Seeking Alpha
Long only, deep value, growth at reasonable price
Profile| Send Message|
( followers)  

Summary

  • Negative sentiment about the partnership has caused an unwarranted drop in stock price.
  • Fundamentals of the business remain strong.
  • Average annual growth of over 15% in distributeable cash flows.

Kinder Morgan Energy Partners (NYSE:KMP) is down over 6% year-to-date, mainly because of the allegations about the manipulation of distributable cash flows through understatement of maintenance capital. My fellow Seeking Alpha authors have covered this subject very nicely and I do not feel the need to add to this discussion. However, I do believe that the negative sentiment offers a great opportunity to its long-term shareholders to add to their positions. I believe the fundamentals of the business remain extremely strong and the future growth of the partnership is under no threat. In this article, I will be mainly talking about the growth in fundamentals and the future expected growth.

Stellar Growth in Distributable Cash Flows

Distributable cash flows are extremely important for any partnership as a good cushion can allow the partnership to grow its cash distributions for the foreseeable future. KMP has recorded stellar growth in its distributable cash flows over the last few years. The table below shows the distributable cash flows over the last three years.

(click to enlarge)

The partnership has grown its distributable cash flows by over 26% during the last year. The net income has more than doubled over the same time period, and it has been the main reason for an increase in the distributable cash flows. The acquisitions are integrated now and are proving to be accretive to the cash flows of the company - the partnership completed the Copano acquisition almost a year ago. Let's now compare the partnership's distributable cash flows with its peers. The table below shoes the distributable cash flows of KMP and two of its peers.

The growth in distributable cash flows has been steadier for KMP compared to its peers Energy Transfer Partners (NYSE:ETP) and Enterprise Products Partners (NYSE:EPD). KMP has shown an average annual growth rate of just below 16% over the last three years. However, at the same time, ETP has recorded much higher average annual growth - ETP's average has been enhanced by a massive jump in DCFs during the last year. It is unlikely that ETP will be able to show the same level of growth in distributable cash flows going forward, and I believe the growth in DCFs will revert to its mean annual growth of close to 20% -- which is still a very impressive growth rate.

EPD, however, has suffered a decline in the DCFs over the last year - as a result, the average annual growth rate for the partnership is negative. However, being the biggest energy partnership, EPD still remains a major player in the sector. The comparison shows that KMP has been able to record impressive growth in its distributable cash flows on consistent basis. On the other hand, its peers have seen major shifts in the DCFs, both in the right and the wrong directions.

Cash Distributions

Let's now look at the cash distributions - KMP has been growing its cash distributions at an impressive rate and the continuous growth in its cash distributions is one of the most attractive features about this partnership. The table below shows the cash distributions for the partnership over the last three years.

(click to enlarge)

KMP has grown its cash distributions by about 5% in each of the last three years. However, at the same time, the growth in distributions to the general partner, Kinder Morgan Inc (NYSE:KMI) has been close to 15%, almost three times more than the growth in distributions to the limited partners. However, despite growing the general partners' distributions at a higher rate, the partnership has been able to grow its limited partners' distributions at a consistent rate, which shows that the partnership has been able to grow its DCFs at an adequate rate to meet its obligations to both, general partners and limited partners.

Let's now compare KMP's cash distributions with its peers - the table below shows the cash distributions over the last three years.

It is clear from the above table that KMP has grown its cash distributions at a faster pace than its peers. ETP has recorded a massive jump in its distributable cash flows, but the partnership has not been raising its cash distributions. However, over the last two quarters, ETP has started to grow its distributions again but its growth rate still remains substantially below its other two peers. EPD, on the other hand, has been growing its cash distributions at a steady rate. However, EPD also falls behind KMP when it comes to growing the cash distributions.

Conclusion

The growth in the fundamentals of the partnership is robust as I stated at the start of the article. We have now seen that the growth in distributable cash flows as well as cash distributions is solid for KMP. Furthermore, the integration of acquisitions such as Copano will further enhance the cash flows as it will help consolidate KMP's midstream business with a solid portfolio of assets. The fall in the stock price over the last few days has been due to the negative sentiment, and unwarranted, in my opinion. I believe the fundamentals of the business are solid and the current stock price gives a good entry point to the investors looking for income as well as growth.

Source: Kinder Morgan Energy Partners: A Good Time To Buy?