The enclosed project contains a summary of operations for Kinder Morgan's Earnings, Cost of Capital, Target Multiples, and various assumptions that were used to construct pro forma financial statements and valuation summaries.
The natural gas industry has changed dramatically, and is much more open to competition and choice. Wellhead prices are no longer regulated; meaning the price of natural gas is dependent on supply and demand interactions. Interstate pipelines no longer take ownership of the natural gas commodity; instead they offer only the transportation component, which is still under federal regulation.
There are about 160 pipeline companies in the United States, operating over 300,000 miles of pipe. Of this, 180,000 miles consist of interstate pipelines. This pipeline capacity is capable of transporting over 148 Billion cubic feet (Bcf) of gas per day from producing regions to consuming regions?, and 123 natural gas storage operators, which control approximately 400 underground storage facilities. These facilities have a storage capacity of 4,059 Bcf of natural gas, and an average daily deliverability of 85 Bcf per day.
Kinder Morgan is an American energy company; it is one of the largest pipeline transportation and energy storage companies in North America with more than 37,000 miles of pipelines and 180 terminals. Kinder Morgan Chairman and CEO is Richard D. Kinder, the company has approximately 8,000 employees and has a combined enterprise value of approximately $55 billion. Their companies include Kinder Morgan, Inc. (NYSE: KMI), Kinder Morgan Energy Partners, L.P. (NYSE: KMP), and Kinder Morgan Management, LLC (NYSE: KMR).
KMP is one of the largest publicly traded pipeline master limited partnerships, it comprised of five business segments: Product Pipelines, Natural Gas Pipelines, CO2, Terminals and Kinder Morgan Canada. Per the company's 2010 annual report, "revenues from the sales of natural gas from our Natural Gas Pipelines and CO2 business segments in 2010, 2009 and 2008 accounted for 44.8%, 44.8% and 65.6%, respectively, of our total consolidated revenues."
The Natural gas segment, which gathers, transports, stores, treats, processes, and sells natural gas, the products pipelines division delivers gasoline, diesel fuel, jet fuel, and natural gas liquids to various markets. The CO2 division is engaged in the production, marketing, and transportation of carbon dioxide and owns interests in and/or operates ten oil fields, and owns and operates a 450-mile crude oil pipeline system in west Texas, the terminals business that stores, and delivers bulk, petroleum, petrochemical, and other liquid products and finally Kinder Morgan Canada which transports crude oil and refined products in Canada. Their customers include major oil companies, energy producers and shippers, local distribution companies and businesses across many industries.
Kinder Morgan has competitors both type public trading and private own companies; some of them are Buckeye partners (NYSE: BPL), Enterprise products partners (NYSE: EPD), Magellan's midstream partners (NYSE: MMP), Sunoco Logistics Partners L.P. (NYSE: SXL) Boardwalk pipeline partner (NYSE: BWP), Anadarko petroleum (NYSE: APC) and Koch industry which is one of the largest privates companies in U.S..
52-Week Price range
$63.42 - $79.34
Kinder Morgan Strategy Analysis
Kinder Morgan business model is simple. They own, operate, expand, build and acquire primarily midstream energy assets that provide a return substantially in excess of their capital costs, and then they distribute that excess to their limited partners and general partner. In order to accomplish this strategy they focus in stable fee-based that are core to north America energy infrastructure, control cost, leverage assets footprint to seek attractive capital investment opportunities both expansion and acquisitions and maintaining a strong balance sheet paramount. CEO Richard Kinder believes strongly that the need for natural gas and the pipelines it flows through will continue to grow.
Kinder Morgan SWOT Analysis
KPM has successful expansionary business model
The company has a high dividend payout and historic growth in dividend
Kinder Morgan has a large footprint of diversified and strategically located asset, and almost all of them are owned by KMP.
Is the Largest independent transporter of petroleum products and CO2 in the U.S. And the largest independent terminal owner/operator in the U.S.
