On Jan 27, we reaffirmed our long-term Neutral recommendation on Kinder Morgan Energy Partners L.P. (KMP) – the largest independent owner and operator of petroleum product pipelines in the U.S. The reiteration was backed by the partnership’s better-than-expected fourth quarter 2012 results, history of increasing distributions and lucrative projects. These were however partially dampened by an uncertain macro environment.
Why the Reiteration?
Kinder Morgan reported its fourth quarter financial results on Jan 16. Earnings from continuing operations of 75 cents per limited partner unit (excluding certain items) beat our expectation of 67 cents. The outperformance was aided by higher volumes in its interstate pipeline network. The partnership also delivered positive performances across each of its business segments.
More importantly, management hiked its quarterly cash distribution rate by 11% year over year. This latest payout marks the 46th consecutive quarterly distribution hike by the pipeline operator. It was fueled by incremental contribution from the dropdown of Tennessee Gas Pipeline (TGP) and a portion of El Paso Natural Gas (:EPNG), growth opportunities in the coal export business as well as robust oil yield.
The partnership will now spend approximately $11 billion in organic projects through 2015. For 2013, nearly $3 billion is planned for expansion and acquisitions. Kinder Morgan is reaping benefits from the recent boom in oil and gas exploration in the North American shale formations as most of these basins have very few or no transportation infrastructure.
Key organic projects comprise the recently upsized Trans Mountain expansion project, the BOTSCO terminal, and the Galena Condensate Processing facility. All these projects are expected to be value accretive to the partnership.
Kinder Morgan also plans to take over Copano Energy LLC (CPNO) for about $3.22 billion in stock. This would spread its footprint in Texas, Oklahoma and Wyoming. The purchase price will reach about $5 billion, including debt.
However, Kinder Morgan’s distribution growth prospects are closely linked to the successful completion of organic growth projects. This, in turn, might be adversely affected by operational hindrance or delays in completion. Again, it remains vulnerable to macro conditions, unstable oil and gas prices and interest rate fluctuations.
We see no earnings momentum for the stock over the last 30 days for the first quarter of 2013 as well as full-year 2013. The Zacks Consensus Estimates for the first quarter and full-year 2013 are currently pegged at 63 cents and $2.55 per unit, reflecting a year-over-year increase of 37.0% and 10.2%, respectively.
Other Stocks to Consider
Currently, the units of Kinder Morgan retain a Zacks Rank #3 (Hold).
However, there are certain other pipeline companies like Access Midstream Partners, L.P. (ACMP) and Atlas Pipeline Partners L.P. (APL) that offer value and are worth buying now. These companies sport a Zacks Rank #2 (Buy).
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