What Kinder Morgan's 2 New Investments Mean for You

Kinder Morgan's tanker and carbon dioxide expansions will hopefully pave the way for greater cash flow to fund its hefty distributions.

Jul 5, 2014 at 10:00AM

Kinder Morgan Inc (NYSE:KMI) is a truly massive company in size and scope. When you think of huge American energy companies, Kinder Morgan might not immediately come to mind. But the truth is Kinder Morgan has a massive footprint of oil and natural gas pipelines and storage facilities that stretches across the entire country through its midstream operators, Kinder Morgan Energy Partners (NYSE:KMP) and El Paso Pipeline Partners (NYSE:EPB).

Kinder Morgan considers itself to have an unparalleled asset footprint and it's easy to see why. When you combine all of its various publicly traded entities, the Kinder Morgan family of companies is collectively the fourth largest energy company in America with a combined enterprise value of approximately $110 billion.

As a result, if you're on the hunt for a well-run energy company with a highly competent management team and a robust distribution, look no further than the Kinder Morgan family. Here's what Kinder Morgan has been up to recently and why it matters to you.

Kinder Morgan expands its tanker fleet
You may recall Kinder Morgan's decision last year to buy two separate oil tanker companies for a total of nearly $1 billion from private equity firms. The fleet initially consisted of nine tankers in all. This was somewhat of a controversial decision at the time that Kinder Morgan took some heat for because tankers were outside its core competency, and also because the market for the oil tanker business was unfavorable.

More recently, Kinder Morgan announced it would build an additional 50,000 ton liquefied natural gas-ready tanker. Construction is set to begin at the end of next year, with first delivery scheduled for 2017.

A key difference-maker to Kinder Morgan's tanker acquisitions is that its purchases are restricted to domestic marine transportation of crude and refined products. That meant that the acquisitions would serve to complement Kinder Morgan's existing transportation business.

This is already starting to pay off for Kinder Morgan. In its first-quarter earnings release, management forecast its terminals business was on track to exceed the 21% annual growth previously expected, due largely to the tanker acquisitions.

Increasing carbon dioxide activity
In addition to its expanded tanker fleet, Kinder Morgan is investing in its carbon dioxide business as well. The company recently announced it would invest $671 million to grow its carbon dioxide infrastructure in Colorado and New Mexico. Collectively, the capital expenditures will boost capacity at the selected sites by more than 1.5 billion cubic feet per day.

Kinder Morgan is seeing growing demand for carbon dioxide services, and will be able to increase production with the new round of investment. It seems management is on to something here, since the company grew earnings from its carbon dioxide segment by 7% in the first quarter.

This is a significant development, because carbon dioxide is big business for Kinder Morgan. In fact, its carbon dioxide business in Colorado record quarterly production in the first quarter. That's set to increase even further once the new investments are underway.

Capital investments to keep distributions flowing
Of course, one of the best reasons for owning Kinder Morgan, Kinder Morgan Energy Partners, or El Paso Pipeline Partners is their respective distributions. Indeed, Kinder Morgan pays a solid 4.7% dividend, while Kinder Morgan Energy Partners and El Paso pay distributions of 6.7% and 7.5%, respectively.

Because of its new strategic investments, in addition to its other businesses such as natural gas pipelines and product pipelines, it's likely Kinder Morgan will continue to generate enough cash flow to pay its hefty distributions.

Kinder Morgan Energy Partners expects to distribute all of its distributable cash flow projected for this year -- $5.58 per unit -- so the company could use some cash flow flexibility. While there are no guarantees, Kinder Morgan's expansions could pave the way for greater cash flow down the road.

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Bob Ciura owns shares of Kinder Morgan Energy Partners LP. The Motley Fool recommends El Paso Pipeline Partners and 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.

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