Longtime Kinder Morgan (NYSE:KMI) investors likely know the company's growth plan quite well. Dubbed the 2-10-2 plan, the company expects to grow its dividend to $2 per share this year and then by at least 10% per year through the end of the decade while also producing $2 billion in excess cash flow. It's a conservative plan that is largely built upon the strong foundation of the company's robust $17.6 billion contract backlog.
I say largely because in addition to organic growth the company does have another avenue for growth that's much less visible: acquisitions. Kinder Morgan has a long history of acquisition and so far this year the company has closed two deals that should drive long-term value creation. However, what's really compelling about Kinder Morgan's future acquisition opportunity is that the company now has a huge, untapped acquisition market sitting in front of it that its peers can't access quite as easily.
Recently, the company's VP of corporate development, Dax Sanders, spoke at an investor conference. He told listeners that he spends about 80% of his time on corporate M&A, so, he obviously knows a thing or two about the company's plans. Unfortunately, he didn't share all that much about the company's plans other than some general parameters. In talking about M&A he said that the strategy hasn't changed as the company will continue to focus on buying stable fee-based assets.
However, what he did point out was that thanks to the company's reorganization from owning MLPs to one big C-corp it has given the company another place to look for these types of assets. He said:
This reorg that we did opens up a lot of new areas to us. The concept of qualifying income is relevant to MLP's, [but] it's really not relevant to us anymore so we're not constrained by that. We're not constrained as much by geography. International deals are, while we're not lining those up, we certainly have fewer constraints around those but at the same time we really like our toll road concept and we still are going to be very disciplined in deploying capital I think.
What he points out is that while the company now has the freedom to pursue acquisitions outside of North America it is not intentionally pursuing these deals. That being said, it does highlight a huge untapped market that Kinder Morgan basically has all to itself.
The pull of demand
Kinder Morgan has an unparalleled asset footprint in North America, which we can see on the following map.
As a U.S.-centric company, Kinder Morgan's main role in the energy industry is to get hydrocarbons and other commodities from production basins and into market centers. Over the past few years a lot of its growth has been on the side of getting hydrocarbons out of production basins, which is something known as supply push. That's because U.S. oil and gas production has spiked in recent years as producers unlocked supplies from new basins that didn't have the takeaway capacity to get the oil and gas out of the region.
Now that the market is beginning to mature the company has seen its growth come from the other side of the equation, which is the demand pull side. This has the company building pipelines to supply gas to power plants, petrochemical complexes, and regions that don't have enough natural gas during the winter. In addition to that, the industry sees a lot of demand pull coming from outside the U.S. That's why Kinder Morgan is building pipelines to supply natural gas to LNG export facilities as well as an oil export pipeline to Canada's West Coast.
That suggests that one of the major international expansion opportunities that Kinder Morgan could have in the future is to acquire, or build, demand pull assets in the markets that want American oil and gas. Places in Europe, for example, which are trying to get off of their dependence on Russia, could be a prime place for Kinder Morgan to be looking for deals as the region lacks capital. Moreover, the fast growing emerging economies in Asia also offer appealing potential for growth. Quite honestly, the whole world is open to Kinder Morgan right now and because its assets are no longer owned by MLPs the company could pursue deals in these regions in order to drive future growth.
Kinder Morgan still has plenty of growth potential in the U.S. as the oil slump could really open up a number of acquisition opportunities close to home. However, with the income constraints of an MLP now taken away, the company can also look outside the U.S. for opportunities. This opens up a whole new world for the company to build or buy assets that are needed to meet the demand pull of America's supply push.
Matt DiLallo has the following options: short January 2016 $32.5 puts on Kinder Morgan and long January 2016 $32.5 calls on Kinder Morgan. 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.