Shares of Kinder Morgan Inc (NYSE:KMI) soared following the news that it would consolidate the MLPs Kinder Morgan Energy Partners LP (NYSE:KMP), Kinder Morgan Management, LLC (NYSE:KMR) and El Paso Pipeline Partners, L.P. (NYSE:EPB) back into a single company, and analysts have come down firmly in favor of the deal as well, though the new stock price already reflects that sentiment.
Goldman Sachs most bullish on Kinder Morgan’s prospects
ValueWalk's Raul Panganiban interviews Kirk Du Plessis, Founder and CEO of Option Alpha, and discuss Option Alpha and his general approach to investing. Q1 2021 hedge fund letters, conferences and more The following is a computer generated transcript and may contain some errors. Interview with Option Alpha's Kirk Du Plessis
“The deal, which is effectively a ‘reverse MLP,’ will irrevocably eliminate the high IDR burden which has been lingering at KMP that resulted in its high cost of capital and limited growth,” writes Deutsche Bank analysts Richard Cheng and Valerie Zhang, who set a $42 price target for Kinder Morgan Inc (NYSE:KMI) versus its current $38.50. “The key takeaway though is while KMI surrenders its IDR ‘golden goose,’ the deal enables the now single KM entity to improve total value proposition by having a lower cost of capital and substantial tax depreciation.”
RBC Capital Markets analysts Elvira Scotto and TJ Schultz think the deal will create value for all the entities involved and expect it to be 2% accretive to Kinder Morgan Inc (NYSE:KMI)’s cash for dividends, but they set a price target of $40, only slightly above the current price.
Goldman Sachs analyst Theodore Durbin was more bullish, increasing his price target from $45 to $50, but he also said that he doesn’t “take a view on the deal closing, which is still subject to a shareholder vote, and our estimate do not include the proposed acquisitions,” meaning that if Kinder Morgan Inc (NYSE:KMI) does acquire the MLP he could push his price target up even further. Ending the MLPs could have harsh, and unplanned for, tax implications for shareholders, but it would still be surprising if the deal was voted down.
Comparing KMI with Perry Capital’s MLP proposal
It is interesting to contrast this reverse-MLP with Perry Capital LLC’s recently unveiled plan to convince major US paper companies to spin off their paper mills into MLPs and take advantage of the favorable tax status. Perry estimates that it could double the value of some paper companies, and q short-lived spike in KapStone Paper and Packaging Corp. (NYSE:KS), International Paper Company (NYSE:IP), Rock-Tenn Company (NYSE:RKT), and Packaging Corporation of America (NYSE:PKG) implies that the market likes the idea.
But part of Perry’s thesis is that the US paper industry is already consolidated into a couple of large companies in the US, while Kinder Morgan Inc (NYSE:KMI) is clearly gearing up for acquisitions. If the maturity of the industry and the degree of consolidation is a major factor in MLP’s attractiveness, we can expect to see other US oil and gas companies follow KMI’s lead to better compete for M&A deals.