On Oct 22, 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 third quarter 2013 results, history of increasing distributions and lucrative projects. These were however partially dampened by an uncertain macro environment.
Why the Reiteration?
Kinder Morgan is one of the largest publicly traded master limited partnerships (MLPs) and generally serves as a benchmark for the pipeline MLP group. A focus on fee-based and diversified businesses has enabled the partnership to spread its business risks. In addition, the CO2 business is a major growth avenue for the partnership with the commodity price risk being offset by a long-term hedging strategy.
In the third quarter, the partnership increased its quarterly cash distribution per common unit to $1.35 ($5.40 annualized), representing 7% year-over-year growth. This is the 49th increase in quarterly distribution since the current management team took over in Feb 1997. Kinder Morgan's latest payout hike was fueled by the contribution from the dropdown of TGP and EPNG, growth opportunities in the coal export business as well as robust oil yield.
Kinder Morgan is an attractive investment opportunity, capable of delivering high returns going forward, supported by continuous emergence of the natural gas shale plays, increase in CO2 demand in the Permian Basin, and growing demand for export coal. Kinder Morgan currently expects to invest approximately $11 billion in organic projects through 2015.
For 2013, the partnership intends to spend nearly $3 billion in expansion and acquisitions. It 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. Other projects, like the conversion of a portion of EPNG to move crude from the Permian to California and a proposed pipeline to service Florida Power and Light are also under review. All these projects are expected to be value accretive to the partnership.
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.
Other Stocks to Consider
Currently, the units of Kinder Morgan retain a Zacks Rank #3 (Hold). However, there are certain other pipeline companies presently performing well like Zacks Rank #1 (Strong Buy) Pioneer Southwest Energy Partners L.P. (PSE) as well as Zacks Ranked #2 (Buy) stocks Energy Transfer Equity, L.P. (ETE) and Energy Transfer Partners, L.P. (ETP).