We have maintained our Neutral recommendation on
Kinder Morgan Energy Partners L.P.
) − the largest independent owner and operator of petroleum product
pipelines in the U.S.
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 distribute its business
risks. In addition, the CO
business is a major growth avenue for the partnership with the
commodity price risk being offset by a long-term hedging
Although the partnership delivered lower-than-expected first
quarter results, it experienced positive performances across each
of its business segments except Product Pipeline.
More importantly, the partnership hiked its quarterly cash
distribution per common unit to $1.20 ($4.80 annualized),
representing a 5% year-over-year growth. It was fueled by growth
opportunities in the midstream energy sector, with more emphasis on
the natural gas shale plays as well as in the coal export business.
It expects to declare a cash distribution of $4.98 per unit for
2012, an 8% increase over $4.61 per unit for 2011.
Again, agreement between
Kinder Morgan Inc.
) − believed to be one of the largest energy transactions in recent
years − is also expected to dilute the impact of the partnership's
oil business and offset a potential slowdown in demand of the
refined products. We believe that the partnership remains on track
to achieve its growth target, thanks to organic expansions, joint
ventures and acquisitions.
However, the partnership's Products Pipelines segment is
experiencing weak demand growth for refined products like jet fuel,
diesel and gasoline. In the first quarter, total refined products
volume declined 1.6% to 155.6 million barrels on an annualized
basis. Also, Kinder Morgan does not expect demand for the refined
product to recover in the foreseeable future.
Again, Kinder Morgan's distribution growth prospects are closely
linked to the successful completion of organic growth projects,
which in turn might be adversely affected by operational hindrance,
cost inflation and overruns, and delays in completion.
Therefore, we see the partnership performing in line with the
broader market and retain a Zacks #3 Rank (short-term Hold
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