Consolidation Considerations in Kinder Deal Aftermath
We see upside for Kinder and an exit strategy for other master limited partnerships.
The Kinder Morgan deal announced last month will result in a consolidated midstream behemoth capable of sustaining 10% dividend growth at least through the end of the decade and positioned to become a natural consolidator in the industry. The single-largest benefit of the deal is a reduced cash cost of capital, which will make growth much more affordable and lower the threshold for accretive acquisitions.
This, combined with founder Rich Kinder's supportive remarks on mergers and acquisitions, suggests upside to our base-case fair value estimate if the consolidated Kinder Morgan goes on a buying spree. We think Kinder is most likely to look for companies and assets that extend its reach geographically or within the midstream value chain, but the most strategically attractive firms today appear richly valued. In our view, the Kinder deal provides a new road map for other maturing master limited partnerships looking to restructure capital costs, and we think Energy Transfer is the next most likely firm to consider such a transaction. However, we do not think Kinder's move spells the end of the MLP as a structure, and we look for continued robust growth and hefty valuations from the industry.
Jason Stevens does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.