Kinder Morgan Energy Partners (NYSE:KMP) has faced many issues over the past month or so. The company was the target of an extremely bearish Barron's front cover story, that among other things, argued that the current distribution was unsustainable and that the Kinder Morgan Inc (NYSE:KMI) share of DCF was hampering growth. However, many of these allegations are old news and are largely a rehash of old Hedgeye talking points.
That being said, Kinder Morgan has not stopped investing into midstream infrastructure nor has it struggled to find growth. Just last week, it was reported that the company had teamed up with BP Plc (NYSE:BP) to export slightly refined crude oil and condensate via two splitter units with a combined capacity of over 100,000 BBLs/D. This project is one of many being built near Houston, with capacity expected to exceed 460,000 BBLs/D.
As I noted in my previous article on the subject, these are basically mini-refineries that will separate crude oil into various components such as kerosene, diesel and gas oil. This processing is necessary not only for the export of the product, but also to allow the local refineries and other end-users to more easily use the ultra light crude coming from the Eagle Ford.
First the good news: Kinder Morgan has reaffirmed its dividend and distribution guidance
However, let us get back on track to the main focus of this article. On March 14, Kinder Morgan announced that it expects to meet or exceed its 2014 financial expectations for all its various companies.
It appears as if the $962M acquisition of Jones Act crude oil tankers is finally starting to pay off as it is expected to have a positive impact on DCF per unit for Q1 2014. In addition, the company is seeing incremental cash flow growth due to the Tennessee Gas Pipeline adding roughly 500,000 dekatherms per day of capacity starting in April. Overall, Kinder Morgan Energy Partners is now expected to generate DCF in excess of its budget targets.
As a reminder, Kinder Morgan Energy Partners is expected to declare distributions of $5.58 per unit for 2014, 5% higher compared to $5.33 in 2013. Also note that Kinder Morgan Management (NYSE:KMR) should also pay a similar $5.58 per share via stock (non cash) dividends in 2014 in the form of additional KMR shares.
Also note that the company reaffirmed both Kinder Morgan Inc 2014 dividends of $1.72 per share (up 8% from $1.60 in 2013) and El Paso Pipeline Partners (NYSE:EPB) cash distributions of $2.60 per unit (up 2% from $2.55 in 2013).
CEO Rich Kinder noted that "2014 is off to a great start and the future outlook for the Kinder Morgan companies remains very bright." In addition, it was noted that the company had "identified approximately $14.8 billion in expansion and joint venture investments that we are confident will contribute to our growth, and we are pursuing customer commitments for many more projects."
Now the bad news: A Morningstar analyst has a cautious note out
While I typically do not put much value into the gyrations of analyst ratings, a recent report by Morningstar's Jason Stevens is somewhat concerning.
Basically, the analyst is projecting Kinder Morgan to have a harder time finding attractive growth opportunities within the next few years. While there are currently plenty of midstream investments in the works, many are expected to be completed within 5 years or so. After that, growth will become harder to find, especially in a size meaningful for Kinder Morgan.
Furthermore, given Kinder Morgan's IDR payments to the GP, it will need to see EBITDA growth of 12% per year to afford annual 5% to 6% distribution hikes. This means about $3B to $4B a year in additional capital projects. The analyst sees this as a quite a "daunting task."
While the report is bullish overall, Mr. Stevens did lower his fair value ("FV") estimates on all four Kinder Morgan stocks.
- Kinder Morgan Inc was hardest hit, with its FV cut 15% to $34 per share.
- Kinder Morgan Energy Partners and Kinder Morgan Management FV was lowered a modest 4% to $90.
- El Paso Pipeline Partners also saw its FV lowered 11% to $37 per unit.
Final Thoughts and Conclusion
Yes, the bears (read Hedgeye and Barron's) will see the Morningstar report as a victory of sorts. However, the relationship between Kinder Morgan and its GP (read IDR payments) has been well known for years. In addition, there are solutions to the IDR problem. Kinder Morgan can simply choose to buy out its GP, much like what other MLPs have done. However, any such transaction would cost a pretty penny.
In addition, Rich Kinder will find a way to create value for Kinder Morgan unitholders as it essentially increases his wealth given his $8.10B investment in Kinder Morgan Inc. This can already be seen in non-traditional investments such as with the splitter project and the Jones Act tankers.
In my opinion, Kinder Morgan's reaffirmation of its guidance far outweighs the fair value reductions from Morningstar.
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.
Disclosure: I am long KMI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.