News, Updates, Analysis and Opinion!
Sunday - 01/25/15

Kinder Morgan: Assessing the Company and two Investment Options KMR vs KMP

Posted: 08/21/2011 | Category: Investing Read: 1264 Word Count: 1418

Kinder Morgan IncAnyone watching the Stock Market can see volatility. For younger investors, the volatility smells like one thing, opportunity. Although there has been a lot of decline in price, energy stock is heavily weighted. However, Kinder Morgan, despite the inflated price per share, still has a lot of promise for the future. In addition, they have two attractive options to consider, for different groups of investors.

Kinder Morgan is one of those companies we don't see often. Working in Transportation, I came across a couple of their facilities. I didn't know who they were though. They are fairly incognito to the public. However, they offer a lot of security to society and their services are essential to just about everyone.

Kinder Morgan is a Pipeline and Storage Company. Their assets, at the time of this post, include 28,000 miles of Pipeline and 180 Terminals. Their Pipelines transport various products including Natural Gas, Refined Petroleum Products, Crude Oil, and Carbon Dioxide. Asset allocations are 33.3% Natural Gas, 27.2% Oil and Co2, 19.7% Storage Terminals, 13.8% Product Pipelines, and 6% Kinder Morgan Canada.

Kinder Morgan owns and operates the Plantation Pipeline. The Plantation is one of the largest US Pipelines. This 3,100 mile Gem transports refined materials, from nine Louisiana and Mississippi Petroleum Refineries, and other nearby Pipelines, through eight States to Washington DC. It takes advantage of the rich resources surrounding the two Southern States. Products handled consist of Gasoline, Diesel (including Bio-Diesel), Kerosene, and Commercial and Military Jet Fuels. These products transport to 130 terminals spread over the eight States and DC. Delivery terminals are owned by Petroleum Refiners, Marketers, Military, and Commercial fuel users.

If the Plantation does not show value of getting in on the Pipeline Business, Kinder also operates “Pacific Operations”. This 3,000 mile Pipeline serves Arizona, California, Nevada, New Mexico, Oregon, and Texas. Kinder Morgan’s Pacific Pipeline is the largest in the Western US, transporting over one million barrels of Gasoline, Jet Fuel, and Diesel Fuel to their customers daily.

Kinder Morgan has been growing aggressively during bad economic times. Here is a small note of growing their business in their Company Profile, “September 1, 2010, it acquired the natural gas treating assets of Gas-Chill, Inc. In May 2010, its subsidiary KM Gathering LLC purchased a 50% ownership interest in KinderHawk Field Services LLC. During the year ended December 31, 2010, it acquired Linden, Baltimore and Euless facilities, and acquired the refined products terminal assets at Mission Valley, California from Equilon Enterprises LLC”.

Kinder Morgan is offering a lot of promise in Natural Gas. No American will argue we need more options for energy. Natural Gas is a second choice to Oil Products. It is abundant in our Nation. In addition, it is easy to use or adapt to existing machinery. However, one of the richest areas for Natural Gas, The Rockies, lacked Pipeline capacity to deliver this resource. Kinder, through a joint venture, is currently changing this situation with the Rockies Express Pipeline. This monster of a Gas Pipeline stretches nearly across half the US, going from Northwestern Colorado to the Pennsylvania/Ohio border.

I have watched this company over a year before deciding to jump-in on the Pipeline Business. Because of their Stocks weight, and confusion over the two investment options, I second guessed my actions and halted investing for a month. After analyzing their Balance Sheet, in comparison to other Companies of Interest, I am investing 100% of my allocated funds towards Kinder Morgan (KMP nothing towards KMR).

Once you get excited about Kinder Morgan, your mind will start spinning its wheels. That's because there are two investment options, interesting to me, for Common Stock. One is KMR and the other is KMP. Both stocks, currently heavily weighted, show a book value of around $25 per share but selling at $56 (KMR) and $65 (KMP) per share. My previous purchases, before this recent down turn was $75 per share. Still, with these inflated prices their returns, Dividends or Distributions, still offer near 7% Their Cash Flow is modest and the Dividend and Distribution grew at a fast pace!.

The way their Stocks have been arranged, both KMP and KMR should trade in unison. However, there is unbalance between the price of Shares. This may demonstrate what more investors favor (KMP Currently is more inflated). The only difference between these twins is KMR offers Distributions in Stocks while KMP offers a Dividend payment. One could describe KMR as KMP with a built-in Dividend Reinvestment plan. While KMR Investors have one option, receive a quarterly equivalent in KMR Shares, KMP Investors have the option of receiving the dividend payment or reinvesting the payment.

Because Kinder Morgan is a Master Limited Partnership, it will have some impact on taxes, often causing a delay on filing a return. In addition, there is a tax difference between the aforementioned investment options. Because KMR pays their Dividend in Stock, there is no need for a K-1 form to file taxes. Essentially, taxes are not paid on distributions but are paid when the stocks are sold. On the other hand, KMP Cash payouts must be declared regardless of reinvesting or keeping the distributions.

Essentially, if we put aside book value, the difference is Tax impact. Naturally, Taxes should affect our decision as they impact our overall return. If we can keep more of the Distribution or Dividend, we are realizing more gain. So here is a big consideration, with MLP's, the Tax rate on Dividends is generally less than Tax Rate on other Dividends (Not including current Qualified Dividends Rules - Read this Post for info on Qualified Dividends). So the thing to ask your accountant is about the impact on Taxes when selling shares of KMR. I am almost certain it will be the normal Tax Rate imposed on income. Although these are not the only factors to consider before choosing, two factors that weighed on my decision; The Weighted Price on distributions from KMR and Volume. Because KMR is repaying with Stocks, we are being rewarded with an inflated price. Essentially, the Stocks are inflated. It's not a big deal if we sell them for the inflated price. However, there is a sense of being shorted here opposed to receiving the Cash Dividend from KMP. Lastly, KMP usually has a higher volume each day. It's easier to move shares.

Kinder Morgan has a promising Dividend/Distribution-History. Their Distributions, through KMR, date back to July 2001. The distributions show a stable and consistent return (of shares). KMP shows Dividends, quarterly, dating back to 1992. In addition, there has been impressive growth in the quarterly dividend payments. Personally, I like to see a longer history. I also believe this contributes to the Volume and Demand (Inflated price). Many investors have their own unique criteria for selecting stocks. For example, I like a large Market Cap. I set my filters to exclude stocks under Two Billion in Market Capitalization. Then I check for at least ten years of steady dividends and growth. Both KMP and KMR meet those filters. Clearly, seeing KMP's 1992 payments makes me feel a little better, although it offers no actual improvement towards security, some investors may raise the bar higher and thereby filtering out KMR as a possible investment opportunity for their portfolio.

Because of the recent Market decline, Kinder Morgan, KMP is trading near their 52 week low. I personally see this as an excellent opportunity. With the signs of growth they demonstrate, and their aggressive development, I am still eager to climb aboard. Being overweight on price does not intimidate me because of my age and the signs of their growth. Pipelines are secure assets. Moreover, the materials they transport and store still have massive demand. Keep your eyes on the News, this company is positioned very strategically with plans of growth, especially between the US and Canada. Whichever fits better in your Portfolio, KMP or KMR, the future looks promising!

Social Sharing

Article Commenting and Discussion

comments powered by Disqus

Top of Page |






Forgot password?