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With its bombshell consolidation announcement on Sunday, Kinder Morgan Inc. (NYSE: KMI) has suddenly become the third-largest energy company in America.
In a $71 billion deal, Kinder Morgan is bringing all of its publicly traded companies under one roof as a single C-corporation.
This move has called into question the entire master limited partnership (MLP) approach.
That's because Kinder Morgan largely pioneered these partnerships, creating what was by far the largest of them all, controlling much of the oil and natural gas that is transported daily in the United States.
So, does this massive consolidation mark the end of MLPs as a main driver in the energy sector?
Here's my take on the matter…
Does the KMI Consolidation Signal the End for MLPs?
In a word, the answer is no.
Remember, MLPs rushed onto the scene to become the hot way to consolidate assets, primarily in the midstream transport of oil and gas. That meant taking ownership over pipelines and related terminals, feeder systems, storage, and gathering points.
Over time, Kinder Morgan ended up being the granddaddy of them all.
The primary advantage of the MLP structure is the lack of a corporate taxing level. All of the profits flow directly to the private tax returns of the partners – much like an "S" corporation in the private sector. As the "S" approach became the leading vehicle for small business creation nationwide, the MLP emerged as the venue of choice to consolidate energy assets.
The MLP benefits the average retail investor in this way: When MLP partners float a portion of equities shares for general trading, they also move along to individual investors a portion of the flow-through profits.
In most cases, that translates into a much higher than average annualized dividend to go along with the appreciation potential of the resulting stock shares.
And with today's low interest rates, high-yielding MLPs, especially those that pay dividends, are very attractive.
However, as the MLP universe expanded, some disquieting elements appeared, as follows…
About the Author
Dr. Kent Moors is an internationally recognized expert in oil and natural gas policy, risk assessment, and emerging market economic development. He serves as an advisor to many U.S. governors and foreign governments. Kent details his latest global travels in his free Oil & Energy Investor e-letter. He makes specific investment recommendations in his newsletter, the Energy Advantage. For more active investors, he issues shorter-term trades in his Energy Inner Circle.