Kinder Morgan Buys Again

On Tuesday, America's biggest midstream company announced it would like to get bigger. Again. One year after its acquisition of El Paso, Kinder Morgan Energy Partners (UNKNOWN: KMP.DL  ) shared its intention to buy Copano Energy (UNKNOWN: CPNO.DL  ) for approximately $5 billion, including debt. This deal isn't as big as the El Paso one, but it is big news nonetheless, so let's take a look.

The deal
This will be a 100% unit-for-unit buyout, with every one unit of Copano exchanged for .4563 units of KMP. That represents a 23.5% premium to Copano's share price at the time of the announcement.

Kinder Morgan will gain the roughly 6,900 miles of pipeline and nine processing plants fall under the Copano Energy umbrella in Texas, Oklahoma, and Wyoming. It will also assume a little over $1 billion in debt. The equity value of the deal is $3.22 billion.

If approved by regulatory bodies and Copano unitholders, the deal should close in the third quarter of this year.

A closer look at the new assets
So what's the big deal? Kinder Morgan has the country's largest midstream footprint, does adding a few thousand miles of pipeline and a handful of processing centers really make that big of a difference?

Yes and no.

The deal doesn't do anything dramatic like double the size of the company, but the locations of Copano's assets are extremely important. All of its assets are in shale plays, the same sort of plays that are igniting America's energy renaissance right now.

Though its assets in the Niobrara Shale and the Mississippi Lime will be instrumental in building value at KMP down the line, Copano's assets in the Eagle Ford Shale in Texas are the big story here.

The Eagle Ford is the hottest play in the U.S. shale oil game right now. Hotter than the Bakken, because it's cheaper to drill and closer to market than North Dakota's shale. Production in the Eagle Ford is on a tear, and capital expenditure there is expected to reach $25 billion-$28 billion this year alone. As a result, the region has been flooded with natural gas liquids, and that's where Copano comes in.

Copano Energy's Eagle Ford assets include the Houston Central Processing Plant, the third-largest facility of its kind in Texas. There, natural gas and natural gas liquids pipelines alike bring commodities from East Texas to be processed. The plant currently has a fractionating capacity of 44,000 barrels per day, and the company expects to bring 400 million cubic feet per day of cryogenic processing capacity on line by the end of the first quarter .

Copano's gathering systems will be a boon to KMP as well. In the third quarter (Copano doesn't report Q4 until March 1), its Eagle Ford gathering volumes increased 248% year over year. Kinder Morgan is no stranger to this business -- it has been in a joint venture with Copano on the Eagle Ford Gathering project since 2011 -- and should incorporate its partner's stake in the booming system quite easily.

Additionally, Copano has several important expansion projects under way that will ramp up volumes across its systems. Its wholly owned DK pipeline is getting 65 miles of pipe added to it, giving new Eagle Ford volumes a conduit to the Houston processing facility. The $120 million upgrade should be in service this quarter.

All told, by the end of 2013, Copano's Eagle Ford assets will have more than 1 billion cubic feet per day of pipeline and processing capacity, and more than 100,000 barrels per day in fractionation capacity. And that is why this is a solid pickup for Kinder Morgan.

Money talks
The Eagle Ford assets drove Copano's bottom line, and beginning in 2014, investors will be able to see the effect on their KMP units as well. Starting next year, the acquisition is expected to add $0.10 per unit to KMP's earnings for at least five straight years. KMP's targeted annualized distribution for 2013 is $5.28, which means investors can expect at least $5.38 in 2014, a 2% increase from this one deal.

Additionally, the vast majority of Copano's Eagle Ford assets are fixed fee revenue generating contracts. Picking up stable assets like that bodes well for future distribution increases, because management knows exactly what to expect regarding revenue. Overall, 64% of Copano's business is fee-based.

Foolish takeaway
Expect more consolidation like this in the energy sector this year. Kinder Morgan has plans to spend more money, and this is likely not the last acquisition we'll hear of in the midstream industry. Hess (NYSE: HES  ) just did put all those terminals up for sale after all, and someone has to buy them.

It's easy to forget the necessity of midstream operators that seamlessly transport oil and gas throughout the United States. Kinder Morgan is one of these operators, and one that investors should commit to memory due to its sheer size – it's the fourth-largest energy company in the U.S. – not to mention its enormous potential for profits. In The Motley Fool's new premium research report on Kinder Morgan, our top energy analyst breaks down the company's growing opportunity, as well as the risks to watch out for, in order to uncover whether it's a buy or a sell. To determine whether this dividend giant is right for your portfolio, simply click here now to claim your copy of this invaluable investor's resource. As an added bonus, you'll receive a full year of key updates and guidance as news develops, so don't miss out!

Read/Post Comments (2) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 06, 2013, at 10:26 AM, TMFPennyWise wrote:

    Very interesting to read about Copano-Kinder Morgan's Eagle Ford projects and the synergy projections, especially since I'm long on KMI and like to look to the future.

    In the same vein, I'd like to read a report on what Aimee thinks about the future of Marathon Petroleum (MPC) and the new MPLX, and their recent reorganization and how they will impact Utica (if at all) which is right in their own backyard. Surely they must have strong aspirations given their headquarters in Findlay, Ohio.

    I think MPC and MPLX are under the radar a little bit and with their reorganization I wonder if the future bodes well for them here in the mid-west. Their stock has done very well in recent months--is there more upside to come?

    Thx. Jay

    Long on KMI and MPC

  • Report this Comment On February 10, 2013, at 2:51 PM, XMFAimeeD wrote:


    Check out this article that Matt DiLallo wrote last month for more on MPLX.


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