Here are the five catalysts that will drive Kinder Morgan’s (KMI) shares in 2012:
- Construction of a new storage facility
- Construction of a new processing facility
- Competitive advantage from the Merger with El Paso
- 98% of KMI’s cash flow comes from KMP; KMP has a very stable fee based business model with minimal risk exposure to commodity prices.
- KMI’s unique corporate structure can draw institutional owners. Other MLPs lack this
A New storage Facility:
The construction of a new storage facility in the Edmonton Terminal has been announced which will add 2.4 million barrels of storage and will cost approximately $210 million. The seven storage tanks, which will be a part of this storage facility, will be constructed by late 2013 in Alberta, Canada. The completion of this project will strengthen the advantage of Kinder Morgan in this area. Subscriptions to the Trans Mountain Pipeline have already exceeded the capacity by 63%, as mentioned by Kinder Morgan Energy Partners LP. This 715-mile system delivers to refineries in central British Columbia, Vancouver, and Washington.
The new processing facility:
Kinder Morgan is also setting up a new $130 million processing facility, which will increase daily output. It will initially produce 25,000 barrels per day, later it will be increased to 100,000 barrels per day. The pipeline is set to have roughly 70 miles of construction and will help transport crude/condensate to the Houston Ship Channel. The project is estimated to be completed by January, 2014.
I believe, both these projects will add to the top line and one can see rising stock price as we approach closer to the completion dates.
Strategic benefits from the Merger with El Paso (EP):
El Paso, another energy-based company, has reported an increase of 18% in its oil and natural gas reserves. This is good news for Kinder Morgan Inc., as it is expected to close its deal early 2012. This pending deal, announced in October, will prove to be a new growth source for KMI. To buy the company, Kinder Morgan had to decrease the offer price so in order not to adversely affect the dividends and debt ratio.
The merger between the two companies will make Kinder Morgan the largest pipeline company in the world, thus there are plenty of opportunities for investors to jump on board. As recently mentioned, this will constitute around 67,000 miles of natural gas pipelines, accounting for roughly 22% of the total natural gas pipelines in the U.S. Market share for the company will substantially rise, giving it access to markets all over the U.S. Since the existing pipelines are regulated, it will pose to be a huge competitive advantage for the company, keeping its stock prices on the high end.
Currently, KMI is trading at $30.74 per share and is expected to reach a price target of $32.50. The company has a P/E ratio of 45.55x and dividend yield of 4.10%. Market capitalization of KMI is $21.70 billion. Investors should keep in mind that Kinder Morgan Energy Partners, LP and Kinder Morgan Management, LLP (NYSE:KMR) are pari passu securities. We expect biggest upside in KMI and KMP. Credit Suisse analyst argues that KMP’s assets are “core to North American Energy Infrastructure”
There is a lot of M&A activity going on in the MLP space. Energy Transfer Equity (NYSE:ETE) has recently announced its merger approval with Southern Union (NYSE:SUG) which will be value additive for shareholders. We expected a good year out of Energy Transfer Equity and were right. ETE has two segments: investments in Energy Transfer Partners (NYSE:ETP) and Regency. Unless the constant dividend structure is changed, it is best to avoid ETP’s stock since dividends have failed to grow. Following points should be kept in mind for those who plan to invest in Energy Transfer Partners (ETP):
- JP Morgan argues that ETP has a high GP burden which will serve as a hurdle for above average growth
- The sizeable asset base is a challenge in this environment
- ETP’s risk profile will improve as they divest propane business
- After the deal with Lone Star JV, ETP’s ability to win new business related to NGL-has increased significantly.
- Both ETP and ETE are in process on completing other deals which will be accretive in coming years.
Energy Transfer Partners (ETP) is looking to sell their propane division for $2.9 billion, signaling a positive benefit for the stockholders and other investors of the company. After the closure of their public offering in November, the company is looking to use the net proceeds to pay back its debt, finance capital expenditures, and for general partnership purpose. Zacks Equity Research has given the company a neutral rating in the long run with a hold rating in the short run. They are worried about the completion times of its growth projects.
KMI’s earnings per share are expected to grow at 26.06% per year over the next five years while those of ETE are expected to grow at 20.81%.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.