Their assets require little maintenance funding
Their senior executive financial incentives, such as bonuses, are tied directly to the performance of the company and their own personal performances.
Kinder Morgan has a high debt-equity ratio of 176.3% and a low current ratio of 0.5 times, this mean the company has been aggressive in financing growth with debt and often results in volatile earnings.
The change in prices of the commodities will affect the volume transported thought the pipelines causing reduction in revenues and earnings.
Midstream operations are capital intensive, requiring funds for the initial construction of pipelines and storage facilities
The placement of KMK on Rating Watch Negative reflects the transactional risk associated with the purchase of EP and planned asset sales and dropdowns that are essential to the subsequent pay down of acquisition debt.
The company is susceptible to weather disruptions leading to losses
Natural gas prices have a high potential to increase in value given more revenue to the companies.
The growth of natural gas as a long-term energy source in the U.S. is opening new business opportunities in this industry sector.
The expansion of shale gas reserves has increased the need for vastly expanded capacity.
Strategic acquisitions and agreements that will allow the company to become the leader in the market.
High activity in merge and acquisition in the sector, ten largest energy deals announced in the third quarter of 2011 involved shale gas plays.
Foreign interest in the U.S. pipeline system is likely to increase
Prospect of low natural gas prices for an extended period, producers and other energy companies with pipeline assets may seek to shed those assets at attractive prices.
The government maybe stringent regulations in this industry sector.
The forecasted costs could overruns and delay projects and affects the cash flows.
Porter's Five Forces Analysis
Threat of Competition (Moderated)
KMP is one of the largest pipeline transportation and energy storage companies in North America and major pipeline publicly- traded limited partnerships in the U.S. However, KMP faces competition in the industry, as there are other MLPs that offer similar services in addition to proprietary pipelines owned and operated by large integrated oil companies, and also it is the possibilities of merge or acquisition to other companies.
Threat of New Entrants (Low)
Threat of new entrants is low due to the industry requires a large amount of capital, highly specialized workers and it is a highly regulated business. So it difficult for new entrants to achieve a leading position in the industry.
Threat of Substitutes (Low)
With commodities such as oil and natural gas, there are no current economical replacements. In the transporting and storage segments of their business, trucks maybe an alternative but there are not efficient or viable taking in consideration the location and the amount of the pipelines and terminals of KMP.
Power of Suppliers (Moderate)
KMP suppliers are also their customers, as oil production and exploration companies extract the resources that are being transported through the pipelines. Their main power comes from demand, which is set by energy prices, if commodity prices fell and drilling slowed down, the revenue of KMP in these segments will be affected.
KMP other materials like cement, sand and metal are available all the time and the company uses their buying power to get a competitive price.
Power of Buyers (Low)
KMP provides services to a large number of customers and not one customer Buyers have little power on the fees that KMP charges. The transportation costs are regulated under FERC, the Federal Energy Regulatory Commission and they will adjust for inflation.
Practical Concerns: Mergers and Acquisitions
Although mergers and acquisitions are for the most part carefully designed to ensure a good fit between two companies, the amalgamation of merging companies is difficult. Driven by economic and strategic barriers to growth, mergers and acquisitions are becoming the best way to grow revenues. Interestingly enough, companies understand the reasons why mergers fail in and yet they continue fail.
One of the major challenges in mergers and acquisitions is cultural incompatibilities. A study from Coopers and Lybrand in 1992, although decades old reveals issues still relevant today. They reported "that in one hundred failed or troubled mergers, 85% of executives who were surveyed said that the major problem was differences in management style and practices" (Huang & Kleiner, 2004).
Managers deprived and promotion opportunities can be particularly acrimonious. One survey found that "nearly 50% of executives in acquired firms seek other jobs within one year" (Why do firms carry out mergers and acquisitions, and how can the difficulties involved be overcome?, 2003). A merger or acquisition is a stressful process for those involved, as it often times includes job losses, restructuring, etc. (Appelbaum, 2000). Companies often neglect the repercussions for corporate identity and communication, factors…