The Guy Who Called the Housing Bubble Just Bought Kinder Morgan. Should You?

Every quarter, large money-managers have to disclose what they've bought and sold via "13F" filings. While Fools don't always follow what the big money does, we can often glean an idea or two by tracing their footsteps. 

Kyle Bass, founder of Hayman Capital Management, is best known for shorting the subprime mortgage securities that nearly crippled the economy, effectively "calling" the economic recession and making a boatload of money at the same time. There's one purchase the Dallas-based hedge fund made last quarter that has nothing to do with real estate but is still worth checking out: Kinder Morgan  (NYSE: KMI  ) . Let's look at what's going on with pipeline operator Kinder Morgan and see how it stacks up against peers like Boardwalk Pipeline Partners  (NYSE: BWP  ) . 

Major asset play 
Bass' history as a real-estate expert is something that can be applied to a lot of investing ideas. His location in Dallas -- the heart of Big Oil -- also exposes him to some pretty big trends. A huge trend right now is the explosive growth in production of natural gas in the U.S., a product of the massive unconventional resources that have been discovered in shale rock all around the country.

The geography of these new discoveries, and that of the demand centers -- i.e., large population centers -- and, in the near future, export facilities located on the Gulf and Atlantic coasts, points to a major need for pipelines to get the natural gas from these new discoveries to the markets. What this means for a company like Kinder Morgan -- the largest pipeline owner and operator in the country -- is massive potential opportunity to leverage its assets and to deploy new pipelines to connect products and markets. 

Why Kinder Morgan? 

Source: Kinder Morgan.

Kinder Morgan is the largest pipeline-operator in the U.S. and the largest operator of natural-gas storage in the country. It's also the country's largest transporter of refined oil products, like gasoline, diesel, and so on, and more than just in pipelines. Simply put, nobody moves oil and gas products around the country like Kinder Morgan, and oil and gas production is absolutely booming right now. 

This diversity of assets that allows it to play such a central role in the logistics of energy makes it a tremendous way to invest in a very long-term trend: the second American energy boom. 

What about Boardwalk Pipeline Partners? 
Like Kinder Morgan, Boardwalk has seen its stock price take a hit recently. But while Kinder Morgan was slapped, Boardwalk Pipeline Partners got hammered:

KMI Chart
KMI data by YCharts.

What Boardwalk is facing right now is the problem of having pipelines in less than ideal locations, based on where its historical customers are located, and where it's transporting the gas from. The Utica and Marcellus shale plays, located in Pennsylvania and other eastern states, are geographically very close to Boardwalk's Texas Gas transmission line and storage facilities, but the other end of those pipelines connects to more distant plays in Texas. Simply put, they go the wrong way and end in the wrong place. Such is the nature of the new energy boom, with natural gas sources now found in areas previously unanticipated. 

It's also worth mentioning that Boardwalk Pipeline Partners is an MLP, or master limited partnership, and the general partner (meaning in control) is Loews, which also owns half of the partnership. Essentially, Loews controls everything about Boardwalk, but its status as an MLP changes how it's taxed, which allows it to pass along more income to the general partner, Loews, and unitholders, the MLP equivalent of a shareholder. 

Why bring this up?
Many midstream pipeline companies are set up like this. Kinder Morgan isn't an MLP, but Kinder Morgan Energy Partners  (NYSE: KMP  ) is, as are two others that Kinder Morgan is the general partner of. The benefit -- that MLPs can pass more income along to investors and the general partner -- comes with additional layers of complexity. Kinder Morgan was recently accused of some financial shenanigans involving MLPs. This created quite a stir and is largely responsible for the falling stock price last year. However, management has addressed the accusations, and nothing material was discovered in the claims. 

Boardwalk, on the other hand, is dealing with very real challenges to its business, which killed the bottom line and forced the partnership to slash the distribution -- that's MLP-speak for dividend -- by a whopping 80%. 

Final thoughts: Kinder Morgan is a tremendous long-term play 
No matter what Kyle Bass does for Hayman Capital's portfolio, be sure to focus on your time frame, objectives, and risk tolerance. There's enough to speculate on without trying to guess what a total stranger is doing with someone else's money. With that said, Kinder Morgan's 5% dividend isn't at the kind of risk that Boardwalk's dividend was, because Kinder Morgan operates some of the most important pipeline and storage facilities in the country. 

If you're looking for more yield, Kinder Morgan Energy Partners -- the pipeline MLP -- pays a 7% distribution based on recent share prices, but the tax rules are different for an MLP than stock, so make sure you understand what that means for you.


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Read/Post Comments (4) | Recommend This Article (13)

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 May 23, 2014, at 11:03 PM, flyawaynow wrote:

    MLP's are great investments for tax free income. I like Enterprise products Partners EPD, and Magellan Midstream Partners MMP.

  • Report this Comment On May 23, 2014, at 11:15 PM, kankemike wrote:

    I need more KMI, thanks for reminding me.

  • Report this Comment On May 24, 2014, at 12:07 AM, ferdiefor wrote:

    How can fools allow this kind of lame writing. KMI is a general partner; Boardwalk of an MLP.

    The proper comparison would be to TRGP and/or ETE and/or ENLC all of which are absolutely kicking KMI's rear end.

    Kyle Bass wants in on my end of the pool where I spend all my time understanding every aspect of these MLPs.... then he better hire me to teach him how to buy superior GPs which does NOT include KMI.

  • Report this Comment On May 24, 2014, at 3:44 AM, TMFVelvetHammer wrote:


    Maybe you didn't read the entire article? Quoted from above:

    >>It's also worth mentioning that Boardwalk Pipeline Partners is an MLP, or master limited partnership, and the general partner (meaning in control) is Loews,<<

    >>Many midstream pipeline companies are set up like this. Kinder Morgan isn't an MLP, but Kinder Morgan Energy Partners (NYSE: KMP ) is, as are two others that Kinder Morgan is the general partner of. The benefit -- that MLPs can pass more income along to investors and the general partner -- comes with additional layers of complexity.<<

    If someone is going to invest in a MLP, they need to know the general partner as well as the MLP. If someone is going to invest in a company that is general partner of one or more MLPs which contribute significantly to earnings, they need to understand the MLPs. That was a large point of this article. Very few investors are MLP experts, and many don't know what they're buying until after the fact.

    Jason Hall

    Article author

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Jason Hall

Born and raised in the Deep South of Georgia, Jason now calls Southern California home. A Fool since 2006, he began contributing to in 2012. Trying to invest better? Like learning about companies with great (or really bad) stories? Jason can usually be found there, cutting through the noise and trying to get to the heart of the story.

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Related Tickers

9/1/2015 4:02 PM
KMI $31.39 Down -1.02 -3.15%
Kinder Morgan CAPS Rating: *****
BWP $13.13 Down -0.53 -3.88%
Boardwalk Pipeline… CAPS Rating: ****
KMP $0.00 Down +0.00 +0.00%
Kinder Morgan Ener… CAPS Rating: *****