Sunday's news that Kinder Morgan (NYSE: KMI) was moving to acquire El Paso (NYSE: EP) really made my day. Finally, some pipeline news that had nothing to do with the Keystone XL controversy!

The deal
El Paso agreed to be acquired for $38 billion, including debt, and the deal involved all entities for both organizations. That means that it affects unitholders in master limited partnerships Kinder Morgan Energy Partners (NYSE: KMP) and El Paso Pipeline Partners (NYSE: EPB) as well.

Under the terms of the deal, El Paso will become a subsidiary of Kinder Morgan, which plans to sell off the exploration and production side of that business. The sale of the E&P side will go a long way in reducing the debt Kinder Morgan will take on to fund the purchase in the first place.

Kinder Morgan will then drop down all of El Paso's natural gas pipelines to Kinder Morgan Energy Partners and El Paso Pipeline Partners MLP entities over the course of the next few years, so that by 2015, Kinder Morgan will generate almost all of its income from its general partnership interests and its ownership of both units of the two MLPs and shares of Kinder Morgan Management.

America's natural gas pipeline picture
The acquisition will make Kinder Morgan the fourth largest energy company in the country, worth about $94 billion and in charge of 80,000 miles of pipeline. The approximate total natural gas pipeline in the U.S. covers more than 305,000 miles and looks like this:

Natgas
Source: Energy Information Administration.

Together, the companies will make up roughly a quarter of the total natural gas pipeline mileage running across the country.

The trend at large
Oil and gas mergers tend to be as cyclical as the industry. It's often a lot easier for bigger companies to get through the tough times. When Exxon met Mobil back in 1998, oil was hovering at a now-unfathomable $10 a barrel. The best strategy then was to buy up smaller companies to share costs and increase scale until oil prices rose again.

The price of natural gas in the U.S. has collapsed to below $4, and now companies in that industry are facing the same issues. Many view natural gas as an important and lucrative fuel for the future, and that's precisely why ExxonMobil (NYSE: XOM) picked up XTO Energy last year and BHP Billiton bought out Petrohawk Energy this year.

Selling off El Paso's E&P unit is just a reminder that with all the acquisitions, there have been plenty of breakups and recouplings in the industry as well. Murphy Oil ditched its refining business onto Valero (NYSE: VLO) and Calumet Specialty Products. Marathon Oil got divorced from Marathon Petroleum (NYSE: MPC), but both are keeping the Marathon name. In the future, energy historians will probably need a genealogist to sort everything out.

Going forward
While the board of directors at both Kinder Morgan and El Paso have blessed this deal, it still needs to be approved by shareholders and the regulatory powers that be, in this case the Federal Trade Commission. If everything goes according to plan, the deal will close during the second quarter of next year. In the meantime, don't be surprised to see several more buyouts in the energy arena.

Add Kinder Morgan and Kinder Morgan Energy Partners to My Watchlist.