Sunday, October 16, 2011

Kinder Morgan Buying El Paso for $21B

Interesting surprise when checking the financial news on a lazy Sunday afternoon. Kinder Morgan (KMI) agrees to buy El Paso (EP) for over $21B. The deal provided a 37% premium to the closing price on Friday. It also amounted to 20%+ above the 52 week high.

Numerous interesting facts about this deal. First, this deal involves natural gas pipelines at a time that nat gas prices remains in the dumps. Second, KMI was willing to pay such a premium over the 52 week high when most investors have fled the markets. Third, KMI was recently re-joined the public markets in February after a nearly four year haiedus.

The combination will form the largest natural gas pipeline network in North America. It also creates the fourth largest energy company in North America with an enterprise value of $94B. Even more importantly, the deal with be cash flow accretive from the beginning.

The deal also provides approximate cost savings of $350M per year amounting to 5% of EBITDA. So again another reason for being an investors and not a employee.

While not particularly interesting to the portfolios run by Stone Fox Capital, it is beneficial to see one of the smartest energy guys in the world willing to pay up for assets. Richard Kinder is definitely one worth following.  Clearly he sees the country converting to more and more natural gas usage.

More details on the merger:


  • The total purchase price, including the assumption of debt outstanding at El Paso Corporation and including the debt outstanding at El Paso Pipeline Partners, L.P. (NYSE:EPB - News) is approximately $38 billion.
  • The consideration to be received by the EP shareholders is valued at $26.87 per EP share based on KMI’s closing price as of Oct. 14, 2011, representing a 47 percent premium to the 20-day average closing price of EP common shares and a 37 percent premium over the closing price of EP common shares on Oct. 14, 2011. 
  • The offer is comprised of $14.65 in cash, 0.4187 KMI shares (valued at $11.26 per EP share) and 0.640 KMI warrants (valued at $0.96 per EP share) based on KMI’s closing price on Oct. 14, 2011. The warrants will have an exercise price of $40 and a five-year term.     


  • Largest owner and operator of natural gas pipelines and storage assets in North America with approximately 67,000 miles of natural gas transportation pipelines. Pipelines are connected to many important natural gas shale plays including Eagle Ford, Marcellus, Utica, Haynesville, Fayetteville and Barnett. Largest provider of contracted natural gas treating services and significant other midstream gathering assets.
  • Largest independent transporter of petroleum products in the United States, transporting approximately 1.9 million barrels per day of gasoline, jet fuel, diesel, natural gas liquids and crude oil through more than 8,000 miles of pipelines.
  • Largest transporter of CO2 in the United States, transporting 1.3 billion cubic feet per day. Carbon dioxide is used in enhanced oil recovery projects.
  • Second largest oil producer in Texas, producing over 50,000 barrels per day.
  • Largest independent terminal owner/operator in the United States. Liquids terminals have capacity of 107 million barrels and store refined petroleum products, ethanol and more. Dry bulk terminals are expected to handle over 100 million tons of materials in 2011, including products like coal.
  • Only oilsands pipeline serving the West Coast. The Trans Mountain pipeline system transports 300,000 barrels of crude oil per day to Vancouver, B.C., and Washington state.       


Disclosure: No positions. Please review the disclaimer page. 


1 comment:

Mark Holder said...

Wondering if Kinder thinks future pipelines will be more difficult to build. All markets are about supply versus demand. Right now pipelines seem to have unlimited supply.

Limited supply has made railroads such a good investment. Just can't build massive railroads anymore. Pipelines could run into supply constraints in the future while demand continues to increase.