What's the Opportunity at Kinder Morgan?

The Opportunity
Kinder Morgan is a holding company. It forgoes the direct ownership of assets, and instead makes its money by owning stakes in the other Kinder Morgan companies: Kinder Morgan Energy Partners , Kinder Morgan Management , and El Paso Pipeline Partners . It also owns a 20% stake in a natural gas interstate pipeline called NGLP.

On a rare occasion, such as now, KMI will own assets, albeit briefly, with the intent to drop them down to either KMP or EPB. For example, KMI purchased the assets of El Paso during that acquisition and is in the process of selling them to the other Kinder Morgan companies.

But really, KMP is KMI's primary asset. KMI owns the general partner and incentive distribution rights in KMP, but it also owns 11% of the limited partner units, and together its ownership in KMP amounts to more than 95% of KMI's cash flow. In other words: When KMP makes money, so does KMI.

In many ways, the Kinder Morgan family is at the top of the midstream heap. It operates the largest natural gas network in the U.S., controlling 75,000 miles of pipeline with assets in every major natural gas play. With 180 terminals, it is the largest independent terminal operator in the States as well. It is the largest independent transporter of petroleum products and carbon dioxide. And, despite the fact that pipelines and terminals are its bread and butter, Kinder Morgan is also the second-largest oil producer in the state of Texas.

Kinder Morgan has considerable assets in Texas and Florida. These regions are particularly important to natural gas pipeline operators because they are the top two markets in the country for natural gas-generated electricity. In the U.S., the use of natural gas in power generation rose 14% between 2008 and 2011. That number is expected to climb 9% higher by next year, totaling 22.7 billion cubic feet per day. The geographical breadth of Kinder Morgan's asset footprint cannot be underestimated as this trend continues.

Kinder Morgan's carbon dioxide business is also a great strength. The country's leading transporter and marketer of carbon dioxide has assets in all the right places to serve oil producers looking for help in enhanced oil recovery. Kinder Morgan has an ownership stake in the two largest CO₂ domes, which provide a combined 1.5 billion cubic feet of CO₂ per day to operators in Utah, Oklahoma, and the Permian Basin.

Through the first nine months of the year, Kinder Morgan's CO₂ segment is up $176 million over last year. Things are going so well for Kinder Morgan's CO₂ business that the company has had to turn customers away. As a result of increasing demand in the Permian Basin, Kinder Morgan has acquired and begun to develop the St. Johns CO₂ field. Stretching across Arizona into New Mexico, St. Johns is expected to provide about 400 million cubic feet of CO₂ per day to producers in the Permian.