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Kinder Morgan Will Combine Its Family of Pipeline, Storage Firms

Stocks in this article: KMIKMPKMREPBXOMCVXCOP

By Jonathan Fahey

NEW YORK -- The group of oil and gas pipeline and storage companies controlled by Kinder Morgan but traded separately will combine and become the fourth biggest U.S. energy company by market value.

The companies announced Sunday that Kinder Morgan Inc. (KMI), Kinder Morgan Energy Partners (KMP), Kinder Morgan Management (KMR) and El Paso Pipeline Partners (EPB) will all combine under the Kinder Morgan Inc. umbrella and trade under the KMI ticker symbol. Houston-based Kinder Morgan Inc. says the total purchase price of the three other companies is $71 billion, including $27 billion of assumed debt.

Read More: Will Natural Gas Prices Keep Coming Down?

The combined market value of the four companies was $92 billion as of the close of the market Friday. That would make it the fourth largest U.S. energy company after Exxon Mobil (XOM), Chevron (CVX)  and ConocoPhillips (COP).

The combination means Kinder Morgan will abandon a novel corporate structure it pioneered and leveraged to great benefit, called the master limited partnership. MLPs are given special tax breaks in part because they distribute much of their cash flow to investors and the partners who run the companies. MLPs have become especially popular in recent years because investors have been willing to pay a premium for high-yielding investments at a time when interest rates on savings accounts and bonds are low.

Read More: Natural Gas Resumes Downward Price Trend as Storage Picks Up

The investor enthusiasm has helped make it easier for MLPs to raise money to buy pipelines or build new ones to expand their portfolios. The Kinder Morgan Partners MLP is so big, though, that investors have questioned whether it could continue to grow under the requirement that it distribute so much of its cash.

Chief executive Richard Kinder said in a statement Sunday that it will be easier for the combined company to add new pipeline projects and other energy infrastructure in a way that will add to the company's earnings.

"In the opportunity-rich environment of today's energy infrastructure sector, we believe this transaction gives us the ability to grow KMI for years to come," Kinder said.

Kinder Morgan said it expects the combined company's debt will be rated investment grade by rating agencies, which would allow it to borrow money for new projects at relatively low rates.

The deal is subject to shareholder and regulatory approval. It is expected to close this year.


Now let's look at TheStreet Ratings' take on some of these stocks. TheStreet Ratings team rates KINDER MORGAN INC as a Buy with a ratings score of B. TheStreet Ratings Team has this to say about their recommendation:

"We rate KINDER MORGAN INC (KMI) a BUY. This is driven by multiple strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its robust revenue growth, good cash flow from operations, expanding profit margins, increase in net income and notable return on equity. We feel these strengths outweigh the fact that the company has had lackluster performance in the stock itself."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The revenue growth came in higher than the industry average of 2.1%. Since the same quarter one year prior, revenues rose by 16.4%. This growth in revenue does not appear to have trickled down to the company's bottom line, displaying stagnant earnings per share.
  • Net operating cash flow has increased to $1,085.00 million or 14.21% when compared to the same quarter last year. The firm also exceeded the industry average cash flow growth rate of -7.19%.
  • 38.48% is the gross profit margin for KINDER MORGAN INC which we consider to be strong. It has increased from the same quarter the previous year. Regardless of the strong results of the gross profit margin, the net profit margin of 7.21% trails the industry average.
  • The net income growth from the same quarter one year ago has exceeded that of the S&P 500, but is less than that of the Oil, Gas & Consumable Fuels industry average. The net income increased by 2.5% when compared to the same quarter one year prior, going from $277.00 million to $284.00 million.
  • KINDER MORGAN INC reported flat earnings per share in the most recent quarter. The company has suffered a declining pattern of earnings per share over the past year. However, we anticipate this trend reversing over the coming year. During the past fiscal year, KINDER MORGAN INC reported lower earnings of $1.15 versus $1.22 in the prior year. This year, the market expects an improvement in earnings ($1.23 versus $1.15).
TheStreet Ratings team rates EXXON MOBIL CORP as a Buy with a ratings score of A-. TheStreet Ratings Team has this to say about their recommendation:

"We rate EXXON MOBIL CORP (XOM) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its revenue growth, attractive valuation levels, good cash flow from operations, increase in net income and largely solid financial position with reasonable debt levels by most measures. We feel these strengths outweigh the fact that the company shows low profit margins."

