Kinder Morgan Stepped Outside of its Comfort Zone to Grow

Kinder Morgan Energy Partners just found a new midstream business to get into: Jones Act ships.

Jan 7, 2014 at 10:27AM

The midsteam energy business is growing. But big players like Kinder Morgan Energy Partners (NYSE:KMP) and Enterprise Products Partners (NYSE:EPD) are getting so large that they need bigger transactions to keep growth going. That's why it's interesting to see Kinder Morgan jumping into the Jones Act shipping business, even though the deal isn't all that big.

What exactly is "midstream"?
Enterprise, Kinder Morgan Energy Partners, and Buckeye Partners (NYSE:BPL) operate the businesses that get oil and natural gas from the well to where it's used. That's the "mid" in midstream. The list of businesses that these companies typically own includes pipelines, terminals, storage, and processing facilities.

For example, both Kinder Morgan and Enterprise Product Partners own over 50,000 miles worth of pipelines that carry everything from crude oil to refined petroleum products. And Buckeye just completed the $850 million acquisition of 20 East Coast terminals from Hess (NYSE:HES).

Enterprise Product Partnersis gigantic, sporting a market cap of around $60 billion. That's more than seven times the size of Buckeye. Kinder Morgan is a bit more complicated because its around $35 billion market cap belies the true scope of what the Kinder empire controls through affiliated companies. Still, Kinder Morgan Energy Partners is over four times the size of Buckeye Partners, even though Buckeye can trace its history back over 100 years and Kinder Morgan Energy Partners was founded in just 1997.

Growing
That difference in size is important, however, because it shows the difference an acquisition can make. For the much smaller Buckeye Partners, the Hess purchase was a big deal chiming in at around 10% of its market cap. That can't be said of Kinder Morgan's recently announced deal to buy two Jones Act carriers from private equity firms for around $1 billion. Enterprise's last big purchase was in 2011, with the partnership focusing largely on internal projects to keep growth going since then.

That's why the most interesting aspect of the Jones Act shipping buy has nothing to do with size; it's interesting because Kinder Morgan has found yet another pie into which it can stick its fingers. Today, the company's network of facilities handles everything from coal to oil. But after the Jones Act purchase, it will own ships that move products between ports in U.S. waters, too.

What's the Jones Act?
That's a unique market because, according to industry player American Shipping Partners, the U.S. government has essentially regulated foreign competition out of the sector by requiring: "...all commercial vessels transporting merchandise between ports in the United States to be built, owned, operated and manned by U.S. citizens and to be registered under the U.S. flag." This is to ensure that there would be enough U.S. ships to support the country if there were an armed conflict.

This is a highly protected $30 billion market and Kinder Morgan just entered it with a decent amount of scale. Even though the deal may not result in large top- or bottom-line improvements at Kinder Morgan, it opens up another avenue for acquisition driven growth. That's a key aspect of the midstream business, but one that becomes harder and harder to do as a company expands.

Finding such niche opportunities is one of Kinder's specialties. That harkens back to its founding in the wake of the Enron scandal. And the logic behind the Jones Act move is fairly solid. According to John Schlosser, president of the partnership's Terminals segment, "Product demand is growing and sources of supply continue to change, in part due to the increased shale activity. As a result, there is more demand for waterborne transportation to move these products."

Looking for opportunities
So while Enterprise and Buckeye stick closer to the mainstream in the midstream sector, Kinder is again cutting a slightly different path. Keep an eye on this transaction and its performance after it's consummated. Kinder might just use its "bird's eye" view of the oil and gas industry to put more money to work in the Jones Act area if the deal works out well.  

The oil and gas boom doesn't stand a chance without pipelines
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Reuben Brewer has positions in Kinder Morgan Energy Partners, Buckeye Partners, and Enterprise Products Partners. The Motley Fool recommends Enterprise Products Partners L.P.. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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