Kinder Morgan is a holding company that owns, for now, parts of several pipeline systems. In August they declared that they would buy all shares of KMP, KMR, and EPB. The purpose of the "merger" is to decrease the cost of capital. Since with the current structure the cost of getting more capital, in the form of issuing more shares, is costly, both with regards to fees and the high distributions. The MLP structure will still be in effect so KMI will still receive lower tax on income and it will be easier for KMI to take in new capital. The merger makes them into the largest energy infrastructure company in North America and the third largest energy company overall.
I find the pipeline business somewhat more attractive in the doorman position they have. They get paid regardless of oil and gas prices and the only time that these prices might affect are if they drop significantly which I don't believe they will.
I am somewhat unsure about how long it takes before gas and oil wells are depleted and if pipelines can be reused once a well empties and the pipeline is no longer needed there. With the recent oil and gas boom in America I anticipate that Kinder Morgan's pipelines will be used for a long time yet and bring an increasing profit to shareholders. It seems there is demand for more infrastructure until 2035 and contracts are on avereage of 16 years which is comforting.
KMI has always, to me, seemed like the best option of the oil and gas companies. Statoil was at the top before but has since rallied. KMI on the other hand after its recent merger news and plans to raise dividends significantly with a current yield of around 5% looks very attractive unlike most S&P companies. The plans to raise dividends by 10% per year until 2020 is also good news. Even if the market does not realize the value that lies here I believe I will receive ample return on my investment. But the question is, can they do what they promise?
In the past KMP has been able to achieve more than promised in 13 out of 14 years. EPB and KMI has also been able to distribute more than management had expected from the beginning which speaks to the possibility of an even more aggressive growth of dividend. It seems they have historically been conservative in their estimates and more often surprise on the upside rather than on the downside. They have also managed to grow both organically as well as through acquisitions.
For current dividend stability one must look at KMI financials, after the merge is complete KMI management anticipates an investment grade rating. KMI has recent years enjoyed some of the lowest interest levels on bond issues fighting with Berkshire Hathaway (BRK) about being able to issue the lowest yielding bond. Which means they are deemed to be able to pay back their money (low risk of capital loss for buyers) in such away to achieve such a low interest expense rate.
In the feature synergies received from the merger as well as the cheaper cost of capital for further expansion should enable a steadily increasing dividend. As mentioned at KMI's past predictions they have been spot on or distributing more than forecasts most of their active years. Management project an 10% annual growth rate until 2020 with a 10% coverage margin.
Some of the main risks involve regulatory risk, crude oil production volumes and commodity prices. Even though I'm hoping people will start using less fuel I see that it is a slow process and anticipate oil/gas to be important for a long time ahead. Some other risk factors are environmental (e.g. pipeline/asset failures), terrorism and economically sensitive business (e.g. steel terminals). Higher interest rates would of course also affect but as mentioned earlier KMI enjoys low interest rates on debt and an <5.5 debt /EBITA leverage ratio as to enjoy investment grade rating. I do find the business somewhat complicated and will try to keep myself informed. Usually the biggest risk are the ones that you aren't aware of.
Thoughts on KMI? Have I made any incorrect assumptions?
Full disclosure: Long KMI
Sources used: Merger presentation and press realease.
