By Ahmed Ishtiaq
Kinder Morgan Energy Partners (NYSE:KMP) is an energy storage and pipeline transportation company. KMP Products Pipelines' section distributes diesel fuel, gasoline, natural gas liquids and Jet fuel to a range of markets with the help of its 8,400 miles of refined petroleum products pipelines. The company also possesses 60 associated product terminals and petroleum pipeline transmix processing facilities. For its natural gas segment, the company has a total of 16,200 miles of natural gas distribution pipelines. The partnership is one of the highest yielding energy partnerships in the market. Its high cash distributions and high dividend yield are a great attraction for investors.
Kinder Morgan distributes a majority of its cash generated through operations to its unitholders. Recently, the company increased its quarterly cash distributions after an encouraging third quarter. At the moment, the partnership pays an annual cash of $5.04 per unit to its unitholders, yielding 6.40%. Kinder Morgan cash distribution hikes are backed by solid growth in the cash flows. The company had cash flows available for distribution before certain items of $455 million. At these levels, the distributable cash flows are up by 15% from $394 million in the same period last year.
Recently, the company announced the expected cash distributions for 2013. It expects to declare cash distributions of $5.28 per unit for 2013, a 6 percent increase over its 2012 budget target of $4.98 per unit, which it expects to meet. KMP will buy 50% of El Paso and 50% of assets in Kinder Morgan Inc (NYSE:KMI). In addition, the company has projected earnings of $5.4 billion for the coming year, which represents an increase of almost $900 million from the current year. The company will have over $2 billion to distribute to its unitholders, and have $30 million in excess of cash distributions.
Furthermore, the partnership will reserve $2.8 billion for investments. The company will invest in expansions, joint-ventures and small acquisitions. The expectations of the partnership are based on average crude oil prices of approximately $91.68 per barrel in 2013. However, the majority of cash generated by KMP is fee based and is not sensitive to commodity prices. In order to tackle the volatile commodity prices, the company has hedged most of its positions. In its CO2 segment, the company hedges the majority of its oil production, but a significant portion of natural gas liquids is currently unhedged.
Kinder Morgan has massive assets in some of the richest areas of the country. Its fee based operations give it security against the volatility of commodity prices. Furthermore, the regulated pipelines provide the company a fixed rate of return. The company has a large asset footprint with a huge number of pipelines connecting to every major energy region in North America. Moreover, Kinder Morgan is the second largest oil producer in Texas. The partnership has its presence in almost every rich unconventional shale play in the country. Massive activity in these areas is creating a great opportunity for companies like KMP.
Comparison with Peers:
KMP peers include Enterprise Products Partners LP (NYSE:EPD), Williams Partners LP (NYSE:WPZ) and Enbridge Energy Partners LP (NYSE:EEP). The table below shows a comparison of some essential metrics with its peers.
Debt to Equity
The comparison indicates that KMP trades at a premium to its peers. All of its peers have lower P/E and P/S ratios. However, the partnership provides an extremely attractive yield. There is only one peer of the partnership which offers a higher yield than KMP. In addition, KMP has better operating margin than its peers, but net margin, ROE and debt to equity ratio are not impressive.
Kinder Morgan Energy Partners has a solid history of impressive cash distributions. Its assets provide it a very good platform to reward its unitholders. A recent pull back makes it an even more attractive investment. There are very few companies in the market which are capable of maintaining their cash dividends. Low interest rate environment has increased demand for income generating assets. I believe KMP is one of the best dividend paying stocks in the market at the moment. The company has the ability to increase cash distributions to its investors - not just maintain the current levels.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: EfsInvestment is a team of analysts. This article was written by Ahmed Ishtiaq, one of our equity researchers. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.