Kinder Morgan Creates 'The Exxon' of Pipeline Companies (KMI, KMP, EP, EPB, EPD, XOM, CVX)

Over the weekend, pipeline company Kinder Morgan, Inc. (NYSE: KMI) announced that it would pay approximately $21.1 billion in cash and stock for El Paso Corp. (NYSE: EP) and El Paso Pipeline Partners L.P. (NYSE: EPB) to create the largest oil and gas pipeline company in the US. The combined busines, including Kinder Morgan Energy Partners LP (NYSE: KMP) will have an enterprise value of $94 billion and own and operate more than 80,000 miles of oil and gas pipelines. Until now,  the largest US pipeline company has been Enterprise Products Partners LP (NYSE: EPD), with about 50,000 miles of oil and gas pipelines in its system.

The deal, which has been approved by the boards of both players, is expected to close in the second quarter of 2012. When it does, Kinder Morgan will have nearly twice the enterprise value of Enterprise, about the same spread as  that between Exxon Mobil Corp. (NYSE: XOM) and its nearest US competitor Chevron Corp. (NYSE: CVX).

The combination gives Kinder Morgan greater pipeline capacity to the US east coast market and additional capacity into southern Arizona and California. Kinder Morgan plans to proceed with plans that El Paso announced last year to sell off El Paso’s exploration and production assets. The sale of those assets will go to reduce the approximately $17 billion of debt Kinder Morgan is assuming from El Paso.

Kinder Morgan shares are up more than 5.5% in the first half hour of trading this morning, at $28.84, in a 52-week range of $23.51-$32.14, and Kinder Morgan Energy Partner shares are up nearly 3.5%, at $73.97, in a 52-week range of $63.42-$78.00. El Paso shares are up more than 23%, at $24.12, after posting a new 52-week high of $24.61 earlier. El Paso Pipeline Partners have seen a share-price drop of more than -10%, to $34.06, in a 52-week range of $31.34-$38.36. Both FBR Capital and Oppenheimer downgraded the shares this morning, from what were essentially ‘buy’ ratings to ‘hold’ ratings.

Paul Ausick