Once thought to be impregnable due to its fee-based energy infrastructure holdings, Kinder Morgan (NYSE: KMI) has not only seen its shares dragged down with the rest of the energy sector but it too succumbed to cutting its dividend last December.
But while it is bloodied and bruised, with many energy companies having also found themselves in bankruptcy court lately, a great deal more would have to go wrong for Kinder Morgan to find itself headed down a similar path. In fact, the situation appears to be quite the opposite, as the seeds for future growth are being planted as we speak.
However, before venturesome investors go diving into the war-torn energy space by buying into Kinder Morgan, here are three key facts about this behemoth energy infrastructure operator you should know.
What is known today as Kinder Morgan had its beginnings in the 1990s, when a group of investors, led by current Chairman Richard Kinder and William Morgan, purchased a general partnership interest in a small liquids pipeline. That pipeline, Enron Liquids Pipeline, was purchased from everyone's favorite corporate accounting offender: Enron. At this point, in 1997, Kinder Morgan Energy Partners had an enterprise value of just $325 million and, through the innovative use of the master limited partnership model as an engine for growth, continued to grow by leaps and bounds in the following two decades.
Through a complex web of various corporations and separate-but-not-quite-separate publicly traded entities, Kinder Morgan made acquisition after acquisition. This yielded an extraordinarily complex consortium that was simplified last year by bringing all these satellites under the Kinder Morgan umbrella. The product of this relentless expansion has been that Kinder Morgan grew to become the largest energy infrastructure operator in North America, with an enterprise value of some $80 billion.
Bigger than you think
One is at risk, upon reading that Kinder Morgan is the largest energy infrastructure operator in North America, of not fully appreciating this fact. Big mistake. Not because it's big, but because such a feat was accomplished in just 20 years under the extremely farsighted and shareholder-friendly guidance of Richard Kinder, William Morgan, and the rest of the Kinder Morgan team.
Kinder Morgan took the crown of largest infrastructure operator fairly recently, thanks to its 2012 acquisition of El Paso Corporation. Today, it operates 84,000 miles of pipelines (that's enough to cross the continental United States about 30 times, in case you're curious), which moves, among other things 2.1 million barrels of petroleum products every day. Pipelines, arguably the bulk of the iceberg, aren't the whole mass. Kinder Morgan happens to also hold interests in over 180 terminals, handling everything from carbon dioxide, coal, and other dry bulk commodities, as well as two rather large oil fields in the Permian Basin of West Texas thrown in.
Making short-term sacrifices
To say that Kinder Morgan's decision to cut its dividend on Dec. 8, 2015, distressed its shareholders (heck, the entire sector) would be an understatement. After all, this is Kinder Morgan we're talking about here. A whopping 91% of its cash flows for fiscal year 2016 are based on fees (not commodity prices). Want to transport your oil 1,000 miles to Houston? You have to pay the toll. No way around it. Why would Kinder Morgan, the innovative market leader in the MLP infrastructure space, do something as drastic as cut its dividend when its cash flows are so "safe"?
The answer lies not in the red ink of income statements, as has been the case with many energy companies, but in their stated growth plans. Since its inception, Kinder Morgan has used a mix of equity, debt, and cash to expand its empire. Those plans have not stopped despite the current climate, but the way those plans were to be funded has. Wall Street just isn't keen on throwing more money at the energy space these days, and to use Kinder Morgan shares trading at multiyear lows as currency for said expansions would not be terribly shareholder-friendly. So, rather than put its expansion plans on hold (new projects that will likely make future cash flows all the higher), the company elected to fund them internally with the money that would have been sent to shareholders every quarter. It hurt, for sure, but it was probably the right move.
Even though Richard Kinder has stepped down from the CEO position, his interests are very much aligned with shareholders'. Not only does Mr. Kinder own 10.99% of Kinder Morgan, but he draws the vast majority of his income from dividend payments as his charimen salary comes in at just $1 per year and receives no stock option grants. As far as management alignment is concerned, one could do a lot worse.
Sean O'Reilly has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Kinder Morgan. The Motley Fool has the following options: short June 2016 $12 puts on 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.