Editor's Note: This article was originally published at 2:03 p.m. on Real Money on Aug. 11. Sign up for a free trial of Real Money.
Richard Kinder is still the brilliant seer of U.S. oil infrastructure, announcing today that he will consolidate his three master limited partnership (MLP) companies, abandoning the MLP format he virtually invented but also freeing up tons of cash to increase his transport portfolio several-fold. This brilliant move will be copied by several other large MLPs, and it supports the immediate repurchase of large MLPs for your portfolio, including Enterprise Product Partners (EPD) and Enbridge Energy Partners (EEP).
Kinder is consolidating his three MLPs -- Kinder Morgan Energy Partners (KMP), Kinder Morgan Management (KMR) and El Paso Pipeline Partners (EPB) -- into their corporate parent, Kinder Morgan (KMI), thus abandoning the MLP structure, with its tax advantages of subordinated debt, a structure that Richard Kinder pioneered 20 years ago. But with the loss of those tax advantages comes the unwrapping of billions of dollars of tax-stranded capital that Kinder is now going to use to purchase and build out even more pipes, tanks and processing sites.
This is the fascinating projection of Richard Kinder's that deserves note: He believes that the most money will be made in the fast growth of that pipeline network, despite the less advantaged tax stance that will result. I think that once again, Richard Kinder is totally right.
A recent report from Noble Energy (NBL) made this completely clear. Noble's miss in the Niobrara that cratered shares (at least temporarily) was not due to bad well results or completion rates or spiraling costs. It was almost entirely due to a lack of infrastructure build-out that slowed production growth. In the Niobrara, there simply aren't sufficient pipelines to take the product away quickly enough. This is a theme that we're seeing more and more in the hottest shale fields undergoing the fastest growth, particularly in the Bakken and Permian shale plays.
The winners of this breakneck production contest will be those that control the pipelines, even perhaps more than those that control the production itself. Think of Kinder's company as the oil company's stockbroker, taking a percentage of every barrel of oil and cubic foot of gas that the company sends to market, whether that company is ultimately profitable or not.
The consolidation has also freed cash to increase the dividend for KMI holders to $2.00 a share, up 16% from the 2014 projections of $1.72. This dividend increase is sending KMP shares up massively today, with more than a 15% gain. But it is the new Kinder strategy that will keep those shares going up in the future.
Other massive MLPs will almost certainly follow suit, if they want to compete with Richard Kinder's forward-looking expansion thesis, with Enterprise Product partners and Enbridge Energy as the most likely. But just buying KMI or KMP shares here is a move I cannot but heartily endorse, despite the big run they've already made.
Richard Kinder is a man who continues to show incredible vision -- and who continues to reward his shareholders with it, time and again.