One buys, the other builds. Both grow.
Houston is home to the country’s two biggest pipeline operators, Kinder Morgan Energy Partners and Enterprise Products Partners, and the two companies have embraced divergent strategies in delivering returns for investors.
That was underscored last week with Kinder Morgan’s $4 billion bid for another Houston pipeline operator, Copano Energy.
“Kinder Morgan has been on a buying spree lately, whereas Enterprise, which for years grew through large acquisitions, is now growing through building rather than buying,” said Hinds Howard, chief investment officer for Guzman Investment Strategies in Austin.
Kinder Morgan has generated a return of 11 percent during the past year, assuming reinvested dividends.
The Copano deal follows Kinder Morgan’s $21 billion purchase of Houston-based El Paso Corp. last year. Other big deals last year for master limited partnerships, or MLPs, included Dallas-based Energy Transfer Partners’ purchase of Houston’s based Southern Union.
“This recent consolidation is a trend that will continue as smaller MLPs find it tougher to compete and larger MLPs find it tougher to grow,” Howard said.
Pipeline partnerships have been among the most attractive investments in recent years because – unlike traditional exploration companies – they focus on yields and cash flow, they are insulated from fluctuations in commodity prices, and they offer certain tax benefits for investors.
Increased domestic oil and natural gas production from hydraulic fracturing in places like North Dakota and South Texas is driving demand for more pipelines. Producers need a way to get more of their oil to refineries.
South Texas market
Kinder Morgan made its offer for Copano in part to capture more of the South Texas market. The two companies share a joint venture that operates a gas-gathering system in the area.
Copano was once among the nation’s fastest-growing pipeline companies, with quarterly distributions rising at an annual rate of about 30 percent. In the past four years, though, its distribution growth slowed to a trickle.
“The deal makes a lot of sense and will clearly benefit Copano investors, who are getting a price they haven’t seen (the company) trade at since mid-2008,” said Howard, who tracks energy partnerships but whose firm doesn’t currently own units in either company.
Easier to acquire
Kinder Morgan’s offer represents a 24 percent premium for Copano investors.
Rumors of a possible takeover had swirled around Copano since the death of its founder and former chief executive, John Eckel, in 2009. Although it functions much like a partnership, Copano is a limited liability corporation, which means it doesn’t have a general partner, making it easier to acquire than a traditional master limited partnership.
The deal will benefit Kinder Morgan over the long term as well, Howard said.
As pipeline demand has grown, so has the interest in so-called midstream partnerships. Despite Kinder Morgan’s buying spree, the industry has seen more than 25 initial public offerings in the past two years.
Reversal in a good way
Meanwhile, Enterprise is taking a different tack. The company is coming off a record year for profitability, and it is building new lines and has reversed the flow of the Seaway pipeline, which used to run from Texas City to Cushing, Okla. An abundance of Midwestern oil has built up at the terminal hub in Cushing, and the pipeline is now being used to move crude to Gulf Coast refineries.
On a recent conference call with investors, Enterprise CEO Mike Creel said the company may consider other pipeline reversals as well.
Assuming reinvested dividends, Enterprise has generated a return of 23 percent during the past year.
Those returns are likely to continue, because pipeline companies collect fees for oil and natural gas moving their networks, much like tolls collected from cars driving on the highway.
These days, the oil and gas highways are jampacked as the U.S. tries to steer itself toward energy independence, or at least, decreased dependence on foreign oil.
That means that whether they’re buying or building, Houston’s biggest pipeline companies should keep generating big returns for investors.