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Executive summary:

  • Kinder Morgan Energy Partners is commencing a 6.9M unit offering.
  • The underwriters have the option to issue as many as 1.03M additional units.
  • Proceeds from the offering are likely to be about $600M.

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Late on Tuesday, Kinder Morgan Energy Partners (NYSE:KMP) announced a public offering of units via an 8-K SEC filing. Kinder Morgan Energy Partners is part of the much larger Kinder Morgan (NYSE:KMI) family of companies, which combined constitute the 4th largest energy company in North America. The company plans to issue about 6.9M units with an additional 1.03M units available via a greenshoe option. The stock has reacted negatively to the news, with units now down nearly 3% as of this writing.

Selling equity at current prices seems like a poor move

Assuming a 5% discount to Tuesday's closing price, Kinder Morgan Energy Partners is likely to raise upwards of $600M in proceeds from the unit offering. In addition, current unitholders would also be slightly diluted as the company would be increasing its float by roughly 2%.

While public equity offerings are not uncommon among MLPs, the timing of Kinder Morgan Energy Partners' secondary is quite odd. The stock has yet to fully recover from its recent declines and is still trading well below its summer of 2013 highs of over $90 per unit.

Furthermore, Kinder Morgan Energy Partners' last equity offering on February 21, 2013, was for 4M units priced at about $86.35. Given that the current offering will likely be priced in the high $70s, this implies a large 10% discount from that offering's price.

Frankly, offering new units at levels below a previous offerings price level sets up a very bad precedent. This is especially the case with MLPs as many of the initial buyers are long-term holders. With their units now seriously underwater, previous buyers have little incentive to hold on to the stock as the company may continue to sell equity at depressed prices.

In addition, by selling equity now, Kinder Morgan Energy Partners may be telegraphing that it believes its stock is overvalued even if this is clearly not the case.

Why is Kinder Morgan Energy Partners raising capital?

While the company did not mention a specific reason for its equity offering in its SEC filing, there are some obvious routes for the raised capital.

I believe Kinder Morgan Energy Partners may be wanting to simply pay down its revolver and or lower its overall debt. As of Q4 2013, the debt to EBITDA ratio of 3.8x was slightly above its historic range.

Kinder Morgan Energy Partners has been spending quite a bit of capital recently, with its $962M Jones Act tanker acquisition in late December as well as continued work on its various expansion projects.

In 2014 alone, Kinder Morgan Energy Partners plans invest over $3.6B in expansions projects and joint ventures. Although the company is funding part of this program via at-the-market equity offerings, mostly of Kinder Morgan Management (NYSE:KMR), these are estimated to only generate about $720M in 2014. Clearly, Kinder Morgan Energy Partners needed to partly fund these capital requirements with an equity offering sometime this year.

Is Kinder Morgan Energy Partners a buy after the equity offering?

Kinder Morgan Energy Partners was on a nice uptrend earlier in the year before falling due to its distribution payment on the January 29. Given that the size of the offering is rather small at less than 2% of float, Kinder Morgan Energy Partners unit price will likely bounce back from the decline fairly soon.

I believe that buyers of the recent secondary offering will be well rewarded. Kinder Morgan Energy Partners is projected to increase its distribution about 5% this year. Assuming a modest 5% discount in price via the offering, this implies a forward yield of over 7.30% for the stock.

Conclusion

It will be interesting to see how the various stocks of the Kinder Morgan group react to this offering. I believe KMR will fall in sympathy with (and possibly more than) its MLP peer. In addition, El Paso Pipeline Partners (NYSE:EPB) may also see some weakness. Kinder Morgan Inc may actually rise as a result as the offering may be technically accretive to it.

Overall, I am not too concerned with Kinder Morgan Energy Partners' equity offering. Yes, the pricing will stink as the stock is near its lows. However, the size of the offering is tiny which will limit the long-term impact for the stock.

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.

Source: Kinder Morgan Energy Partners: Buy The Dip?