Highlights from the analysis by TheStreet Ratings Team goes as follows:
  • XOM's revenue growth has slightly outpaced the industry average of 2.1%. Since the same quarter one year prior, revenues slightly increased by 2.9%. Growth in the company's revenue appears to have helped boost the earnings per share.
  • The company, on the basis of net income growth from the same quarter one year ago, has significantly outperformed against the S&P 500 and exceeded that of the Oil, Gas & Consumable Fuels industry average. The net income increased by 28.0% when compared to the same quarter one year prior, rising from $6,860.00 million to $8,780.00 million.
  • Net operating cash flow has increased to $10,202.00 million or 32.78% when compared to the same quarter last year. The firm also exceeded the industry average cash flow growth rate of -7.19%.
  • XOM's debt-to-equity ratio is very low at 0.12 and is currently below that of the industry average, implying that there has been very successful management of debt levels. Despite the fact that XOM's debt-to-equity ratio is low, the quick ratio, which is currently 0.58, displays a potential problem in covering short-term cash needs.
TheStreet Ratings team rates CHEVRON CORP as a Buy with a ratings score of A-. TheStreet Ratings Team has this to say about their recommendation:

"We rate CHEVRON CORP (CVX) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its revenue growth, attractive valuation levels, largely solid financial position with reasonable debt levels by most measures, increase in net income and increase in stock price during the past year. We feel these strengths outweigh the fact that the company has had somewhat disappointing return on equity."

Highlights from the analysis by TheStreet Ratings Team goes as follows:
  • CVX's revenue growth has slightly outpaced the industry average of 2.1%. Since the same quarter one year prior, revenues slightly increased by 0.5%. Growth in the company's revenue appears to have helped boost the earnings per share.
  • The net income growth from the same quarter one year ago has exceeded that of the S&P 500, but is less than that of the Oil, Gas & Consumable Fuels industry average. The net income increased by 5.6% when compared to the same quarter one year prior, going from $5,365.00 million to $5,665.00 million.
  • CVX's debt-to-equity ratio is very low at 0.15 and is currently below that of the industry average, implying that there has been very successful management of debt levels. Although the company had a strong debt-to-equity ratio, its quick ratio of 0.99 is somewhat weak and could be cause for future problems.
  • In its most recent trading session, CVX has closed at a price level that was not very different from its closing price of one year earlier. This is probably due to its weak earnings growth as well as other mixed factors. Turning our attention to the future direction of the stock, it goes without saying that even the best stocks can fall in an overall down market. However, in any other environment, this stock still has good upside potential despite the fact that it has already risen in the past year.
TheStreet Ratings team rates CONOCOPHILLIPS as a Buy with a ratings score of B. TheStreet Ratings Team has this to say about their recommendation:

"We rate CONOCOPHILLIPS (COP) a BUY. This is driven by a number of strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its revenue growth, attractive valuation levels, increase in net income, largely solid financial position with reasonable debt levels by most measures and solid stock price performance. We feel these strengths outweigh the fact that the company has had somewhat disappointing return on equity."

Highlights from the analysis by TheStreet Ratings Team goes as follows:
  • COP's revenue growth has slightly outpaced the industry average of 2.1%. Since the same quarter one year prior, revenues slightly increased by 3.5%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.
  • CONOCOPHILLIPS reported flat earnings per share in the most recent quarter. This company has reported somewhat volatile earnings recently. But, we feel it is poised for EPS growth in the coming year. During the past fiscal year, CONOCOPHILLIPS increased its bottom line by earning $6.43 versus $5.90 in the prior year. This year, the market expects an improvement in earnings ($6.51 versus $6.43).
  • The net income growth from the same quarter one year ago has exceeded that of the S&P 500, but is less than that of the Oil, Gas & Consumable Fuels industry average. The net income increased by 1.5% when compared to the same quarter one year prior, going from $2,050.00 million to $2,081.00 million.
  • The current debt-to-equity ratio, 0.38, is low and is below the industry average, implying that there has been successful management of debt levels. Although the company had a strong debt-to-equity ratio, its quick ratio of 0.90 is somewhat weak and could be cause for future problems.

Copyright 2014 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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