Kinder Morgan’s shopping spree continues
Kinder Morgan‘s (NYSE: KMI) growth engine has run out of gasoline in recent years. The company had invested heavily to build new pipelines and other infrastructure to expand its operations. However, these opportunities have dried up due to volatile energy prices and a constant shift towards cleaner alternative energy options.
This leads Kinder Morgan to switch fuel sources by starting to make acquisitions again. The company recently unveiled its second deal of the year, setting it up for future growth. Here is an overview of the new strategic direction of the company.
Image source: Getty Images.
Details on the last agreement
Kinder Morgan buys Kinetrex Energy in $ 310 million deal. Kinetrex is a leading supplier of liquefied natural gas (LNG) in the Midwest with two national small-scale LNG production and refueling facilities. In addition, the company owns a 50% interest in a renewable natural gas (RNG) landfill facility with three other RNG facilities in development.
The draw here is the RNG development capabilities. Kinetrex has entered into commercial agreements to begin construction of the new landfill-based RNG facilities. Once operational, the company’s four sites will produce more than four billion cubic feet of RNG each year. They will capture the methane produced by decomposing organic waste, which will reduce greenhouse gas emissions from these sites while providing a cleaner burning fuel source for the country’s gas distribution system.
Kinder Morgan expects the deal to pay off for shareholders as all three GNR facilities begin operations over the next 18 months. Combined with the additional capital required to complete the projects, the overall investment represents less than six times that of Kinetrex in 2023. EBITDA.
For the prospect, it is a little better assessment than that of the company. recent $ 1.225 billion purchase from Stagecoach Gas Services. Kinder Morgan paid 10 times the 2020 EBITDA of Stagecoach. However, it sees that number drop to a single-digit high EBITDA multiple as it captures the cost savings by integrating the pipeline and storage assets into its existing network.
Positioning for the energy transition
Kinetrex represents the first major investment since Kinder Morgan launched its Energy Transition Ventures Group earlier this year. He formed this business unit to identify, analyze and pursue business opportunities that emerge as the global economy shifts to low carbon energy sources. The group takes a broad approach. It examines opportunities in carbon capture and sequestration, renewable natural gas capture, hydrogen production, renewable energy production, electricity transmission and renewable diesel production.
He identified the RNG as an ideal opportunity. RNG has the potential to grow rapidly in the short term and generate attractive returns on investment, as landfills provide low cost, predictable, long term methane supplies. In addition, there are many potential synergies with its existing assets since RNG is already pipeline grade gas, which makes it interchangeable with conventional gas. As such, Kinder Morgan can transport and store it without making any changes to its existing infrastructure.
The company believes it can leverage Kinetrex’s expertise and platform to develop and acquire additional RNG assets. There are many opportunities given the currently fragmented ownership of existing RNG assets and the potential to build RNG facilities supported by wastewater treatment plants and agricultural operations in addition to landfills.
Beyond RNG, Kinder Morgan is investing in a few other projects to support alternative fuels. It is spending $ 60 million to build new renewable diesel hubs in northern and southern California to serve that state’s renewable fuel market. It also has terminals and pipelines capable of blending, storing and exporting ethanol and other biofuels while evaluating multiple opportunities to establish new platforms to handle these products. The company could also target acquisitions to further strengthen its capacity to manage biofuels.
Return to growth mode
In recent years, Kinder Morgan has focused on strengthening its financial profile. This led him to contract by selling assets. However, it is now back in growth mode by going on the offensive and acquiring assets to increase its size and diversify into new growth markets. These investments have the potential to increase its cash flow so that the company can maintain and increase its dividend by 6%. This makes Kinder Morgan look like a more attractive income stock these days as it finally looks like it has visible growth ahead.
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Matthew DiLallo owns shares of Kinder Morgan. The Motley Fool owns shares and recommends Kinder Morgan. The Motley Fool has a disclosure policy.
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