The 3-Headed Cash Machine That Is Kinder Morgan

In the world of energy transport Kinder Morgan is a juggernaut. It's the fourth largest energy company in North America, with 68,000 miles of pipeline servicing every major oil and gas region in the country. It's also the largest independent oil and CO2 transporter and has recently branched out into oil tankers as well. 

However, Kinder Morgan is a complicated empire. There are four tickers under which its companies trade: KMI, KMP, KMR, and EPB. This article outlines the differences between these securities and summarizes some of the growth catalysts that make Kinder Morgan one of the best ways for long-term income investors to profit from America's historic energy boom.

Kinder Morgan Energy Partners  is the MLP that operates the vast majority of Kinder Morgan assets. As an MLP it doesn't pay dividends to shareholders but distributions to unit holders (for a more detailed explanation of MLPs see this article).

Recently the entire family of Kinder Morgan companies has been hammered by negative press arguing the company's best growth is behind it. 

Despite management's vigorous reply to the charges against it, as well as a reiteration of previous guidance of 5% distribution growth and 8% dividend growth (for Kinder Morgan Inc), shares fell to multi-year lows.

Kinder Morgan Inc  yields 5% and is the parent company and general partner to both Kinder Morgan Energy Partners and El Paso Pipeline Partners. It owns 8% of KMP units, 13% of KMR shares, and 41% of EPB units, from which it collects cash distributions and stock dividends. In addition it collects IDR (incentive distribution rights) fees from its MLPs. This means 50% of marginal distributable cash flow (DCF) goes to KMI above a certain distribution rate, which has been achieved for both MLPs. 

Kinder Morgan Management  yields 7.4% and is exactly like KMP, but pays out stock dividends instead of cash distributions. This is a great option for investors who want to participate in a dividend reinvestment plan (DRIP) but whose brokers don't offer one. Most brokers will allow investors to own partial shares, though some won't allow selling partial shares.

Growth catalysts
There are five primary growth catalysts for the Kinder Morgan Empire: the Marcellus shale production boom, ethane exports, gas exports to Mexico, LNG exports, and a potential merger between KMI and KMP. For purposes of brevity only the first two will be discussed in this article.

The Marcellus shale is the largest gas formation in America, covering 15 million acres in Pennsylvania, New York, West Virginia, and Ohio. The EIA estimates there are 410 Tcf (trillion cubic feet) of recoverable natural gas, or 15 years' worth of U.S. production.

Production from the Marcellus has increased from 1 Bcf/d (billion cubic feet/day) to 14 Bcf/d in 2014 and is projected to increase to 20 Bcf/d by 2017-2018. This mind-boggling growth will mean high demand for transportation and storage facilities that Kinder Morgan is investing in. 

On the back of the natural gas boom is an explosion in NGL (natural gas liquids) production. Specifically, ethane is being produced at such a furious pace that there is simply no infrastructure to store or transport it. This has created a glut resulting in such low prices that producers are having to "reject" ethane by not refining it out of natural gas (ethane is a valuable petrochemical used in plastics).

This kind of waste is why Kinder Morgan is partnering with Mark West Energy and Targa Resources to repurpose Kinder's Tennessee gas pipeline system to transport NGLs, such as ethane, 1,000 miles to the Gulf Coast for export. The initial capacity will be 150,000 bpd (barrels/day) but expandable to 400,000 bpd.

With Enterprise Product Partners predicting NGL production to increase by 79% by 2020, driven by a doubling of export demand, Kinder Morgan stands to benefit greatly from this strong energy trend. 

Kinder Morgan is one of the best-run energy companies in the world. Its caliber of management (who invest right alongside investors) and access to financial resources mean that this company's optionalities to take advantage of America's energy bonanza are nearly without equal. With the above growth catalysts and the recent price declines caused by none fundamental factors, long-term income investors can have confidence in generous income yields that are likely to grow strongly for decades to come.

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Adam Galas has no position in any stocks mentioned. The Motley Fool recommends Kinder Morgan. The Motley Fool owns shares of 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.

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