This energy transportation company was the financial headline du jour on Monday, August 11. The company is really a “family” of companies all under the oversight of Richard Kinder who once was CFO at Enron, which became a House of Fraud after his departure. Over the past 18 years he has overseen the growth of his company from a handful of natural gas pipelines to what is now the third largest energy company in the world. We have invested our clients capital in one or more of the Kinder Morgan entities since early 2004, enjoying average annual returns in the double digits with steadily rising dividends all along the way.
While admiring the drive, skill and transparency of Kinder’s management, like some others, I’ve been concerned with the company’s deteriorating returns on equity and its relatively sub par performance during the run up in prices for energy master limited partnerships of the past two or three years. Apparently Mr. Kinder was keenly aware of this issue.
Last weekend the company announced a restructuring that will roll the three subsidiary companies into the parent Kinder Morgan Incorporated (KMI). This is to be accomplished through a tender in which KMI plans to offer premium prices for the shares of Kinder Morgan, LP (KMP) and Kinder Morgan LLC (KMR) by paying a substantial premium to the current share prices. Both issues responded with sharp quotation increases on August 11, 2014. KMP was up 17% and KMR (widely held in Trusted Financial managed client accounts)* up 23%. Although KMI will be taking on additional debt to finance the measure, it too rose, an apparent vote of confidence by the market and, most likely, because management has promised to increase the dividend next year about 14%.
One of the reasons cited for this streamlining is that the company believes its future cost to issue equity or borrow funds will be reduced, making new acquisitions and expansion projects pencil out better. Mr. Kinder, speaking on a conference call, indicated his belief that there will be major consolidations in the energy transportation space in coming years, so he wants his company (he is the largest shareholder) to be positioned to lead the charge.
In the ten plus years that we have been investing for our clients in the energy space, I’ve expanded my understanding of this industry and my appreciation for the potential to build wealth by helping to finance North America’s energy infrastructure. Technology has blessed us with a new abundance of petroleum products, much of it in the form of natural gas, one of the cleanest burning fuels. However producing fields, many of them in remote parts of the country, need to be connected to refineries and to consumers. Pipelines, railroads and shipping all present investment opportunities, and we are already working in these areas.
Right now, I am searching for new opportunities that may benefit from the coming consolidation of the industry (i.e. acquisition targets) to add to client portfolios.
*As a matter of record, the shares were under attack last autumn after a hedge fund published a report claiming that Kinder had misrepresented the nature of its capital expenditures in order to artificially boost earnings. Barron’s magazine repeated this charge, in February, even after Rich Kinder had refuted them on a conference call, point by point. In a comment I made on September 11, 2013 on www.linkedin.com , I indicated faith in Kinder’s management and we continued our investment in Kinder Morgan.
