When markets are in turmoil some companies worry while others get excited. We can count Kinder Morgan Inc. (NYSE:KMI) among the latter. When oil prices plunged by 50% it knew its business would be largely unaffected because 94% of its earnings are either fee-based or protected by commodity price hedges. Instead, the plunge was a buying opportunity as it expected oil companies to unload their noncore midstream assets for cash. There's just one problem: Oil companies haven't needed to sell assets to raise cash, which has hindered Kinder Morgan's hopes of taking advantage of the weak oil market.
Where's all the M&A?
On Kinder Morgan's recent conference call, analysts asked management about its thoughts on mergers and acquisitions in the current market environment. That's not a surprise for a company that has made $26 billion in acquisitions since 1997. Furthermore, given that the M&A market got a jolt from Royal Dutch Shell's (NYSE:RDS-A) (NYSE:RDS-B) recent announcement that it would acquire rival BG Group for a hefty premium, analysts wanted to know when Kinder Morgan would pounce.
CEO Richard Kinder reminded analysts that the company had already made two acquisitions this year, including its $3.1 billion acquisition of Bakken midstream company Hiland Partners. So, as Kinder put it, "we've not been sitting on the sidelines." He added that the company continues to look for new opportunities, but these deals need to fit in terms of accretion and feasibility. However, the company has encountered an unexpected roadblock in its search for deals, according to Kinder.
"The real retarding factor to acquisitions right now is that there's just a lot of very cheap money flowing into the energy segment, particularly in the upstream area, that are backing companies that otherwise might be more in need of selling midstream assets that we would be interested in if they didn't have some of this capital flowing into their operations," the CEO said.
The flood of capital
Kinder was pointing out that investors are plowing money into the energy sector in hopes of profiting from a future rally in the industry. Not only have private equity firms raised billions in energy-focused funds, but during the first two months of the year alone energy companies raised $7.75 billion of equity capital in 16 separate deals. That was the biggest quarterly surge in seven years and more equity capital than oil producers raised in all of 2009.
One example of this impact is seen at Bakken shale-focused Oasis Petroleum (NYSE:OAS). It was recently able to issue $409 million in equity thanks to strong investor demand, leading the company to upsize its offering from 25 million shares to 32 million shares. This capital is buying the company time so that it doesn't need to unload its Bakken midstream assets for cash. Instead, the company is considering creating a master limited partnership to fund construction of a North Dakota gas processing plant. That MLP would also own the company's crude oil gathering lines and saltwater distribution lines. Kinder Morgan might have been interested in this asset, which could be a nice bolt-on to Hiland Partners. However, Oasis did not have to put the asset on the market because it received the cash it needed directly from investors.
The amount of cheap money pouring into the energy industry at the moment is hindering Kinder Morgan's ability to make acquisitions. This money is not only enabling oil companies to hold on to their midstream assets, but also increases the numbers of prospective buyers for assets that do hit the market, including investors interested in MLP IPOs. This all means Kinder Morgan for now might not be able to make a big splash as it won't do a deal unless it will really move the needle, which is tougher to do with so much competition.
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.