You Can Still Benefit From Solid Enron Management
It doesn't seem possible, but Houston's infamous Enron figuratively met its maker on Dec. 2, 2001, a decade ago last Friday. On that day, the company, which had been formed in 1985 by Kenneth Lay through the merger of Houston Natural Gas and InterNorth, a big Omaha-based pipeline company, filed for bankruptcy.
In its little more than a decade-and-a-half of existence, Enron became replete with a cast of characters whose bravado and ethical derring-do ultimately toppled the company. My reading of perhaps the best-known book about the company's ascendancy and demise, The Smartest Guys in the Room, by Bethany McLean and Peter Elkind, a pair of Fortune senior writers, leaves me with the strong impression that the four most noteworthy characters in the story were led by Lay, who passed away suddenly in 2006 while awaiting sentencing following convictions on several counts of securities fraud and other transgressions.
Then there were Jeffrey Skilling, president and, for a time, CEO of the company, and CFO Andrew Fastow, both of whom remain incarcerated for their roles in conjuring up a host of corporate financial illegalities. Finally, there was Richard Kinder, a lawyer and one-time Enron general counsel, whose slate remains clean. After being abruptly passed over by Lay for the CEO post at Enron, Mr. Kinder just as abruptly left the company. He was to form Kinder Morgan (NYS: KMI) , a huge natural gas and refined products pipeline and terminal operator, which is in the process of buying El Paso (NYS: EP) , one of its chief rivals.
Never, but never, underestimate the importance of management
I've spent time and space discussing the Enron foursome in large part to demonstrate my longtime contention that difficult-to-quantify managerial quality is all too often overlooked in the investment analytical process. But Lay and his minions or Kinder ultimately can wind up with a flawed company or a solid and long-lived one, based largely on their specific business approaches and ethical standards.
At the time of Mr. Kinder's departure from Enron, he convinced the company to sell him Enron Liquids Pipeline, a natural gas transporter, for a comparatively low cost of $40 million. The unit had been for sale for some time, since for many in the company it lacked the pizzazz of Enron's newer -- and, as it turned out, weaker -- ventures. Following the completion of several other deals, the expanded pipeline company was renamed Kinder Morgan, after Mr. Kinder and William V. Morgan, a now-retired University of Missouri classmate of both Kinder and Lay.
Kinder scrambles to the top
Today, with a reputation for a no-nonsense management style and an uncanny memory for past details, Kinder ranks in the pantheon of energy managers with the likes of Rex Tillerson, CEO of ExxonMobil (NYS: XOM) , and Chesapeake's (NYS: CHK) founder and CEO Aubrey McClendon. In the process, he apparently has become the richest man in Houston, which outdoes a similar ranking in most other cities.
As for the current Kinder Morgan, its website notes that the company ranks as the leading transporter of refined petroleum products, the second-largest natural gas transporter, the largest operator of independent terminals, the largest CO2 marketer and transporter, Texas' second-largest oil producer, and the sole pipeline transporting oilsands in both Vancouver, B.C. and the state of Washington. Beyond that, by the second quarter of 2012 -- assuming willingness by regulators and the shareholders of both companies -- it is expected to complete the acquisition of El Paso, the nation's leading interstate natural gas pipeline, a significant U.S. natural gas producer, and an operator in Egypt and Brazil.
Kinder Morgan is expected to pay $21.1 billion in cash and stock in the sizable transaction -- along with the assumption of El Paso's debt -- bringing the price tag on the transaction to about $38 billion. The $14.65 in cash, 0.4187 of a Kinder Morgan share, and 0.640 of a warrant being paid for each El Paso share represents a 37% premium to the latter company's pre-announcement value.
Post-transaction activities likely will include the raising of $7 billion to $10 billion in debt repayment funds through the sale of El Paso's E&P unit. Word has it that such private equity firms as the Blackstone Group (NYS: BX) and Kolberg Kravis Roberts (NYS: KKR) are eager to participate in such a sale.
Put that in a giant pipe and let it flow
The final result will include North America's premier midstream energy company, with ownership and operation of 67,000 total miles of pipeline. Further, as if he needed an incentive to maintain his solid management style, Mr. Kinder will own nearly $95 billion of the company's stock following what can hardly be expected to be the company's final transaction. (El Paso CEO Douglas Foshee will be eligible for an exit package of about the same amount, should he leave within two years of the transaction's completion.)
A Foolish top-down conclusion
My own 30,000-foot perspective from the proposed Kinder Morgan-El Paso combination leaves me with two salient conclusions. First, I'm certain that the massive changes during just the past few years in the production of oil and gas in North America will lead to a host of additional combinations among both producers and pipelines. Indeed, such relatively new plays as the Marcellus Shale, the Bakken, and the Eagle Ford remain the victims of insufficient infrastructure capacity. I'd betting that E&P and pipeline operator Williams (NYS: WMB) could well be participants in an upcoming marriage.
Second, and most important for now, given my status as a management freak and my admiration for Richard Kinder's track record, I'm inclined to pay special attention to the combination of his company and El Paso as it is completed, matures, and expands. Given our rapidly changing North American energy picture, I suggest that you do the same. I know of no better way to do so than to add Kinder Morgan to your version of the Fool's My Watchlist.
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At the time this article was published Motley Fool newsletter serviceshave recommended buying shares of Chesapeake Energy. 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. Fool contributorDavid Lee Smithdoesn't own shares in any of the companies listed in this article. The Motley Fool has adisclosure policy.