We have updated our model for Kinder Morgan Partners (KMP) to incorporate changes following the firm's full-year results for 2012 and other recent developments. Our new price estimate for the stock is around $91, which represents a premium of around 10% over the current market price. Here is a summary of the key changes to our model and the rationale for the modifications.
Increased Natural Gas Pipelines' EBITDA Margins
Margins for the natural gas pipelines division rose from around 15% in 2011 to around 25% in 2012. This was primarily due to the firm's acquisition of the Tennessee Gas Pipeline Company and a 50% stake in the El Paso Natural Gas pipeline system while divesting some natural gas pipelines and related assets.
We believe that the firm will be able to sustain these margins for two reasons. First, the performance of the asset base is likely to be better following the acquisitions and divestitures. The El Paso system will allow the firm to increase access to the Mexican market, while the Tennessee pipeline acquisition expands access to the Marcellus and Utica shale plays and connectivity to major cities on the east coast such as New York and Boston. Second, the outlook for natural gas demand in the U.S. looks promising as electric utilities and the industrial sector are expected to increase their consumption going forward. As natural gas prices increase, shippers will be in a better position to pay higher shipping rates.
Increased Kinder Morgan Canadian Revenues From FY 2017
The firm recently announced that it has raised its capacity expansion plans for the Trans Mountain pipeline in Canada to 890,000 barrels per day (bpd), up from its earlier plan of 750,000 bpd, citing stronger demand from shippers. The additional capacity is likely to come online by 2017. Taking this into account, we have increased Kinder Morgan Canada's forecast revenues in 2017 from around $640 million to around $700 million assuming that the capacity is added around the first quarter. We have also increased our capital expenditure forecasts accordingly.
Increased Average Shipping Price for Products Pipelines
Shipping rates for products pipeline operations rose sharply from around $1.30 per MMBbl in 2011 to around $1.90 per MMBbl in 2012. This was a result of some fee based transmix processing agreements expiring, as well as the firm moving toward purchasing incremental volumes of transmix and selling incremental volumes of refined products. This has resulted in higher revenues as well as higher costs. Taking this into account, we have reduced our EBITDA margin forecast for the products pipelines division as well. The net price impact is negligible.
Disclosure: No positions.