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An Earnings Preview… for the Natural Gas Sector

by | published January 18th, 2012

Today, I'm convinced, is the financial media's favorite day of the year.

For the next 24 hours, they have something to parrot from one show to the next.

That's because Goldman Sachs (NYSE: GS) reported fourth-quarter earnings before the bell this morning, beating the ever-lowering expectations of Wall Street analysts.

And we all know how much CNBC loves to talk about these Masters of the Universe and what Goldman's earnings mean for 2012.

An equally important company will report earnings after the bell. But it will receive far less coverage.

Later today, Kinder Morgan (NYSE: KMI), master limited partnership Kinder Morgan Energy Partners (NYSE:KMP), and limited partner Kinder Morgan Management (NYSE: KMR) will all report earnings for the first time since the parent company engaged in the largest energy deal of 2011 – the $37.8 billion KMI-El Paso merger.

And here's the thing: I'm not worried if Kinder Morgan beats earnings estimates or not.

I'm more interested in its general performance. That's because of what Kinder Morgan does and what it represents. This company's recent activities provide a glimpse of the domestic energy picture and the major trends moving forward, particularly in the natural gas markets.

Put simply, we can learn from Kinder Morgan.

The company clearly understands where to put its money in order to profit…

After “the Deal of the Year,” What Comes Next?

In October 2011, Kinder Morgan signed a deal to acquire all of the outstanding shares of El Paso. Kinder Morgan agreed to a $38 billion deal, which included the inheritance of about $17 billion of outstanding debt.

Kinder Morgan's financials are now, of course, impacted by a sudden increase in debt. But once this deal closes in 2012, expect the company to make its first move to alleviate this pain. Kinder will keep El Paso's pipeline infrastructure (which is really all they ever wanted from the deal) and sell El Paso's exploration and production (E&P) assets.

The sales proceeds will immediately help reduce the debt.

And what does that suggest?

It means that Kinder Morgan recognizes that the best place to profit in the coming years is in transportation of domestic fuels. By selling the E&P assets and maintaining its focus on its midstream operations, the company is poised to make its best profits… particularly when natural gas prices rise.

Midstream Production Will Remain Hot

Pipeline companies earn revenue by transporting natural gas from the field to the market. These midstream companies have been in huge demand over the past few years as upstream gas drillers develop huge new deposits in Pennsylvania, New York, Utah, and other states.

They make their money by charging transport fees. And over the past few years, these fees have remained almost constant, even though natural gas prices have dropped considerably.

2011 was a record year for merger and acquisition activity in the energy sector. And 2012 will likely be even more lucrative. But the major question is where most of this activity will take place.

As Kent said this month, you have to look to the. As oil prices rise and the diversification of gas usages expands, the position of midstream providers will only become more attractive.

Kinder's acquisition of El Paso was the first of many mega deals that the market expects in the future.

The final reason I am interested in Kinder Morgan's performance today centers on one of the most important leaders in the energy sector today.

Continued Focus on Sound Management

In the mid-1990s, Enron made two critical mistakes that ultimately sparked its demise.

The first was abandoning its bread-and-butter pipeline business in order to focus on short-term alchemy in the energy markets.

The second mistake was denying Richard Kinder the opportunity to become its CEO in 1996, five years before the firm's bankruptcy.

Kinder went on to create a pipeline venture with a college friend named William Morgan (the two bought a natural gas venture from Enron in their first company deal.)

Enron went on to become the greatest corporate scandal in American history.

Today Enron leaders are still in prison, and Kinder Morgan executives are sitting on top of the energy world. I think that says a lot about the importance of sound corporate leadership.

And for investors, I think a company's leadership team is a critical thing to weigh when deciding how best to grow your money.

As Kent said last week, sound management is the most intangible factor that he considers when evaluating potential takeover targets. Kent measures “sound management” in two parts:

  1. The balance between debt and operational coats, and
  2. Revenue generation.

Kinder Morgan is currently sitting on a lot of debt (due to the El Paso deal). But the market and analysts seem confident, and not just because the company is the largest pipeline and storage player out there. There is great confidence in the company's leadership to steer this El Paso deal to profitability.

What's more? Kinder seems confident himself. The CEO receives an annual salary of only $1.

His earnings have come from frequent purchases of his company's stock. Appreciation over the years has made him a billionaire.

And insiders at the company continue to accumulate shares, a welcome sign from many investors.

A Bellwether of Confidence

Today, it's important to understand not just where Kinder Morgan is going, but where the natural gas markets are heading in the future.

