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Kinder Morgan Stepped Outside of its Comfort Zone to Grow

Reuben Brewer
January 7, 2014

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.

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.

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