There is big news in pipelines today: Kinder Morgan Partners (KMP) is buying El Paso Energy (EP) for a big 37% premium, which will make the former the U.S. leader in pipeline mileage and volume. But, more than that, this monster merger is a tell on the future of natural gas.
No one in Washington seems to believe in it -- but Richard Kinder does. He is the kind of guy in the world of natural gas that you don't ignore. Kinder is the undisputed king of midstream, understanding the transport and storage business in natural gas as no one else in the world does. He is the godfather of the transport master limited partnership. On a basic level, he singlehandedly devised the investment vehicle to deliver fantastic dividends (actually distributions) to shareholders while avoiding the double taxation problems that had previously burdened connected natural gas exploration and production companies.
Richard Kinder, CEO of Kinder Morgan Partners -- with market capitalization of $23 billion -- receives a yearly check of $1 from his company, preferring to benefit solely from distributions, as his shareholders do. He's all in the boat with his shareholders. The man was paying $26.87 a share for El Paso when it closed on Friday at a much lower $19.59, making most analysts cringe. Clearly, they will say, that's an enormous overpayment for a natural gas exploration, production and pipeline company.
But it is Richard Kinder who is paying it. That makes all the difference.
The exploration-and-prodution portion of El Paso will almost surely be spun out, because Kinder is a midstream guru. He's not interested in concentrating on the next great shale play, even as he is convinced of their monster future. It is the pipelines at El Paso that excite Kinder, as they will give him added exposure in Texas and through the midcontinent. They will deliver an enormous new pipeline system into New Mexico and Southern California to augment his own products pipeline, and add new routes dead through the mid-Atlantic and up to the North East, cutting right through Marcellus country.
You don't think Richard Kinder believes in the inevitability of shale? You know he does.
He believes even more in the inevitability of natural gas, which is still the most overwhelmingly cheap, plentiful, safely extractable, green and domestic energy supply we've ever seen.
That's why Richard Kinder is prepared to pay a premium to become the undisputed leader in natural gas transport. He knows that, when Washington and the rest of the country sees what he already knows, he will have the most extensive and desired transport network and a monopoly on the rates he can charge on it.
Who else is as sharp as Richard Kinder and ready to bet on natural gas? There's no network of midstream assets out there that's quite as fantastic as that of El Paso, so any other mergers or buyouts by other midstream companies couldn't even begin to match this deal. But the pressure is clearly on: The merger mania in natural gas is again beginning, and bigger MLPs will need to roll out the checkbooks if they have been looking to grow.
Watch for new attempts for expansion by Enterprise Products Partners (EPD), Enbridge Partners (EEP) and Energy Transfer Partners (ETP) for a start. Of course, there is a big dice roll between acquiring assets in front of a possible boom in natural gas, and acquiring a boatload of unsustainable debt from acquiring those assets (and paying distributions). We've seen the big nat gas companies blow themselves up before -- in 2000, by getting this bet wrong. But, at this point, who will want to be potentially left behind?
Richard Kinder isn't afraid. He's telling the industry to get out of his way. He says that natural gas is coming, like it or not.