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Kinder Morgan ManAŞement, Ltd. Şti. Message Board

  • abter1 abter1 May 20, 2009 2:23 PM Flag

    new research report: KMR discount is too large

    Wach. issued a report on KMR 5/19. Their bullet point summary:

    Kinder Morgan Management, LLC
    KMR: Reiterate Outperform - Discount To KMP Unjustified
    • Discount To KMP Unjustified. We are reiterating our Outperform rating on Kinder Morgan Management, LLC. We believe KMR's 13.0% discount to KMP is unwarranted and should narrow over time as the valuations for both securities are based on the same underlying assets, earnings power and stream of future cash flows (distributions). KMR is yielding 10.2% versus KMP’s yield of 8.9%. In contrast to KMP, which pays cash distributions, KMR pays a qualifying stock dividend (i.e. investors do not receive K-1’s).

    • Reversion To Mean Implies Potential Upside For KMR. Since its inception in 2001, KMR has traded at a discount to KMP of 0.5% (on a yield basis) or 50 bps on average. The spread has been as wide as 161 bps and as narrow as (34) bps. Currently, KMR trades at a 131 basis point discount. The KMR-to-KMP discount has only exceeded 130 basis points less than 3% of all trading days since KMR’s IPO in 2001. If KMR reverted to the historical mean spread (and KMP’s yield remained the same), this would imply a unit price of $45 or almost 10% upside.

    • Why The Steep Discount? KMR has traded at a discount to KMP for a variety of reasons including (1) less liquidity (KMP’s 3-month average daily trading volume is 1,000,000 units versus KMR’s average daily trading volume of 450,000, (2) lack of understanding of the i-share structure, (3) the absence of a natural arbitrage between KMR and KMP, (4) investors current preference for cash over stock, and (5) possible selling pressure in late 2008.

    • Headwinds In 2009 For Kinder Morgan But Distribution Appears Secure.
    KMP faces a number of headwinds in 2009 including low commodity prices, a weak economy, and a sizeable financing requirement. While KMP’s cash flow is predominantly fee-based (~80%), the partnership is likely to struggle to generate sufficient cash flow to cover its distribution (which includes no budgeted increases for the year). However, we don’t believe KMP will reduce its distribution in 2009. Instead, any shortfall in cash flow could be funded with short-term borrowings.

    Valuation Range: $50 to $53

    Investment Thesis:
    Kinder Morgan is poised to grow distributions at a five-year CAGR of 3% supported by its high-quality portfolio of strategically located assets, organic growth projects, and experienced management team, in our view. With a large and diverse asset base covering most of the United States, the partnership is well positioned to capitalize on most of the major supply/demand trends driving the energy markets including: the expected growth in Canadian oils sands production, the emergence of LNG in the Gulf Coast and the continued growth of natural gas production in the Rockies, in our view.

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