Tuesday, December 24, 2013

Way Beyond My Comfort Zone But "Hey, Why Not"


January 7, 2014: whoopee! Just as I said, regarding the Kinder Morgan Energy/tank company story. Motley Fool has a piece on this same story and comes to same conclusion!  
So while Enterprise and Buckeye stick closer to the mainstream in the midstream sector, Kinder is again cutting a slightly different path. Keep an eye on this transaction and its performance after it's consummated. Kinder might just use its "bird's eye" view of the oil and gas industry to put more money to work in the Jones Act area if the deal works out well. 
Flashback, May 1, 2013, posted December 31, 2013:  
Oil traders including commodities giant Trafigura and Australian bank Macquarie have quietly begun shipping U.S. crude oil from Texas to Canada, raising the ire of U.S. East Coast refiners who may pay four times as much for a similar voyage.
In the latest oil trading trend to emerge from the unexpected boom in U.S. shale production, the firms have hired at least seven foreign-flagged tankers to run the route to Canada this year, most of them for the first time, according to market sources and data analyzed by Reuters.
U.S. refiners, however, are required by a shipping law from 1920 known as the Jones Act to use more costly U.S.-owned and operated ships if they want to tap into the oil bounty emerging from the Eagle Ford fields of Texas, highlighting the uneven playing field that is taking shape in the Atlantic basin.
Although the law itself has long been a bone of contention in the industry, the emergence in recent months of such a prominent example of how the Jones Act "penalizes" domestic firms is reopening old wounds, according to John Auers, senior vice president of refinery consultants Turner, Mason & Co.
"They're resentful of it, they think it's unfair - they've told me that," Auers said in an interview.
The trend was highlighted on Monday by U.S. government data showing crude oil exports to Canada leapt to a 13-year high of 124,000 barrels per day, double rates from last year. Much of that was in the form of shipments by rail, pipeline or barge, which have been steadily rising for months. But that data did not include details on the mode of transport, masking the swift rise of seaborne traffic.
The latest such cargo is aboard the Everglades, which loaded a 500,000-barrel cocktail of light, sweet crude in Nederland, Texas late last week. The tanker, Macquarie's first U.S.-to-Canada shipment, on Tuesday was rounding Florida en route to the Come-by-Chance refinery in Newfoundland, which is now run by South Korea's national oil company.
Original Post
I wasn't going to post the link to this story until I saw the article at SeekingAlpha.

Here is the link to the Kinder Morgan story I was not going to post: 
Kinder Morgan Energy will spend $962 million in cash to buy two tanker companies as the transportation and storage company expands its shipping business.
American Petroleum Tankers has a fleet of five tankers that can hold 330,000 barrels of cargo.
State Class Tankers has commissioned the construction of four tankers that hold 330,000 barrels of cargo. They are expected to be completed in 2015 and 2016. 
This is the link to the Seeking Alpha story:
On Monday, Kinder Morgan Energy Partners announced that it would acquire two oil tanker companies from private equity firms. While the market neither cheered nor booed the acquisition with units trading in line with the broader market, I do believe this acquisition is a strategic mistake for KMP and am disappointed they made the deal. I do not consider these transactions to be a reason to sell as I believe KMP remains at major discount to its fair value, but nonetheless, it is a disappointing action that could be problematic if it is a sign that KMP plans to move more significantly into the tanker industry.
Might there be an opening KMI has spotted? Think Jones Act. The Gulf Coast is going to be flooded with light light sweet oil in 2014.

I particularly enjoyed the concluding paragraph of the SeekingAlpha story:
KMP should stick to its core competency of pipeline transportation where there is far better growth potential. The cheap valuation in this deal is another sign that the tanker market is in secular decline. Given its strong dividend and undervalued unit price, I am not selling my KMP, but I am deeply disappointed in this unusual strategic miscalculation.
Let's see: the writer is complaining that Kinder Morgan bought the tankers for a low price.   One of the themes of this blog has been that companies tend to stagnate when they fail to identify what "business" they are in.

With this transaction, Kinder Morgan suggests to me it sees itself in the oil transportation business, not the pipeline business. Huge aha! Burlington Northern did that several years ago when it realized it was not in the railroad business but in the transportation business. That insight moved the company to a whole new level.

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