New Era In Energy: Kinder Morgan CEO | Mad Money | CNBC

If you're looking for a way to play the North American Energy Renaissance that isn't all that vulnerable to the nasty decline in oil and natural gas we've seen lately, a decline that seems to have stabilized somewhat at $80, then I think you want to own a pipeline company that works as a kind of a toll road operator. And the best pipeline player in existence is now Kinder Morgan Incorporated, KMI for all you home gamers. That's because this afternoon we learned that Kinder Morgan has received all of the necessary regulatory approvals for its long-awaited acquisition of all three of its master limited partnership subsidiaries, which will create a gigantic pipeline company that transports tons of oil, natural gas, and I think one of the biggest carbon dioxide. When the shareholders vote on it a month from now, in fact this transaction, Kinder Morgan will become the third largest energy company in North America, energy company, not pipeline, as I've been saying ever since this deal was announced. The new Kinder Morgan is the kind of company that's coveted by money managers because it gives you both growth and income. In terms of growth, the company sees $600 billion in pipeline projects that need to be undertaken in this country, and once it's consolidated into a single business, Kinder Morgan will be able to borrow money much more cheaply to fund those projects. On the income side, the new Kinder Morgan expects to pay $2 per share in dividends and continue to raise this dividend over time. It yields 5.1%, which is why my charitable trust has been buying the stock. So let's take a closer look with Richard Kinder, the visionary co-founder, chairman, and COO of Kinder Morgan Incorporated. Hear more about where his company is headed. Rich, welcome back to Mad Money.

Thank you, Jim, glad to be here.

Rich, I read through the documents and it seems like a possibility that this deal could close around or before Thanksgiving. True?

That's our target. The shareholder and unit holder votes are set for November 20th, and assuming we get approval, which we certainly expect from all the entities, we will close very shortly thereafter. So we should be closed before Thanksgiving, yes.

Now last week we had a tsunami of selling in all of these stocks. They all trade together, the good ones and the bad ones frankly. Were you surprised, or is this because there's a kind of a commoditization of the MLPs that you may never have dreamed of when you started this principle a long time ago?

Well, I think we're living in a volatile market. I think actually after we announced our earnings, which were very much on target, in fact if you look at the present company configuration, KMI is expected to slightly exceed its budget for the year in terms of dividends, KMP and EPB right on their targets for the year. I think that reassured people, and actually Wednesday, Thursday, Friday, and Monday of this week we were up pretty nicely. So I think the market recognized that we're not as subject to this commoditization game as some others are, and we certainly don't think that we are.

All right, I agree with that obviously. Now Rich, one of the things I hear people say is, you know, Jim, you're so bullish about these MLPs and Kinder Morgan, but you should take a look at the balance sheets of some of the customers and recognize that even if they have contracts to pay Kinder Morgan, if oil and natural gas drop substantially, they will not be able to pay, and therefore all the things you like about Rich Kinder and this company are going to become untrue. What do you think?

Well, we think we have very solid contracts. Again, as we've said so many times, we're just like a toll road. We have good, solid, long-term contracts, particularly in our natural gas pipeline segment, and most of these companies are credit-grade, very worthy companies. There are some that are sub-investment credit. There we have letters of credit and other indicia of credit that should help avoid any issues. But the main thing here, Jim, is that this infrastructure is really needed. For example, take all of the additional contracts we've signed for volumes coming out of the Marcellus and Utica plays in the Northeast. That production has got to get out, and it's going to move no matter who controls the actual production, because we just have more natural gas and more NGLs coming out than can be absorbed in the Northeast. So the ultimate test, I've been in this business over 35 years, the ultimate test is: is the product, in this case the transportation capacity, really needed? And in our case, across the board, it really is needed. And that's the greatest indicator that you're going to be successful in what you do.

Rich, I have felt because of your efforts and the efforts of some other visionaries that we were coming closer to continental self-sufficiency. But I was thinking that if Saudi Arabia were really threatened by that, they could flood the world with oil. They have additional capacity. So what's happening is that perhaps they're trying to drive our industry out of business, or at least cut back in our drilling. At what price would that really happen? Would you be worried about, and do you think that theory has any merit?

Well, I'm not sure what the Saudis are thinking. That's beyond my pay grade. But I can tell you this: we've done a lot of looking at market clearing prices. And as you can see, this is kind of a double-edged sword. Just as you saw when natural gas prices declined pretty precipitously two or three years ago, actually that increased the demand, and you had more demand pull from petrochemical companies, from electric generators who switched to natural gas because it's cleaner but also because of the lower price. I think you're going to see the same thing on the oil side. To be specific, if we look at the Permian Basin, which is a big market for us, we think that all the CO2 we move in the Permian Basin and sell to third parties, if you were starting a new CO2 flood today, you probably need $60 oil. But we think on the floods that are actually in operation today, where you're just buying CO2 to continue to do infield drilling and injection, that price is in the $40 to $45 range. So I'm not overly troubled by price for oil at the current level. I don't think it's going to have much impact on our midstream infrastructure play.

Well, excellent. That's what I needed to know. Rich Kinder, looking forward to that deal closing. Co-founder, chairman, and COO of Kinder Morgan. Good to see you again, sir.

Thanks, Jim. And I appreciate the opportunity. And we think this is a great opportunity for our shareholders. We'll increase the dividend to $2 next year, and we are projecting a 10% growth rate through 2020 with over $2 billion of excess coverage.

Well, that's why my charitable trust has a big position in it. I thank you, Rich. You're totally right. Mad Money is back after the break. Stay with KMI, stay with Cramer.