Kinder Morgan Inc's New Funding Plan Starts to Take Shape

Image source: Kinder Morgan Inc.

Before the oil market downturn, Kinder Morgan had nearly unfettered access to capital, enabling it to fund acquisitions and growth projects with ease. However, some of the collateral damage of the downturn is that Kinder Morgan's access to capital is no longer as open as it once was. This tougher access is forcing it to seek out new sources of funding for growth.

One of those sources emerged this week when the company announced that it sold a 50% stake in a pipeline project to a private equity firm. That transaction could be a prelude to what lies ahead for the energy infrastructure giant.

Details on the deal

On last quarter's conference call, founder Richard Kinder provided some color on how Kinder Morgan planned to fund growth going forward. He said that,

One of the things Kinder noted was that the company planned to use selective joint ventures to offload the funding of some of its projects. Doing so would enable the company to participate in the value created by the project without being on the hook for the entire investment. It would also free up some of its cash flow for uses other than CapEx.

This past week the company announced one such transaction, agreeing to sell a 50% equity interest in its Utopia Pipeline Project to private equity firm Riverstone Investment Group. Under the terms of the agreement, Riverstone will pay Kinder Morgan an upfront cash fee reimbursing it for the 50% share of CapEx that has been expended up to that point. In addition to that, Kinder Morgan will receive another payment to recognize the value it has created in developing the project. Further, Riverstone will pay its 50% share of the projects costs going forward.

This is a pretty sweet deal for Kinder Morgan. Not only does it save $250 million, which is half of the project's cost, but it gets paid a premium on top of that. That cash improves the company's financial flexibility, which could enable it to return more cash to shareholders than initially anticipated.

A growing trend

What is worth noting about this transaction is that Kinder Morgan did not partner with an MLP or other energy company. Instead, it partnered with a private equity firm, which is a growing trend in the sector. Over the past couple of years, several of its smaller peers have obtained funding from private equity to build projects or pursue growth opportunities.

Crestwood Equity Partners , for example, has a long history of working with financial investors to secure capital for growth projects. In 2014 Crestwood announced an agreement with several strategic investors who committed to invest $500 million into the company via preferred units. That capital was intended to help the company fund its then $1.2 billion growth project backlog. In addition to that, last year the company signed a joint venture agreement with well-known energy-focused private equity firm First Reserve to provide it with up to $500 million in equity capital funding for several expansion projects in the Delaware Basin. Under the terms of that JV agreement, First Reserve will fund 100% of the capital requirements for the initial build-out of the systems, with Crestwood Equity Partners funding 100% of future CapEx for the JV.

Meanwhile, NGL Energy Partners formed a strategic relationship with Oaktree Capital earlier this year. Initially, NGL Energy Partners received a $240 million cash infusion after issuing convertible preferred units to Oaktree. This injection provided NGL Energy Partners with cash for debt reduction and to fund CapEx. In addition to that, NGL Energy Partners and Oaktree will jointly pursueorganic growth projects and strategic acquisitions with Oaktree assisting with funding and structure while NGL Energy Partners operates the assets.

While it is unlikely that Kinder Morgan will enter into any significant strategic relationship with a private equity firm, it is clear that these investors are looking to put capital to work in the energy infrastructure sector. That should provide Kinder Morgan with plenty of opportunities to secure funding for future projects.

Investor takeaway

Kinder Morgan made it clear that it is seeking joint venture partners for some of its projects. While this could include other energy midstream companies, it will also likely involve additional transactions with private equity. Unlike most midstream companies, private equity firms have excess capital to deploy, which Kinder Morgan needs right now.

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Matt DiLallo owns shares of Kinder Morgan and has the following options: short January 2018 $30 puts on Kinder Morgan and long January 2018 $30 calls on Kinder Morgan. The Motley Fool owns shares of and recommends Kinder Morgan. The Motley Fool recommends Oaktree Capital. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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