US Kinder Morgan eyes M&A, new projects in $71bn consolidation

HOUSTON (ICIS)–Kinder Morgan Inc (KMI) expects its $71.0bn deal to consolidate its master limited partnerships into one corporation will free up money to acquire more businesses and develop more pipelines and other infrastructure, the US-based midstream company said in an investor presentation on Monday.

Under the deal, KMI will acquire all of the outstanding units and shares of Kinder Morgan Management LLC; Kinder Morgan Energy Partners LP; and El Paso Pipeline Partners LP.

The deal should close in the fourth quarter, creating the largest energy infrastructure company in North America and the third largest energy company overall, with an enterprise value of $140bn, KMI said.

Out of the $71.0bn, $40.0bn will come from KMI equity; $4.0bn will come from cash; and $27.0bn will come from assumed debt.

Among the many reasons KMI gave for pursuing the deal was that it eliminates incentive distribution rights, which will significantly lower the cost of capital, the company said.

Lower capital costs will help KMI grow, and the company is targeting two areas.

Master limited partnerships (MLPs) are ripe for consolidation, the company said. There are more than 120 energy MLPs with an enterprise value that exceeds $875bn.

Any acquisitions will likely be folded into KMI instead of being maintained as MLPs, the company said.

In addition, there is more than $640bn of investment needed in energy infrastructure through 2035.

In the US, the advent of shale gas and tight oil have created new centres of energy production that lack the pipelines to ship the hydrocarbons to the where they are needed.

Kinder Morgan is already involved in several of these projects.

In November 2013, Kinder Morgan Energy Partners and MarkWest Utica EMG have started searching for customers for a proposed pipeline to transport natural gas liquids (NGLs) from the northeast US shale formations to the Mont Belvieu hub in Texas.

The company is expanding its carbon dioxide (CO2) infrastructure so it can better serve the oil industry, which uses the gas to enhance production.

Kinder Morgan and Shell plan to export about 2.5m tonnes/year of liquefied natural gas (LNG) from the Elba Island terminal near Savannah, Georgia.

In the US, demand for infrastructure should continue to increase because of rising production in the Marcellus and Utica formations in the northeast US and oil in the Bakken in North Dakota.

The gas in the Marcellus and Utica is rich in NGLs, which will need to be fractionated and transported to the Gulf coast, the current demand centre in the US.

Gulf coast demand will continue to grow as petrochemical companies build new crackers.

Shell and Odebrecht could build new crackers in the northeast, which would further increase demand for NGLs and midstream services.

More NGL demand could come from ethane and liquefied petroleum gas (LPG) exports.

In the Bakken, North Dakota is adopting regulations to limit the amount of gas being flared by oil producers.

To reduce flaring, oil producers in North Dakota will need pipelines to transport the gas away from the wells.

Kinder Morgan’s activities are not limited to the US.

In Canada, an Imperial Oil-Kinder Morgan joint venture is developing a crude-oil railroad loading facility in Edmonton, Alberta.

The company is developing the Trans Mountain oil pipeline from Alberta to British Columbia in Canada.

In Mexico, Kinder Morgan announced in June 2013 that it is conducting an open season for capacity on its Mier-Monterrey pipeline.

Despite its substantial hydrocarbon reserves, Mexico relies on imports to supply one-third of its demand for natural gas. Much of this gas comes from the US via pipeline.