Kinder Morgan is a bellwether of investor confidence in the marketplace. The company's activities over the last few years show the growth of the unconventional oil and gas markets, the commitment to the midstream, and the importance of sound management in any sector.

As we've said before, there are big deals on the horizon. All it takes is a little bit of confidence from the markets for the stars to align.

Even if the company is close to expectations and confidence in the company remains even lukewarm, I expect other market leaders to show confidence in boosting their midstream operations.

Sincerely,

James

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  1. edward nickles
    January 18th, 2012 at 13:46 | #1

    Whats going on with rexx? Is there any new information on the company?

  2. Martha Beals
    January 18th, 2012 at 14:44 | #2

    How many years has it been said that Natural Gas is going to take off and it hasn’t? Why does the industry continue to drill and drill with the price edging towards $2? We have too much supply now and not enough demand.

  3. Mike Mann
    January 18th, 2012 at 17:51 | #3

    Martha.

    It did take off a few years ago… but the new unconventional sources in shale have changed the game. Remember when nat gas was over $10?

  4. eric taylor
    January 18th, 2012 at 20:46 | #4

    Bought AGL for my 94 year old mother earlier when the merger with Nicor
    was approved by the board. I did have more hopes for the storage of gas,
    but the distribution and basic transport are more conservative now.

    Penngrowth Energy (PGH) of Canada is believed to have big capital
    rewards long term, because it has been knocked down from the reorganization and change from a limited cap. to a taxable entity,
    yet, it still is good for a reinvestment and wait for the oil
    to flow, supporting a dividend, unlike many more speculative ventures.
    You may wait 4 years or more for Bakken side plays to make money!

  5. Michael Youngblood
    January 18th, 2012 at 21:10 | #5

    Penngrowth Energy is up 7.35 percent sense I bought 10/13/11 so i hope it does whiled. What I need now is some of the stocks that are ready to make some big gains now. Michael

  6. reshawn D
    January 18th, 2012 at 21:57 | #6

    Dr. Moors,

    What do you think of Niska energy partners and Energy Transfer Partners as investments? They have good dividends. Are the dividends sustainable? What are their growth prospects?

  7. Kenny G
    January 18th, 2012 at 22:01 | #7

    Um, I need a million dollars to invest in one of the good Dr’s predictions or recommendations and in return we will split the profits and I will pay all the taxes on the profits. So if anyone is or Dr Kent is that confident in a trade that he has or yourself believes they have a winner please feel free to help me out…and yourself ?

  8. January 20th, 2012 at 17:28 | #8

    Could you tell me about all the gas thats going from Russia to europe and how thats going to effect the markets

  9. enthusceptic
    January 29th, 2012 at 03:41 | #9

    Russia and others have been supplying gas to Europe for many years, Tony, and soon it will also come from Poland. I doubt that Europe needs very much, if any, Nat. gas – NG – from North America. The gurus can set us straight on this if they want to. An overview of the global NG situation would be great.
    Is there any doubt that Kenny G is a smoker? I think not. Can you please end this free-for-all? On Monday will do. Please put all comments on hold and find an editor. The way it is now I see unpleasant sides of myself – and you too – apologies to anyone mentioned by name. No offense was intended, but I lost control of
    my sense of humour.

  10. enthusceptic
    January 29th, 2012 at 04:01 | #10

    I love a bit of CNBC-bashing, especially when linked to GS. I have said too much. Soon Men in Black will be seen near my house and wherever I go.

  11. Leslie
    February 1st, 2012 at 20:31 | #11

    I enjoy reading all of your updates
    what would you recommend for me how to invest in the ENERGY INDUSTRY
    to achieve the utmost from a $ ONE THOUSAND DOLLAR INVESTMENT?

    Thank you
    discoversolar@aol.com

  12. Sumflow
    February 2nd, 2012 at 15:06 | #12

    How does Kmr fit into the coast-to-coast pipeline that Dr Moors told us about?

  13. February 18th, 2012 at 02:34 | #13

    I see fkircang shale to produce natural gas is not a bad thing for nuclear energy, the fracked shale contains an enormous amount of uranium, and by opening up by fkircang, the gas industry has laid the groundwork for in situ uranium mining with very low energy costs.

  14. enthusceptic
    March 29th, 2012 at 10:39 | #14

    To those who worry about NG prices: follow the developments in the industry and keep on reading good advice. The decisions must be yours.

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