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.
The problem can be seen on Kinder Morgan’s own "asset map."
Kinder Morgan has substantial pipeline assets in the Permian, and extensive assets in the Eagle Ford, but very little participation in the Bakken play or the growing Tuscaloosa Marine Shale play which extends across central Louisiana and into Mississippi.
Bringing natural gas to market also requires more than pipelines. It requires extensive processing, separating natural gas from liquids. Kinder Morgan is active in this area in Eagle Ford but will now be able to grow in other plays.
Kinder Morgan is also a major player in producing carbon dioxide for fracking. The new structure will let it invest more heavily in this area and not rely on projects like NRG’s (NRG) coal retrofit near Houston, which I wrote about last week, for supplies.
The deal does change the game for investors. High dividends are no longer as assured as they once were. The expectation is that capital gains will make up for that, and Kinder Morgan is now able to wheel-and-deal with that in mind.
When a pipeline company is ready to build and wants to assure its supplies, it holds an "open season" seeking commitments of supply before making an investment. Kinder Morgan’s consolidation means it's now open season on U.S. oil and gas infrastructure.