2013 has been an odd year for Kinder Morgan Energy Partners (KMP). The stock started the year strong, rising alongside nearly every other high yield stock as investors reached for income. However, this rally had dissipated by the summer as concerns over the Fed's tapering took center stage. Soon after, Kinder Morgan Energy Partners and its general partner Kinder Morgan Inc. (KMI) came under a bear attack from a certain independent research firm, further adding volatility to the stock, but doing relatively little damage to its share price. At current prices, Kinder Morgan Energy Partners appears to be attractively priced, especially considering its historic valuation and future distribution growth.
Kinder Morgan Energy Partners: a 7% yield trading at a discount
Kinder Morgan Energy Partners' current distribution has it yielding about 6.80%. This has the stock at its highest TTM yield since at least 2010. In addition, Kinder Morgan Energy Partners has broken a long trend of steady price appreciation alongside its distribution growth rate. As shown, the company is between 10 to 15% undervalued as the distribution growth rate has outpaced unit price growth over the past 6 months.
KMP data by YCharts
According to Kinder Morgan Energy Partners' 2014 financial projections, the company is anticipated to declare $5.58 per unit in cash distributions for the year. This would mark a 5% increase from current levels. This level of growth is broadly inline with the company's previous estimates and historic trends. If Kinder Morgan Energy Partners were a dividend paying stock, a 7% yield with 5% growth would be considered extremely attractive. However, in the MLP space, investors seem to have gotten used to this level of distribution growth and some complacency may have set in. When Kinder Morgan Energy Partners budgets in distribution growth, it clear means it. Over the past 14 years, the company has met or exceeded its projected distribution growth target every year except for 2006.
What has caused the recent weakness?
While it is sometime difficult to pinpoint the reasons for a stock underperforming, for Kinder Morgan Energy Partners there is a clear disconnect starting in the summer of 2013. As I noted in the intro, the market started to factor in interest rate risk into its valuation. The end result was a sell-off in high yield names as current income was now less valued compared to potential share price appreciation.
Also factoring into the summer decline was a broad move away from "safe" stocks, with limited to no growth potential. Especially hard hit was the MLP sector. While I would argue Kinder Morgan Energy Partners does offer solid growth prospects, the market now seems to be more in a "show me" mode.
Let us also not forget the Hedgeye related decline during September. While this dog may have been more bark than bite, it still added unneeded volatility to Kinder Morgan Energy Partners and its related companies.
Growth project announced and their expected impact
While Kinder Morgan Energy Partners' stock has lagged, that has not stopped the company from continuing its growth projects. Over the past few days, the company announced a series of projects and capital investments. Below is a breakdown of these events:
On December 16, Kinder Morgan Energy Partners filed a formal application with Canadian regulators to nearly triple the size of its 300K BBL/D Trans Mountain pipeline. This pipeline will allow Canadian oil sands production to have access to the Pacific coast, and gives Asian energy customers an alternative energy source. The company has 13 customers already signed up as shippers which brings committed capacity to approximately 708K BBL/D. This is a major growth project for Kinder Morgan Energy Partners and constitutes a large chunk of future anticipated capex spending. Total costs for the expansion are estimated to run at C$5.4B, with construction starting in 2015 and ending in 2017.
On December 20, Kinder Morgan Energy Partners announced a joint venture with Targa Resources Partners (NGLS) for new natural gas liquids fractionation facilities at Mont Belvieu, Texas. Total capacity is estimated to be 150K BBL/D with a potential increase to 400K BBL/D over time. This project is expected to mostly serve customers in the growing Utica and Marcellus shale plays. When coupled with the proposed Utica Marcellus Texas Pipeline, which is a joint venture between Kinder Morgan Energy Partners and MarkWest Energy (MWE), it should offer customers in that region a fully integrated NGL solution to end customers in the Gulf Coast.
On December 20, Kinder Morgan Energy Partners announced a 50/50 joint venture with Imperial Oil (IMO) to build a crude oil rail-loading facility in Edmonton, Alberta. Total costs are estimated at $170M with another $100M being spent by Kinder Morgan Energy Partners on pipeline connections in two staging tanks in the Edmonton storage facility. The Edmonton Rail Terminal is expected to have a loading capacity of 100K BBL/D at the start, with a potential to expand to up to 250K BBL/D. The terminal is to be connected via pipelines to greater Kinder Morgan Energy Partners systems for delivery to broader North American markets. This project is a continuation of the crude by rail trend in Western Canada, as current production continues to outstrip pipeline capacity.
On December 20, Kinder Morgan Energy Partners announced that its joint venture with Magellan Midstream Partners (MMP) has agreed to transport Eagle Ford Shale production from Anadarko Petroleum (APC) to the Houston Ship Channel. The project includes a new 10 mile pipeline to connect the Double Eagle Pipeline and the KMCC Pipeline in Karnes County, Texas, and construction of a 240K BBL storage facility. The project is expected to be completed by 2015.
On December 23, Kinder Morgan Energy Partners announced that it was buying two tanker companies for $962M. The sellers are affiliates of PE firms Blackstone Group (BX) and Cerberus Capital Management. The companies acquired, American Petroleum Tankers and State Class Tankers, are Jones Act qualified, which means they are engaged in the marine transportation of crude oil, condensate and refined products in the United States domestic trade. In total, the transaction involves 9 vessels from with each having 330K BBLs of cargo capacity. Currently, five of the American Petroleum Tankers ships are in operation under long-term contracts. The four State Class Tankers are still in construction and are scheduled to be delivered in 2015 and 2016. Kinder Morgan Energy Partners is to invest about $214M to complete the construction of these vessels.
As can be seen, Kinder Morgan Energy Partners is clearly investing for its future growth. These projects should add substantially to future EBITDA for the company at compelling multiples. Do note that for several of the projects Kinder Morgan Inc is waiving some of its IDR payments to facilitate the transactions.
Final Thoughts and Conclusion
Considering the stock is only about $3 off its 52 week low, Kinder Morgan Energy Partners still appears to be very attractively valued as the company seems to have many avenues for growth. A 7% yield with 5% growth is nothing to sneeze at and offers a compelling total return proposition. Kinder Morgan Energy Partners is clearly a stock worth considering, especially at under $80 per unit. Also note that for those seeking stock dividends, Kinder Morgan Management (KMR) is also an option and often trades at a sizeable discount to Kinder Morgan Energy Partners.
Disclaimer: The opinions in this article are for informational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned. Please do your own due diligence before making any investment decision.