NEW YORK (TheStreet) -- The decision by Kinder Morgan (KMI) to consolidate its master limited partnerships Kinder Morgan Energy Partners (KMP) and Kinder Morgan Management (KMR) into a single corporation means that the oil and gas infrastructure business is entering a new growth phase.
Master limited partnerships are capital extractors. They are dedicated to paying maximum dividends at the expense of writing down assets. They are great for investors, because they maximize asset returns, but they’re not great structures for building assets.
For that you need stock you can offer in exchange for assets or other corporations, the ability to create debt against those assets and the flexibility to focus on growth rather than distributions.
One thing that’s increasingly clear is that America’s oil plays need more assets, more infrastructure, and therefore more capital, in order to bring the oil and gas to market. Production in the Permian Basin and Eagle Ford plays in Texas keeps going up. As I wrote last month, the Bakken play in North Dakota produced 1 million barrels/oil per day in May, and 29% of its natural gas was being flared for lack of infrastructure.
By consolidating all his assets into a single, standard corporate structure, Kinder Morgan CEO Rich Kinder can bid on and build that needed infrastructure without focusing on demands for distributions.
Hedgeye analyst Kevin Kaiser has criticized the MLP structure for under-investing in pipeline maintenance, a charge the company angrily denied, and this deal responds to the critics. But it does more. After the deal, KMP will have a capital structure that lets it buy and build again.