Kinder Raises Bet on Natural Gas With $21.1 Billion El Paso Pipe Purchase

Richard Kinder, the ex-Enron Corp. president who parlayed its pipelines into a multibillion-dollar enterprise, is betting on record natural-gas demand in Kinder Morgan Inc.’s $21.1 billion purchase of El Paso Corp. (EP)

The acquisition, announced three days before the University of Missouri-educated lawyer’s 67th birthday, would give Kinder control of a pipeline network long enough to circle the Earth more than three times. Kinder plans to sell Houston-based El Paso’s oil and gas wells to focus on the fuel transportation market, where prices and profits are less volatile.

“We believe natural gas is going to play an increasingly integral role in North America,” Kinder said in the statement announcing the deal yesterday. “If America is serious about reducing carbon emissions to benefit the environment, and reducing its dependence on foreign oil, natural gas is absolutely the best readily available option.”

U.S. factories, power plants and homeowners burned a record 24.1 trillion cubic feet of gas last year, according to the Energy Information Administration. Pipeline operators such as Kinder have profited even as a glut of supply from new wells in Texas, Arkansas and Pennsylvania slashed prices 16 percent.

Kinder Morgan rose 9.5 percent, the largest intraday increase since Aug. 9, to $29.44 at 9:33 a.m. in New York. El Paso climbed 25 percent, the biggest gain in three years, to $24.52.

Drilling Technology

Statoil ASA and Brigham Exploration Co. announced today that they have entered into a merger agreement for Statoil to acquire all of the outstanding shares of the U.S. producer for $36.5 per share through an all-cash tender offer.

Breakthroughs in drilling techniques since the 1990s allowed energy explorers to extract gas from previously impenetrable geologic formations. In the past decade, U.S. gas output jumped 11 percent, outpacing a 3.2 percent rise in consumption during the same period.

Burning gas to fuel power plants emits about 44 percent less carbon dioxide than coal, according to the American Natural Gas Association, a Washington-based trade group that represents energy companies.

Every new gas well needs to be linked to a pipeline before the owner can begin recouping invested capital and making a profit. Output has been constrained in some newly opened production areas, such as Pennsylvania’s Marcellus Shale, because of a dearth of pipeline capacity to haul the fuel to major population centers.

Source: Kinder Morgan Inc. via Bloomberg

Kinder Morgan Chief Executive Officer Richard Kinder. Close

Kinder Morgan Chief Executive Officer Richard Kinder.

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Source: Kinder Morgan Inc. via Bloomberg

Kinder Morgan Chief Executive Officer Richard Kinder.

‘Breakthrough in Supply’

“When you’re buying something like this you’re looking at 10 years ahead and I think that’s the vision that he sees,” said Stephen Smith, president of Stephen Smith Energy Associates, a research company in Natchez, Mississippi. “We’re in a period where there has been a breakthrough on the supply side and it’s of such a scale that a temporary glut has been created.”

Kinder’s bets on energy pipelines have paid off handsomely, placing him 46th on the Forbes Magazine list of wealthiest Americans. Kinder Morgan operates the second-biggest U.S. pipeline network by volume through its control of Kinder Morgan Energy Partners LP (KMP), which operates or owns interests in 37,000 miles (60,000 kilometers) of pipelines and 180 terminals.

The El Paso transaction will create a company with an enterprise value of $94 billion and 80,000 miles of pipelines, according to Kinder Morgan. The El Paso deal will add pipelines from California to New England that carry about one-fourth of U.S. gas supplies.

Largest Shareholder

Kinder is the largest shareholder in Kinder Morgan, with about 31 percent of the company, according to data compiled by Bloomberg. He formed the Houston-based company in 1996 with a group of investors and an initial investment of $40 million after he was passed over for the top job at Enron.

When he bought all the shares in the company with a group of private-equity firms in 2007, its total value was $22 billion, including $7 billion in debt.

The company re-emerged as a publicly traded entity in February when it issued 95.5 million shares at $30 a share. Kinder Morgan fell 3 cents to $26.89 in New York on Oct. 14, a 10 percent decline from its debut.

“Rich Kinder continues to make history by shaping and redefining the North American energy landscape,” said Bill Herbert, an analyst at Simmons & Co. International in Houston. “Mr. Kinder is making a bet that the structural positives will eventually prevail and he is, once again, likely making the wise bet.”

Kinder took a salary of $1 from Kinder Morgan last year, receiving the bulk of his income from dividends paid on his stake in that company and Kinder Morgan Energy Partners.

Avoiding ‘Dumb’ Acquisitions

Kinder Morgan Energy Partners said in May it will spend $855 million to buy the 50-percent stake it doesn’t own of a Haynesville Shale gas pipeline system from Petrohawk Energy Corp. The Haynesville spans parts of Louisiana, Texas and Arkansas.

In a 2006 interview, Kinder said he evaluates acquisitions on projected cash flow and reviews transactions for three years after they close to ensure financial targets are met. Like fellow billionaire Warren Buffett, he said he frets about making the wrong deal.

“As Buffett said, you can undo 10 years of hard work with one stupendously dumb acquisition,” Kinder said in the 2006 interview. “We’re trying to avoid one stupendously dumb acquisition.”

To contact the reporters on this story: Gene Laverty in Calgary at glaverty@bloomberg.net; Joe Carroll in Chicago at jcarroll8@bloomberg.net

To contact the editor responsible for this story: Susan Warren at susanwarren@bloomberg.net

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