Monday November 07, 2011
by Tom Slee, contributing editor Internet Wealth Builder
We remain extremely cautious on the overall market while keeping an eye open for unusual opportunities such as Kinder Morgan (KMI) -- which we have added to our buy list.
Established in 1997, Kinder Morgan is one of the largest pipeline and energy storage companies in North America with more than 37,000 miles of pipes and 180 terminals.
Almost all of the assets are owned by Kinder Morgan Energy Partners, a master limited partnership which goes from strength to strength. Kinder Morgan Inc. -- our recommendation -- acts as General Partner of KMP and owns 11% of the units.
Taken private in 2007 and then public again in February 2011, KMI is essentially a new corporation with a limited track record but its initial numbers are extremely encouraging.
Supported by a market cap of $20 billion, Kinder Morgan Inc. is expected to receive distributions of at least $4.60 a unit from the partnership in 2011 and in turn currently pays a $1.20 dividend. Management expects these dividends to grow at more than 10% per year.
The big news is that Kinder has now launched a friendly takeover of El Paso which owns a 42,000 mile interstate natural gas pipeline system.
The deal, programmed for completion in during the second quarter of 2012, will create the largest pipeline company in the world. There are going to be economies of scale as well as a potentially huge tax benefit.
Analysts expect Kinder to fold El Paso's assets into its Partnership (KMP) and avoid corporate taxes. EP's profits can then be passed tax free through to partnership unit holders and, in the case of Kinder Morgan Inc., increased dividends to shareholders.
We could see more acquisitions at the KMI level and with subsequent transfers to the partnership.
Based on the existing operations, KMI is expected to distribute about $1.35 a share in 2012 but the El Paso deal means that we will need to revise our numbers upward before year end.
Kinder Morgan Inc. remains a Buy at $29.10 with a target of $34. Keep in mind that the stock is going to fluctuate in these uncertain markets. Pipelines, however, are a relatively defensive industry.
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