When Kinder Morgan (NYSE: KMI) announced its $71 billion megamerger with its three MLPs -- the second largest energy merger in history -- CEO and Chairman Richard Kinder said one of the reasons was to prepare the company "to pursue expansion and acquisitions in a target-rich environment."
While Kinder has recently made good on that plan, one unexpected obstacle has popped up that is potentially threatening to slow Kinder's growth ambitions: access to cheap and plentiful credit that is keeping weaker oil producers from selling midstream assets despite the crash in oil prices.
Kinder Morgan: merger machine
The midstream industry -- oil and gas processing, transportation, and storage -- is an enormous one, with $1.5 trillion in potential acquisition and investment opportunities expected through 2035. Thus far in 2015, Kinder has pulled the trigger on two purchases: the $3.1 billion acquisition of privately held Hiland Partners, and the $158 million purchase of three major oil storage terminals.
The rationale for these deals is plain to see. Hiland Partners gives Kinder ownership of the 84,000 barrel per day Double H pipeline, which connects the oil terminals in the prolific Bakken shale formation with Guernsey, Wyo. From this major oil crossroads, oil can be more easily transported to key areas such as mid-continent oil refineries and the oil terminal in Cushing, Okla., where West Texas intermediate -- the U.S. oil standard -- is priced.
Meanwhile, the $158 million purchase of major oil storage terminals is similarly strategic. Kinder is buying three storage terminals that will add 2.2 million barrels of oil storage capacity, giving Kinder a total of 45.2 million barrels of oil storage capacity.
Oil storage is a great business to be in when oil prices crash, because demand by oil producers and speculators to store oil for sale at later, potentially higher prices grows enormously. For example, compared with this time last year, the amount of oil in storage is up 19%, potentially resulting in more profitable storage contracts for Kinder in the future should oil prices remain low for a prolonged period of time.
Why cheap credit is crimping Kinder's merger style
Kinder's founder and chairman, Richard Kinder, recently told analysts at the company's most recent conference call that investors can expect acquisitions to continue: "You can expect us to be active in the coming months. ... We think that there's still opportunities out there, and we're going to look at them."
Ironically though, the abundance of cheap and plentiful credit, which helped Kinder pull of its megamerger with its three MLPs, is also making finding good takeover targets more challenging. According to Richard Kinder: "There's just a lot of very cheap money flowing into the energy segment...particularly on the upstream area that's 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."
Bottom line: Don't expect another megamerger anytime soon
In the past year, Kinder has executed nearly $75 billion in mergers and acquisitions, and it will take time for the company to digest them and realize the $55 billion in tax savings it expects to gain from absorbing its MLPs. In addition, as Richard Kinder pointed out, credit is plentiful now, which means that not only are oil producers able to hold onto midstream assets longer, but also it's potentially easier for midstream MLPs to finance the construction of their existing backlogs. Thus, I would expect Kinder not to try for another large purchase -- such as a large MLP -- anytime soon, but rather to focus on executing on its existing $18.3 billion backlog of growth projects.
That's not to say that Kinder won't continue to expand its empire of quality energy assets. However as it's done so far this year, I'd expect these future acquisitions to be on the smaller side and target very specific assets that Kinder feels represent the best returns on investment for long-term investors.