Kinder Morgan (NYSE:KMI) made big news during its recent earnings call when it announced the $3 billion acquisition of the Bakken midstream MLP Hiland Partners. This is in line with management's stated goals of increased growth through acquisitions courtesy of Kinder's $55 billion in tax breaks it will receive thanks to its recent merger with its MLPs.
With Kinder Morgan now clearly on the acquisition prowl, I'd like to point out one of my favorite midstream MLPs, one that analysts believe may be next up on the merger hit list.
The biggest reason Kinder Morgan might buy MarkWest Energy Partners
According to Jason Stevens at Morningstar, MarkWest Energy Partners (UNKNOWN:MWE.DL) might make a mouth-watering acquisition target. I tend to agree for one main reason.
As this map shows, MarkWest has a dominant position in the Utica and Marcellus shales, two natural gas formations that have been growing production at astounding rates.
Like gas production in these regions, MarkWest is growing like a weed, with 21 processing and NGL, or natural gas liquids, fractionation plants under construction. Markwest also has a competitive advantage over most of its competitors thanks to its lack of a general partner -- which greatly lowers a MLP's cost of capital -- Kinder Morgan's access to even cheaper capital could help to boost the margins on these projects. For example, MarkWest's current borrowing costs are 4.5% while, post merger, Kinder Morgan's will decline to just 2.9%.
How realistic is such an acquisition?
|Company or Partnership||Enterprise Value/Earnings Before Interest, Taxes, Depreciation, and Amortization||Enterprise Value||Trailing 12 Month EBITDA||5-Year Projected Payout Growth (compound annual growth rate)|
|Kinder Morgan||16.11||$104.24 Billion||$6.47 Billion||10%|
|MarkWest Energy Partners||19.2||$14.68 Billion||$0.7649 Billion||23.30%|
There are two main reasons I can see that argue in favor and one that argues against a Kinder Morgan acquisition of MarkWest.
The argument against is based on MarkWest's current valuation, which, on a Enterprise Value/EBITDA basis, is more expensive than Kinder's own valuation, as seen in the above table. In addition, based on MarkWest's current enterprise value -- the value of just its core business -- Kinder Morgan would likely have to pay around $19 billion to acquire it, assuming a 30% premium.
Given the fact that Kinder Morgan has thus spent $74 billion on acquisitions over the past six months,it might balk, at least in the short term, at such a large acquisition. That's especially true given that a MarkWest acquisition would only boost Kinder's EBITDA by 11.8%, at least in the short term.
However, on a longer-term basis, a MarkWest acquisition could greatly boost Kinder's growth prospects. For example, analysts are expecting MarkWest's distribution growth rate over the next five years to be 133% higher than Kinder's dividend growth rate over that same time period. That's because of MarkWest's immense long-term growth potential in two of America's fastest growing natural gas formations and its strong presence in the booming NGL market. In fact, over the next five years the largest growth in ethane, a NGL used by the petrochemical industry, is expected to come from the Bakken, Marcellus, and Utica shale.
Kinder Morgan's acquisition of Hiland Partners gives it a strong presence in the Bakken, and an acquisition of MarkWest Energy Partners would make it the dominant transporter and processor of NGLs in the Utica and Marcellus.
Bottom line: MarkWest makes an excellent addition to Kinder's empire
The dominant position MarkWest holds in the booming Utica and Marcellus shale, as well as its fast-growing NGL fractionation capacity makes it, in my opinion, a tempting takeover target by Kinder Morgan. MarkWest's furious pace of growth could be a great way to turbo charge Kinder's own growth rate for years to come and help it potentially beat its long-term dividend growth target of 10% per year through 2020.