WASHINGTON, August 11, 2014 – Investors awoke this morning to a startling bit of news. The Kinder Morgan master limited partner (MLP) juggernaut has announced a mega-merger of its various entities. Mothership Kinder Morgan Inc. (KMI) will, in effect, “eat its own” as Forbes online prefers to head the event.
By year’s end, KMI will gobble up its massive and popular MLP Kinder Morgan Energy Partners (KMP) as well as Kinder Morgan Management (KMR), which owns a chunk of KMP.
But wait! There’s more! KMI will also gobble up an additional MLP that gained control of in recent years, El Paso Pipeline Partners (EPB).
The actual MLPs, namely KMP and EPB, and many others like them, have been favored for years by income-oriented investors. Like the Market Maven, for example.
With hefty dividend payouts ranging from 5-8 percent or so in post-Great Recession years, these investments have rewarded conservative investors with surprising consistency in spite of periodic sniper attacks by columnists writing for Barron’s. That publication seems to think some nefarious accounting conspiracy yet lurks beneath the mighty Kinder Morgan dividend engine.
Such talk once again damaged the various Kinder Morgan stocks earlier this year, though they’ve since recovered. And they recovered even more, big-time, in this morning’s trading as investors tried to gauge the premiums they’d receive when the mega-merger occurs, likely near the end of 2014.
The merger is said to be the biggest energy merger on Wall Street since Exxon bought Mobil in 1999.
What’s all the hoopla about? Two things. First of all, through its various entities, KMI owns and operates the flat-out largest energy pipeline infrastructure and storage network in the U.S. Based in U.S. oil capital Houston, Texas, KMI effectively owns 80,000 miles, give or take, of pipelines as well as 180 storage facilities/terminals.
To use highly technical terminology, the pipeline business is one swell business to be in. Since a great deal of fossil fuel in this country besides coal (which Obama’s EPA is disastrously terminating) is produced in areas relatively distant from population centers, the raw product needs to be moved from source to storage to processing facilities, i.e., refineries.
As we’ve seen from the administration’s eco-freak and Buffett-railroad friendly stonewalling of the proposed Keystone Pipeline, much of the nation’s newly tapped fossil fuel, specifically oil, can go via pipeline, but is also forced to go by railroad tanker car which is proving to be an iffy choice when it comes to overall safety.
Transporting raw fuel product via pipeline, however, is quicker, cheaper and generally safer, and it’s how much of our oil flows from place to place today in the U.S.
But better yet for the owners of pipeline and storage infrastructure like KMI, companies pay a “toll” for using the pipeline transport facilities, much as East Coasters are accustomed to paying a toll for the privilege of sitting in traffic on the GW Bridge, for example. Except that oil pipelines generally don’t have traffic jams.
The economics here are simple. Once a pipeline company constructs a pipeline, their major capital expenditure (capex) is over. At that point, they’re open for business and management sits back and starts collecting the tolls which amount to quite a lot annually.
Kinder Morgan’s genius was to move a lot of its pipeline capacity into MLPs once each system was built out. This provides happiness to the management company in a variety of accounting ways, as in taxation. And it provides, if anything, even more happiness to investors in the spun-off MLPs. Similar to REITS, most of each year’s profits in MLPs are paid out to investors, spreading the various tax burdens around.
Meanwhile, taxes or not, MLPs are perhaps the best current way for Americans who invest to beat today’s high oil prices by subscribing to that old but still valid maxim: “If you can’t beat ‘em, join ‘em.” Over the years, most MLPs I’ve followed and occasionally invested in (including KMP) have been paying out dividends well in excess of current stock and bond yields.
Yes, even MLPs suffer from occasional bouts of volatility. As KMP and KMI have suffered from Barron’s periodic guerilla attacks. But payouts have been generally consistent, and MLP investors are usually a happy lot.
The KMI etc. event seems to have given legs to the relief rally that started to develop in all the averages this Friday past. As of about noon today, the Dow is up roughly 56 points, the SP 500 is up some 10.5 points and the NASDAQ is up an impressive 37.74 points indicating a rally in tech may finally be at hand.
All markets have been short term oversold, so some kind of bounce here was highly likely after July’s lousy second half. It remains to be seen how long the current rebound will last however, as markets remain edgy about the material effects of Obama’s rapidly collapsing excuse for a foreign policy, particularly with regard to Russia and the Middle East, not to mention our “Open for Business 24 Hours a Day” southwest border, now more of a sieve than a national demarcation line.
That said, the bulls seem to have seized control back from the bears at least for today, and that, in general, makes the Maven happier than he was earlier last week when bear paws seemed primed and eager to scalp the Maven’s entire portfolio.
Today’s Trading Tips
Gold is off today, predictably, since the world didn’t blow up over the weekend, and since international financiers are still intent on keeping the yellow metal’s price below $1300 an ounce at all costs. That said, gold miners are getting happy here, although we’d probably wait for a down day to get into them.
It’s not uncommon for gold miners to do better than the actual metal in environments like this, so that may be where we can cop a quick trade if the winds seem to be blowing in our direction.
Aside from defensive positions in the metals (we don’t really regard them or the miners as long-term investments), the Kinder Morgan thing might finally be encouraging oil companies and drillers to catch new bids. It’s also about time for the financials to consider awakening from their market-deadening slumber.
We’ve already placed a pretty large bet on Bank of America Warrants, specifically the Series A warrants (BAC/WS/A at Schwab but your symbols may vary). Each Series A warrant gives the holder the right to purchase one share of Bank of America (BAC) at $13.30 per share, and it can be exercised at any time prior to its expiration in January of 2019.
This and most other warrants currently available actually function like really long-term options. They tend to follow the stock price quite closely, but their total price also includes time value, which decays over time for obvious reasons.
The Series A warrants are currently “in the money,” as BAC is currently worth $15 and change, at least as of today’s trading. The A warrants themselves are currently hovering around $6.70 today.
We’ve been buying the warrants in periodic trades, buying most of our holdings prior to the tentative announcement last week of BAC’s latest settlement with Eric Holder’s DOJ extortionists, with regard to the bank’s disastrous Countrywide mortgage portfolio.
Which, of course, the government pretty much made them buy. But hey, this is Barack Obama’s Washington. Penalize the shareholders to the tune of $17-19 million, but keep those fat cats’ salaries and bonuses intact so they’ll continue donating to the right campaign coffers.
But we digress. With the possibility of some kind of closure for BAC’s current mortgage torture, the stock should strengthen fairly near term, taking the warrants with it. At which point—assuming things work out as predicted—holders of the warrants can take a profit by selling them. Or, if they like BAC long term, they can simply convert to BAC common shares.
As always, travel at your own risk on trades like this. As with options, you could lose your investment entirely, although you should be safe for another year or three relatively speaking.
The main negative here is the current Washington regime. If these people were half as clever at rebooting jobs and the economy as they are extorting money from corporate America—and stockholders large and small—we’d have actually had an economic recovery long ago. So always make sure you keep a close eye on Washington’s own Chavezistas every time you take a chance like this one.