This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

Kinder Morgan Deal May Not Be the Game Changer You Think It Is

Stocks in this article: MWEEQTAPLKMPKMIKMREPBOKEWPZ

NEW YORK (TheStreet) -- Kinder Morgan (KMI) is consolidating its master limited partner interests with the $71 billion acquisition of Kinder Morgan Energy Partners (KMP), Kinder Morgan Management (KMR) and El Paso Pipeline Partners (EPB). The deal is a game-changer in some ways, but by no means should investors steer clear of other MLPs because of the transaction.  Richard Kinder is a master of his industry, so when he decides that the best plan of action for the firms he controls is to consolidate, it is worth thinking about.

In fact, Kinder Morgan’s motivation probably was at least partially due to its perception that its own MLP's were undervalued.  One can look at the price action of other MLP's Monday to gauge the market reaction to the proposal: Markwest Energey (MWE), up 7.4%; EQT Resource Partners (EQT), up 4.7%; Atlas Pipeline Partners (APL), up 3.8%.

Read More: Kinder Morgan Consolidation: What it Means for MLPs

The rush for MLP's is not over, but I do think the Kinder deal pointed out that the field has become somewhat crowded. 

A few short years ago, there were fewer than two dozen of these partnerships. Now there are probably closer to 200, many of which are in the same energy-oriented areas. It has been, as Kinder Morgan pointed out, somewhat more difficult to find growth opportunities.

In addition, smaller MLPs might be somewhat disadvantaged compared to their larger brethren in how efficiently they can raise capital.  

Also consider that MLP's are required to pay out most of their cash flow, so they are in the capital markets often looking for both new equity and debt.

The advantage of a corporate structure (vs. the MLP structure) is that the corporation gets to retain more earnings and use the capital to grow. It is not unlike the advantage Berkshire Hathaway's utility subsidiary has vs. its peers. It not longer has to pay a dividend and can use that money for growth.   

In Kinder Morgan's case, size was a negative factor, in terms of growth opportunitiues. In addition, it is more difficult now for MLP's to differentiate themselves in the minds of investors.  But it still can be done and takes a bit more homework.

We have many partnerships in the gas and oil transportation areas, we also have MLPs in the oil refining area, in petrochemical manufacturing areas and similar spaces.

Granted I am no pro on MLP valuation, but I believe the following companies are worth looking into: Williams Pipeline (WPZ) continues to offer an attractive yield with reasonable growth potential, as does Oneok Partners (OKE) and MarkWest Energy Partners. All are located in areas of rapidly expanding gas & oil production, which will foster a need for gathering and mid-stream pipeline networks to move the gas & oil to refineries and processing plants.

The advantages remain what they were: MLPs remain an efficient way to invest in generally fairly high-income producing assets in a liquid and tax-efficient way. This is, indeed, the reason they have become so popular. This popularity took off several years ago as bond rates plummeted, causing investors to look elsewhere for yield. REITs (real estate investment trusts) blossomed, as did MLPs.

Read More: Kinder Morgan Starts 'Open Season' for Oil and Gas Infrastructure

At the time of publication, the author was long MarkWest Energy, although positions may change at any time.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Peter W. Tuz, CFA is president of Chase Investment Counsel of Charlottesville, VA. The firm manages about $420 million on behalf of institutions and individuals. The opinions expressed by Mr. Tuz are his alone.

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 16,805.41 +127.51 0.76%
S&P 500 1,964.58 +13.76 0.71%
NASDAQ 4,483.7150 +30.9230 0.69%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs