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How to Play Oil Infrastructure With Richard Kinder

Dana is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

If you're looking for dividend income, and if you're looking to play the explosion in U.S. oil and gas, the transformation of our country from an importer to an exporter of energy, you want to play with Richard Kinder.

Kinder, who is worth $9.4 billion, has updated a strategy first used by old John D. Rockefeller. By controlling the infrastructure that leads to market, you can control the market.

Kinder has three ways for you to participate in his pipeline plays:

  1. Kinder Morgan Inc. (NYSE: KMI) is the main operating company.
  2. Kinder Morgan Energy Partners LP (NYSE: KMP) holds many of the company's assets.
  3. Kinder Morgan Management (NYSE: KMR) is the management company for KMP.

These are three different stocks with three different aims. KMR aims for capital appreciation, KMP aims for income, and KMI aims to run the other two.

KMR for Profit

Over the last 10 years KMR has shown the greatest price appreciation of the three, 149%. But it does not pay a dividend.

Technically, KMR is a limited partner in KMP. But it actually has a delegation of control agreement under which it runs KMP. KMR has a market cap of $10.26 billion, taking on the asset value of the company and the accumulated deficit.

The company's insiders use KMR as the vehicle for their own stock purchases. Management insists there should be no difference in how KMR and KMP trade, but there often is, and KMR capital gains tend to be 50% higher than in the other units.

What's important to remember is the company's strategy, which is to buy and build pipelines for both liquids and gas that bring product from where it's produced to its most profitable destination. Thus, while many investors were fascinated by Cheniere Energy's plans, under the symbol LNG, to build a giant gas liquifaction plant on the Texas-Louisiana border, KMR was quietly turning on the taps to increase its direct exports to Mexico, reducing that country's need for coal. While the market was focused on the exploits of Chesapeake Energy, or CHK, in developing gas reserves in the northeast through fracking, KMR was quietly acquiring the pipeline capacity to take it to market. While environmentalists are mainly focused on the efforts of TransCanada to build the Keystone pipeline from Canada, Kinder Morgan is quietly building a pipeline across Canada for the same purpose.

If you have a long-term time horizon, buy KMR.

KMP for Income

If you're an income investor there may be no better play on the big board today than Kinder Morgan Partners, or KMP.

KMP sports a dividend rate of nearly 6%, and that dividend has been steadily increasing for years. Had you bought the stock at the bottom of the 2009 crash cycle, at $41.91, you have more than doubled your money and gotten 17 dividend checks totaling nearly the value of that original investment.

You may be wondering why Kinder Morgan has this convoluted ownership strategy, with extensive use of limited partnerships? It increases the flexibility of deal-making, and gives owners of assets being acquired options on how to cash out. They can take cash, they can enter into partnership, or they can take stock in any of a number of instruments with different investment goals.

KMP last offered its dividend on April 25, and it was $1.30 per share. That's a bump from the $1.29 per share of the previous quarter, which in turn was a bump from the $1.26 per share of the two quarters before that. In other words, the yield offered here is understated – a rising dividend increases your yield automatically.

KMI Is the Balanced Approach

If you like some of both, capital appreciation and income, you probably want to own KMI.

Unlike KMR, KMI pays a dividend, currently 38 cents per share. If you want income, however, you are better off in KMP, with its higher dividend.

In 2012, when Kinder closed on El Paso Corp., formerly ELP, it was KMI that made the acquisition. A few months later, KMP acquired half of the El Paso pipeline from KMI, along with a pipeline in Tennessee. KMI does the deals and runs the assets, KMP takes interests in the assets and hands out money.

Frankly I don't think that, with a five-year time horizon, you can go wrong in any of these companies. The value of pipelines, however, depends heavily on the value of what's going through them, and the pipeline's ability to arbitrage between supply and demand. When energy prices roll over -- and I think they will as other countries learn the beauty of fracking, and as renewable energy supplies increase -- then the good times are going to end for all these companies. But you will have booked enough profit by then not to mind too much.


Dana Blankenhorn owns shares of Kinder Morgan Energy Partners LP. The Motley Fool recommends Kinder Morgan. The Motley Fool owns shares of Kinder Morgan. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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