The 3-Headed Cash Machine That Is Kinder Morgan

Kinder Morgan Energy represents the largest midstream empire in America. Investors may be confused between the various securities they can purchase: Kinder Morgan Energy Partners, Kinder Morgan Inc, Kinder Morgan Management. This article clears up the confusion and points out some of the growth catalysts that make this family of companies one of the best energy plays in America.

May 24, 2014 at 4:10PM

In the world of energy transport Kinder Morgan is a juggernaut. It's the fourth largest energy company in North America, with 68,000 miles of pipeline servicing every major oil and gas region in the country. It's also the largest independent oil and CO2 transporter and has recently branched out into oil tankers as well. 

However, Kinder Morgan is a complicated empire. There are four tickers under which its companies trade: KMI, KMP, KMR, and EPB. This article outlines the differences between these securities and summarizes some of the growth catalysts that make Kinder Morgan one of the best ways for long-term income investors to profit from America's historic energy boom.

Kinder Morgan Energy Partners (NYSE:KMP) is the MLP that operates the vast majority of Kinder Morgan assets. As an MLP it doesn't pay dividends to shareholders but distributions to unit holders (for a more detailed explanation of MLPs see this article).

Recently the entire family of Kinder Morgan companies has been hammered by negative press arguing the company's best growth is behind it. 

Despite management's vigorous reply to the charges against it, as well as a reiteration of previous guidance of 5% distribution growth and 8% dividend growth (for Kinder Morgan Inc), shares fell to multi-year lows.

Kinder Morgan Inc (NYSE:KMI) yields 5% and is the parent company and general partner to both Kinder Morgan Energy Partners and El Paso Pipeline Partners. It owns 8% of KMP units, 13% of KMR shares, and 41% of EPB units, from which it collects cash distributions and stock dividends. In addition it collects IDR (incentive distribution rights) fees from its MLPs. This means 50% of marginal distributable cash flow (DCF) goes to KMI above a certain distribution rate, which has been achieved for both MLPs. (NYSE:KMI)

Kinder Morgan Management (NYSE:KMR) yields 7.4% and is exactly like KMP, but pays out stock dividends instead of cash distributions. This is a great option for investors who want to participate in a dividend reinvestment plan (DRIP) but whose brokers don't offer one. Most brokers will allow investors to own partial shares, though some won't allow selling partial shares.

Growth catalysts
There are five primary growth catalysts for the Kinder Morgan Empire: the Marcellus shale production boom, ethane exports, gas exports to Mexico, LNG exports, and a potential merger between KMI and KMP. For purposes of brevity only the first two will be discussed in this article.

The Marcellus shale is the largest gas formation in America, covering 15 million acres in Pennsylvania, New York, West Virginia, and Ohio. The EIA estimates there are 410 Tcf (trillion cubic feet) of recoverable natural gas, or 15 years' worth of U.S. production.

Production from the Marcellus has increased from 1 Bcf/d (billion cubic feet/day) to 14 Bcf/d in 2014 and is projected to increase to 20 Bcf/d by 2017-2018. This mind-boggling growth will mean high demand for transportation and storage facilities that Kinder Morgan is investing in. 

On the back of the natural gas boom is an explosion in NGL (natural gas liquids) production. Specifically, ethane is being produced at such a furious pace that there is simply no infrastructure to store or transport it. This has created a glut resulting in such low prices that producers are having to "reject" ethane by not refining it out of natural gas (ethane is a valuable petrochemical used in plastics).

This kind of waste is why Kinder Morgan is partnering with Mark West Energy and Targa Resources to repurpose Kinder's Tennessee gas pipeline system to transport NGLs, such as ethane, 1,000 miles to the Gulf Coast for export. The initial capacity will be 150,000 bpd (barrels/day) but expandable to 400,000 bpd.

With Enterprise Product Partners predicting NGL production to increase by 79% by 2020, driven by a doubling of export demand, Kinder Morgan stands to benefit greatly from this strong energy trend. 

Foolish takeaway
Kinder Morgan is one of the best-run energy companies in the world. Its caliber of management (who invest right alongside investors) and access to financial resources mean that this company's optionalities to take advantage of America's energy bonanza are nearly without equal. With the above growth catalysts and the recent price declines caused by none fundamental factors, long-term income investors can have confidence in generous income yields that are likely to grow strongly for decades to come.

3 more income plays on America's energy bonanza
Record oil and natural gas production is revolutionizing the United States' energy position. Finding the right plays while historic amounts of capital expenditures are flooding the industry will pad your investment nest egg. For this reason, the Motley Fool is offering a look at three energy companies using a small IRS "loophole" to help line investor pockets. Learn this strategy, and the energy companies taking advantage, in our special report "The IRS Is Daring You To Make This Energy Investment." Don't miss out on this timely opportunity; click here to access your report -- it's absolutely free. 


Adam Galas has no position in any stocks mentioned. The Motley Fool recommends Kinder Morgan. The Motley Fool owns shares of Kinder Morgan. 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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

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The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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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