The midstream industry is in the midst of an intense ramp-up in organic growth and company consolidation. Mergers and acquisitions are an every-other-day occurrence as companies like Kinder Morgan and Enterprise Products Partners (NYSE: EPD) look to cash in on America's booming domestic energy production.
Growing fast enough to capitalize on oil and gas production is a big challenge for the companies in the midstream industry, but your analysis of their potential shouldn't stop there. I created a premium report on Kinder Morgan to help investors look past the wheeling and dealing and toward some other areas that warrant attention.
Below is an excerpt from the report, laying out three areas investors need to watch in the coming years. We hope you enjoy.
Four key areas you must watch
The midstream industry is famous (in these parts) for its high yields. Though KMI only went public again in 2011, its MLP, Kinder Morgan Energy Partners , has a long history of increasing its distribution payment. The partnership has increased its distribution every year since 1996, achieving a compound annual growth rate of 14% over that time. Kinder Morgan is committed to a future of distribution increases across its publicly traded entities. Using 2011 as a starting point, management's goal is to increase dividends at KMI by 12.5% each year until 2015, while also increasing distributions at KMP and sister MLP El Paso Pipeline Partners over the same time period by 7% and 9%, respectively. Currently, all three are on target to achieve these goals.
Kinder Morgan's terminal business is pretty diverse and can be affected by numerous energy trends simultaneously. For example, U.S. coal exports to Europe have reached record highs, part of a trend that has benefited Kinder Morgan's Terminal segment. In fact, KMP recently posted record coal export volumes. The company's terminal network is positioned well for the increase in exports, as evidenced by the deal it signed with big time coal producer Peabody Energy. However, weak domestic demand for coal also affected KMP's terminals segment revenue. Steel volumes at Kinder Morgan's terminals have also been weaker than in the past. The low demand for steel combined with weaker domestic coal demand could have really hurt the terminal business segment. However, increased demand for coal exports was able to offset those declines. There is a lot going on in this particular segment, and the impact of trends can vary from quarter to quarter; savvy investors will keep a close eye on Kinder Morgan's terminal business.
KMI announced it was dropping down $6.22 billion worth of assets to KMP, including a 100% stake in the Tennessee Gas Pipeline and a 50% stake in the El Paso Natural Gas pipeline. The Tennessee Gas Pipeline is a 13,900-mile pipeline system with a capacity of 7.5 billion cubic feet per day. El Paso Natural Gas is a 10,200-mile system with a capacity of about 5.6 bcf per day. These dropdowns are important because they allow KMP to make up cash flows lost to divestments related to the El Paso acquisition. Kinder Morgan was forced to sell assets in certain regions to avoid antitrust violations. These drop downs are scheduled to continue until they are completed in 2015, when KMI reverts back to being solely a holding company, and investors should monitor that progress.
Kinder Morgan has $9.8 billion in growth-oriented projects scheduled for completion over the next five years. The projects are geographically diverse and represent KMP's ability to maximize the size of its asset-footprint to generate growth. For example, the $1.7 billion to be spent on natural gas pipelines includes projects in the Northeast, Mississippi, and along the Mexican border. $4.8 billion has been designated to the Trans Mountain pipeline expansion in Canada, and another $1.6 billion to developing CO2 source field expansions in New Mexico, Arizona, and Colorado. KMP's return on investment has not dipped below 13% since 2002, and its return on equity hasn't hit below 20% since 2001. All told, the partnership makes smart decisions targeting growth and realizes excellent returns on those decisions.
Looking for more guidance
That was just a sample of our new premium report on Kinder Morgan. If you're weighing whether the company is a buy or sell, the report is an essential resource for investors seeking more information on the company. Not only that, but the report comes with updated quarterly guidance and dives into upcoming catalysts on the horizon. To get started, simply click here now.
The article The Key Areas You Must Watch at Kinder Morgan originally appeared on Fool.com.
Fool contributor Aimee Duffy has no positions in the stocks mentioned above. The Motley Fool owns shares of Kinder Morgan. Motley Fool newsletter services recommend El Paso Pipeline Partners and Kinder Morgan. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.