MLP ETFs Soar on Kinder Morgan Consolidation Plan


Kinder Morgan (KMI) was a star performer in Monday’s trading session, as the stock skyrocketed over 17% on the day. The massive gain for this oil and gas firm came after the company announced big consolidation plans in the weekend that could pave way for additional acquisitions.

The Houston billionaire Richard Kinder will combine all its publicly traded master Ilimited partnerships – Kinder Morgan Energy Partners (KMP), Kinder Morgan Management (KMR) and El Paso Pipeline Partners (EPB) – under one roof. The transaction, pending shareholder and regulatory approval, consists of $40 billion in stocks, $4 billion in cash and $27 billion in assumed debt (read: 3 MLP ETFs for Excellent Income and Growth).

The deal is the second largest in the U.S. energy sector history just behind Exxon Corp.’s $74.5 billion purchase of Mobil Corp. in 1999. If approved, the newly formed company will trade under the symbol KMI with a market value of $140 billion. This would create the largest energy infrastructure company in North America and the third largest energy company worldwide, trailing Exxon Mobil (XOM) and Chevron (CVX).

The combination will simplify Kinder Morgan’s existing financial structure, removing investor scrutiny of distribution rights, and providing significant tax savings and financing benefits. Additionally, the transaction will allow the company to expand its energy pipeline infrastructure to oil, gas and coal reserves market.

Further, the combined entity will reward shareholders further by raising the annual dividend to $2.00 per share next year from the current $1.72 per share. It also projects dividend payout growth of 10% per year from 2015 to 2020 (read: 3 Dividend ETFs Crushing the Market).

Market Impact

The stock market greeted the consolidation plan with enthusiasm, pushing not only shares of KMI and its MLPs cousins higher but also spreading bullishness into the entire MLP sector. Kinder Morgan shares surged to a fresh high of $42.49 on the day but closed a little lower at $39.37 on elevated volume of more than 18 times the normal.

Meanwhile, KMP, KMR and EPB also reached new highs, climbing 17.1%, 23.9% and 20.7%, respectively. The Alerian MLP index rose 3.7% on the day, marking the largest one-day increase in one and half years and drove all the MLP ETFs higher as well. In particular, ETRACS Wells Fargo MLP Index ETN (MLPW) and ETRACS Alerian MLP Infrastructure Index ETN (MLPI) led the way gaining over 4% while other MLP products are up in the range of 2–4% (see: all the MLP ETFs here).

Though there are several options available in the space to play Kinder Morgan’s strategy with most having decent allocations to the in-focus four firms, we have highlighted three ETFs that are heavily invested in these firms.  

Alerian MLP ETF (AMLP)

This fund tracks the Alerian MLP Infrastructure Index, holding 26 U.S. stocks in its basket. Of these, KMP takes the top spot at 11.02% while EPB makes up for a small share in the basket at 2.88%. Oil and gas pipeline and distribution sector dominates the fund’s return at 95% while oil refining and marketing takes the remainder.

AMLP is the most popular and most liquid ETF in the MLP space with AUM of $8.9 billion and average daily volume of 3.1 million shares. It charges 85 bps in fees per year from investors and added nearly 3% on the day.

First Trust North American Energy Infrastructure Fund (EMLP)

This ETF is an actively managed fund designed to provide exposure to the securities headquartered or incorporated in the U.S. and Canada and are engaged in the energy infrastructure sector. The fund has amassed $800 million in its asset base while trades in good volumes of roughly 192,000 shares a day. Expense ratio came in at 0.95%.

The product holds 61 securities in total. Kinder Morgan Management and Kinder Morgan occupy the top second and third positions with a combined 11.7% of total assets while El Paso Pipeline Partners make up for a small share of 1.45%. From a sector look, more than half of the portfolio is allocated to pipelines while electric power companies round off the top two at 30.8%. EMLP was up 3.25% on Monday trading session (read: 3 ETFs Hitting All-time Highs in Rocky Market).

Global X MLP & Energy Infrastructure ETF (MLPX)

This product follows the Solactive MLP & Energy Infrastructure Index and holds 39 stocks in its basket. Of these, KMI and KMR take the second and seventh spots, respectively, with a combined share of 15.8%. Here again, EPB accounts for a small slice in the basket with just 0.63% of total assets.

In terms of industrial exposure, about 90% of the portfolio is allocated to the oil and gas pipeline and distribution while energy exploration and production firms make up for 6% share. The fund has AUM of $160 million and charges 45 bps in annual fees. Volume is moderate at around 73,000 shares on average. MLPX was up 2.8% yesterday.

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