expected, per a May 8th presentation, to pay $1.35 in 2012 distributions. This would equate to a 3.6% annual distribution.


Investors are provided the opportunity to invest in one of three Kinder Morgan entities. The General Partner, Kinder Morgan, pays an annual 3.6% distribution rate. The partnership is expected to pay $4.98 for 2012 distributions. This equates to a 5.9% annual cash distribution for 2012.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.