Why Warren Buffett Bought Kinder Morgan Over Other Infrastructure and MLPs
By going with the clean corporation structure of Kinder Morgan, it would seem that Buffett is not making an already very complicated tax structure and tax filing of Berkshire Hathaway just that much more complicated. As a reminder, companies pay dividends while MLPs pay distributions that are part income and distributable cash flow and partly a return of capital.
Now let’s consider what else Buffett was attracted to with Kinder Morgan. It is counted as the largest energy infrastructure company in North America, having ownership or operating interests in roughly 84,000 miles of pipelines and around 180 terminals. Its pipelines transport almost every group of energy components as well. Its terminals store petroleum products and chemicals, and the company also handles bulk materials like coal and petroleum coke.
It seems unlikely that Buffett is looking to create any super-structure here, with a Phillips 66 deal with Kinder Morgan. It may not be that likely that he would try to complicate what is already complicated around tax time (already nearly 18,000 pages tax filing or so from 2012). Still, Buffett is no stranger to being opportunistic. He also wants to buy quality — and Kinder Morgan is top-notch in infrastructure.
Buffett’s actual Kinder Morgan stake was a new position and was listed as 26.533 million shares, as of December 31, 2015. The market value of that investment at the time was a mere $392 million. Even if this move was a bet made by one of Buffett’s new portfolio managers rather than Buffett himself, it seems very possible that the stake would be increased rather than traded — even after seeing that Kinder Morgan shares jumped 10% to $17.20 after the news of the Buffett stake.
The reality is that a stake of close to $400 million just will not move the needle very much for Berkshire Hathaway. It is barely a 1% stake, while Buffett is now a more than 10% holder in Phillips 66. The value of Berkshire Hathaway’s public U.S.-listed common stocks was put at a whopping $131.855 billion at the end of 2015, and Berkshire Hathaway now has a $318 billion market cap.
The recent upgrade of Kinder Morgan by Credit Suisse is now looking much smarter, but it is also hard to forget the key thesis the firm stated at the time: “Hard to see much downside from here, no matter what happens in energy markets.”
Kinder Morgan shares have a 52-week trading range of $11.20 to $44.71, and the consensus analyst price target on the stock is $20.13.