KMP’s Entry Into The Tanker Space Could Prove Promising

Last week, Kinder Morgan Energy Partners (NYSE:KMP), one of North America’s largest mid-stream energy companies, said that it had entered into an agreement to acquire two oil tanker companies – American Petroleum Tankers and State Class Tankers – from the Blackstone Group and Cerberus Capital Management. ^[1] Both companies are primarily engaged in the marine transportation of crude oil, condensate and refined products within the United States. While the deal is a slight departure from KMP’s traditional land-based energy transportation business, we believe that it is reasonably good value and will help to further diversify KMP’s revenue stream.

Trefis has a $92 price estimate for KMP, which is roughly 15% ahead of the current market price.

See Our Complete Analysis For Kinder Morgan Energy Partners

U.S. Tanker Business Is Strong, Despite Global Slump

Unlike the global tanker business, which is facing significant headwinds due to a declining outlook for U.S. oil imports as well as increasing refining activity in the Middle East ^[2], the U.S. tanker business is thriving. According to the U.S. EIA, domestic oil production is likely to surpass imports by 2014 due to improving output from shale plays. This is likely to be positive for the domestic tanker business, as moving petroleum products by tankers is sometimes as competitive as railroads in terms of pricing. ^[3] Additionally, capacity constraints on pipelines in areas such as the Gulf Coast and Mid-Continent could also boost demand for such waterborne transportation. ^[3]

Together, both the acquired companies will have a fleet of around 9 tankers, all of which are Jones Act qualified. Under the Jones Act, movements between U.S. ports need to be made on ships that are built in the United States and manned by U.S. crew. These ships are typically more expensive and scarcer when compared to foreign ships. ^[4] American Petroleum Tankers has a fleet of five tankers, with a cargo capacity of 330,000 barrels each, contracted to customers including BP Plc, Royal Dutch Shell Plc and Phillips 66. State Class Tankers, on the other hand, is building four tankers that will be delivered in 2015 and 2016. These new tankers will operate on long-term charters with a major integrated oil company upon delivery.

A Fairly Priced Deal

KMP will pay around $962 million in cash for the two companies, while Kinder Morgan Inc. (NYSE:KMI) will invest approximately $214 million to complete the construction of the SCT vessels. Overall, the valuation of the deal looks relatively attractive given that KMP expects to generate a combined annual EBITDA of roughly $140 million after the State Class Tankers vessels are operational. This translates to an EBITDA multiple of roughly 8.4 times, which looks very fair. Additionally KMP’s management has indicated that the acquisition, which is expected to close in Q1 2014,  will be immediately accretive to unit holders.

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1. Businesswire [↩]
2. WSJ [↩]
3. Seeking Alpha [↩] [↩]
4. Bloomberg [↩]