On Oct 22, we reaffirmed our long-term Neutral recommendation
Kinder Morgan Energy Partners L.P.
) - 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
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
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
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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.
) as well as Zacks Ranked #2 (Buy) stocks
Energy Transfer Equity, L.P.
Energy Transfer Partners, L.P.