Kinder Morgan Becomes One of the Largest in Its Field


The global oil and energy market is revving up, with some big mergers and acquisitions one after the other. The most recent biggie was the deal between Kinder Morgan (NYS: KMI) and El Paso (NYS: EP) -- the ninth-largest takeover in the global energy sector and the largest ever for a pipeline company. The agreement will enable Kinder Morgan to acquire El Paso for $21.1 billion, creating the largest midstream and the fourth-largest energy company in North America.

The pact
The deal stands to make Kinder Morgan the largest owner and operator of natural-gas pipelines and storage assets in North America. The company will have a network of 80,000 miles of natural-gas pipelines connecting major shale areas like Eagle Ford, Marcellus, Utica, Haynesville, Fayetteville, and Barnett. The combined company will also become the largest independent transporter of petroleum products in the United States, operating through more than 8,000 miles of pipelines transporting approximately 1.9 million barrels per day of gasoline, jet fuel, diesel, natural-gas liquids, and crude oil.

The prospects
America's drive to curb carbon emissions and to decrease dependence on foreign oil could easily result in a boom in the natural-gas sector. According to the American Natural Gas Association, burning natural gas as fuel in power plants emits 44% less carbon dioxide than burning coal. This, in combination with technological advancements and innovations, has spurred the increase in U.S. gas output by 11% in the last decade.

In the coming years, both demand and supply of natural gas are expected to increase. U.S. gas production has already surpassed demand. As production of natural gas is on the rise in the U.S., more and more pipelines are needed to move gas to new markets, especially for power generation. Production from different new gas fields, such as the Marcellus Shale, has been affected by insufficient pipeline capacity to haul fuel to major markets.

Kinder Morgan plans to cash in by becoming the largest owner and operator of natural-gas pipelines. El Paso assets, which complement Kinder Morgan's pipelines, produce considerable and steady cash flow and are connected to key supply regions and main consuming markets. The wide network is expected to generate strong revenues, reduce operating costs, and provide future growth opportunities.

Kinder Morgan is focused on natural-gas and other fuel transportation markets and plans to sell off El Paso's oil and gas wells. But there is another reason behind the sale. Kinder Morgan had to arrange for a $11.5 billion loan from Barclays (NYS: BCS) to acquire El Paso, which increased its debt to a whopping $14.5 billion. The oil and gas production unit sell-off is expected to fetch around $7.3 billion to $9 billion. The company might use this cash to shed some of the debt load.

Evercore Partners (NYS: EVR) and Barclays have begun marketing the unit to potential buyers like Apache (NYS: APA) , Hess (NYS: HES) , and Occidental Petroleum (NYS: OXY) , who have interest in shale gas production.

Kinder Morgan holds an even stronger grip over its competitors, being the largest transporter of carbon dioxide and the largest independent terminal owner and operator in the United States.

The sector is witnessing further consolidation, with U.S. pipeline owner Energy Transfer (NYS: ETP) bidding $5.1 billion to acquire Southern Union (NYS: SUG) to gain access in Florida and the Midwest.

Foolish takeaway
By creating the largest natural-gas pipeline network operator in the country, Kinder Morgan has sealed its position as a major player in the energy segment. The future holds good prospects for the company given the increased emphasis on the natural-gas segment in the U.S. The El Paso deal is expected to create synergies that would help Kinder Morgan reap rich dividends in the years to come. The stock is surely worth watching. If you're looking for other ways to profit from the natural-gas boom, check out a special report by The Motley Fool, "One Stock to Own Before Nat Gas Act 2011 Becomes Law." You can download it for free by clicking here.

At the time thisarticle was published Fool contributor Abantika Chatterjee does not own shares of any of the companies mentioned in this article. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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