Kinder Morgan Inc Pipeline View

Image source: Kinder Morgan.

Today, Kinder Morgan (NYSE:KMI) is the third-largest energy company in North America. It is the behemoth of energy infrastructure, controlling the largest natural gas pipeline network in North America in addition to operating large petroleum product pipeline and terminal segments. It also has a more than $20 billion backlog of projects to grow its network over the next five years. It's a project pipeline that is expected to fuel upward of 10% compound annual dividend growth through 2020.

That said, today's Kinder Morgan, and even the one it is planning to build over the next five years, might not be the same Kinder Morgan we see a decade from now. Here's what that company could look like.

Matt DiLallo
There are two overriding themes that are guiding Kinder Morgan today. First, the company is focused on buying or building assets that will cash in on the natural gas megatrend. Second, the assets it buys and builds are primarily fee-based, which locks in its cash flow and largely insulates it from commodity price volatility. I don't see either theme changing over the next decade. Instead, I see the company doubling down on its fee-based natural gas vision and taking it global.

Given that vision, the company's carbon dioxide oil production business doesn't appear to be a good strategic fit for the Kinder Morgan of the future. That's largely due to the fact that that business is directly exposed to commodity price volatility, though the company does hedge much of its production, which is noted on the chart below:

Year

Percent of Volumes Hedged

Average Price

2015

88%

$78

2016

79%

$72

2017

58%

$73

2018

45%

$75

2019

24%

$66

Data source: Kinder Morgan investor presentation.

While the bulk of its production is hedged in 2015 and 2016 above the current market price, the hedges are weaker in future years, which could drag on cash flow if oil stays weak. Because of this, I think that we could see Kinder Morgan sell or spin off this unit at some point in the future.

The other move that I see Kinder Morgan making is expanding its presence outside of North America. One thing it could do is get involved in the LNG trade overseas. It is currently in the process of developing two LNG export facilities in the U.S., which is why it could make a lot of sense for it to buy or build assets that would reliquefy natural gas as well as store and transport it to end users in Asia and Europe. This would enable it to cash in on growing demand for gas overseas even more directly while also giving it an even better handle on demand overseas, thus putting it in the position to better gauge expansion opportunities in North America to meet the demand it can see developing.

Overall, I don't think Kinder Morgan will be all that different a decade from now, because the natural gas megatrend is a decades-long one. Instead, I think the company will look for opportunities to put itself in an even better position to maximize the value it can capture from this trend. 

Rich Smith
Many who follow Kinder Morgan have differing opinions on where the stock is headed. On Wall Street, most analysts agree that the company is going nowhere fast, with long-term earnings growth projected at less than 4% over the next five years. On Motley Fool CAPS, investors are more optimistic, rating the stock four stars and predicting Kinder Morgan will outperform the stock market.

Personally, I think all these people might be right, but it might not matter. Because in 10 years' time, Kinder Morgan might very well be a private company.

It's happened before.

Kinder Morgan was actually the very first public company I ever covered for The Motley Fool -- more than a decade ago, in 2003. Three years later, though, as natural gas prices slid off a late-2005 high and investors turned pessimistic, the company took itself private.

Today, we're seeing much of the same dynamic in the gas markets. Decent prices in the winter of 2014 are giving way to sustained low nat-gas prices. Analysts who follow the industry see little prospect for pricing gains as far out as 2020. That's not an environment calculated to help Kinder Morgan grow its stock price -- but it may depress that stock price enough to make the company an attractive "going private" target for long-term investors such as its founder and executive Chairman, Richard Kinder.

In fact, with the stock down more than 40% over the past 12 months already, I wouldn't put it past Mr. Kinder to be contemplating a takeout even as we speak. 

Jason Hall
Kinder Morgan's management has used a number of tools in an attempt to maximize shareholder returns since going public. And as Rich describes, the company has also been both public and private at times.

I think it's also quite possible that Kinder Morgan could (once again) be more than just one company.

Going back in time – just over one year ago, in fact – Kinder Morgan consisted of four separate entities. The company was divided into Kinder Morgan, two master limited partnerships (Kinder Morgan Partners and El Paso Pipeline Partners), and LLC Kinder Morgan Management.

Kinder Morgan essentially controlled all four entities as the general partner and stake in shares, while the separate entities benefited from the favorable tax structure of MLPs and LLCs. However, management decided that combining all of its scale would simplify the business, and would allow for greater growth potential, creating today's midstream behemoth. 

However, at some point over the next decade, it's likely that the growth potential will slow, and at that point, management could again choose to restructure the company, potentially spinning off assets with better growth potential into a separate company from more stable, cash-producing assets with less room to grow beyond increased prices for its services.

In theory, this would unlock value in the growth part of the business, if the company's stock were to trade below what management considered fair value for an extended period of time. 

Jason Hall owns shares of Kinder Morgan. Matt DiLallo owns shares of Kinder Morgan and has the following options: short January 2018 $30 puts on Kinder Morgan and long January 2018 $30 calls on Kinder Morgan. Rich Smith has no position in any stocks mentioned. The Motley Fool owns shares of and recommends 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.