Kinder Morgan Partners Coverage Launch: $79 Trefis Price Estimate

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Kinder Morgan Partners ( KMP ) is a subsidiary of Kinder Morgan Inc. that owns and operates pipelines and storage terminals throughout the U.S. It operates in five main business segments: Products Pipelines, Natural Gas Pipelines, CO2, Terminals and Kinder Morgan Canada. KMP competes with interstate and intrastate pipelines and their shippers for attachments to new markets and supplies as well as for transportation, processing and treating services. The company faces direct competition from other pipeline and energy companies like Enterprise Products Partners ( EPD ), Williams Companies, Inc. ( WMB ) and from pipeline subsidiaries of energy giants like the ExxonMobil Pipeline Company of the Exxon Mobil Corporation (NYSE:XOM).

Coverage Launch $79 Price Estimate for Kinder Morgan Partners

We recently launched coverage on Kinder Morgan Partners with a $79 price estimate for the company's stock, which is about a 10% premium over its current market price. We have broken down our analysis of Kinder Morgan along its main business divisions.

1. Natural Gas Pipelines
2. Carbon Dioxide
3. Terminals
4. Product Pipelines
5. Kinder Morgan Canada

Natural gas pipelines division is the most valuable for the company

The Natural Gas Pipelines segment contains both interstate and intrastate pipelines. Its primary businesses consist of natural gas sales, transportation, storage, gathering, processing and treating. Within this segment, KMP owns approximately 15,500 miles of natural gas pipelines and associated storage and supply lines that are strategically located at the center of the North American pipeline grid. With more than $4.4 billion, the division contributed more than 50% to the company's revenues in 2010. The operating profit from the division was close to $1 billion during the same period. With the natural gas demand increasing steadily, we believe that going forward this division will have a greater contribution to the company's overall revenues and profits.

Key Business Trends

Demand and pricing

With the exception of periods of high product prices or recessionary conditions, the demand for petroleum products are relatively stable. Therefore, the company seeks to own refined products pipelines located in or near stable or growing markets. Pricing is based upon the tariffs that are adjusted annually based on changes in the U.S. Producer Price Index.

Increase in fuel demand

According to the American Petroleum Institute, the overall demand for fuel was approximately 5% higher for the first quarter of 2011 compared to the same period in 2010. The demand for distilled fuels (gasoline and diesel) grew by more than 15% during the period. The trend is expected to continue for the next few years as industrial output is expected to grow, in turn pushing up pipeline product shipments.

Ethanol wall increased in U.S.

In October, 2010 the Environmental Protection Agency (EPA) increased ethanol blending requirements from 10 percent to 15 percent of gasoline in the U.S. Such a move may push up ethanol consumption by more than 5 billion gallons annually, which will in turn result in an increase in ethanol shipments by KMP.

The shift towards natural gas

In the recent past, with the rapid discoveries of new reserves, natural gas is gaining popularity. Natural gas when compared in terms of energy equivalents, is as cheap as coal. Moreover it is a cleaner fuel to burn with lower harmful emissions and is more portable than coal. Hence large road transport fleet companies and industries have already moved on to natural gas usage and this trend is likely to continue considering the benefits.

See our full analysis for Kinder Morgan Partners



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Stocks , US Markets

Referenced Stocks: EPD , KMP , WMB

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