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Kinder Morgan Energy Partners, L.P (NYSE:KMP) does not drill, refine or explore for natural gas and oil. Instead, it provides the companies that do with means to get their product to the market. Many of the companies that do drill, explore and refine natural gas or oil would have a hard time getting their product to the market without KMP.

Kinder Morgan Energy Partners, L.P. is a pipeline transportation and energy storage company in North America ... It operates in five business segments: Products Pipelines, Natural Gas Pipelines, CO2, Terminals and Kinder Morgan Canada. In May 2010, its subsidiary KM Gathering LLC purchased a 50% ownership interest in KinderHawk Field Services LLC. During the year ended December 31, 2010, it acquired Linden, Baltimore and Eules's facilities, and acquired the refined product's terminal assets at Mission Valley, California from Equilon.

Kinder Morgan Energy Partners, L.P. the same thing day in and day out but it knows its business well and its revenue and profits over the past few years are clear reflection of this; they have both generally trended higher. On top of all this it sports a very healthy dividend of 5.4%

The chart below clearly illustrates how KMP has trounced the S&P 500 over the years.

KMP is in the perfect business; it operates like a massive toll collector. It receives a fee irrespective of the price the underlying commodity is trading at, generally avoiding commodity price risk.

It has a massive network that spans 38,000 miles of pipeline, and 180 terminals provide all of which serve to provide it with very wide foot print. Its pipelines currently reach the most active places such as the Bakken and the eagle ford shale formations.

Kinder Morgan Energy Partners, L.P pipelines transport a wide range of products; natural gas, refined petroleum products, crude oil, carbon dioxide are examples of the many products and materials that pass through their pipelines. KMP also stores and or handles Coke, ethanol, coal, Steel, etc.

Performance

You could not ask for a better company; it has raised its distribution consecutively for 16 years in a row. Its dividend has grown from $2.36 in 2002 to $4.64.

  1. Total return for the past 5 years= 111%
  2. Total return for the past 3 years= 102%
  3. Total return for the past 12 months= 25%
  4. Consecutive dividend increases = 16 years

100K invested in KMP for 10 years would have grown to 315, 627.50

Growth

The 10 year net income chart below illustrates that net income has been in an upward trend for the past five years

Net income for the past three years

  1. 2009= $1.30 billion
  2. 2010= $1.26 billion
  3. 2011= 1.31 billion
  4. Projected 2011= It stands at $781 million and could top the $1.2 billion mark.

Dividend sustainability

Net income has generally been rising as indicated by the 10 year chart, but so has the total cash flow from operating activities

Operating cash flow the past three years has been on the rise

  1. 2009= $2.2 billion
  2. 2010= $2.17 billion
  3. 2011= 2.41 billion
  4. Projected 2011= it stands at $1.98 billion and could top the $2.7 billion mark.

The cash flow from operating activities has been more than enough to cover the dividend payments and is on course to rise for three years in a row after a minor dip in 2010.

KMP has a huge free cash flow rate of $1.7 billion as of Sept, 2011. The chart below illustrates that the free cash flow has been in an uptrend for the past 10 years.

While the earnings per share took a hit in 2007, they have rebounded very strongly since then as illustrated by the 10 year chart below.

Other key important ratios

  • Price to Sales = 2.44
  • Price to Book = 2.59
  • Price to Tangible Book = 3.84
  • Price to Cash Flow = 20.00
  • Quick Ratio = 0.40
  • Current Ratio = 0.50
  • LT Debt to Equity = 1.54
  • Total Debt to Equity = 1.78
  • Interest Coverage = 3.30

Technical outlook

KMP is rather overbought in the short to intermediate time frames. We would wait for a pullback to the 75-80 ranges before adding new positions. We would not be surprised to see it trading at or above 100 before the year is out.

Competition

Williams Companies, Inc. (NYSE:WMB)

It has a free cash flow rate of $552 million and a current ratio of 1.18 and an interest coverage ratio of 3.50.

Net income for the past three years

  1. 2009= $1.4 billion
  2. 2010= $-285 million
  3. 2011= $ -1.09 billion
  4. Projected 2011= It stands at $820 million and could top the $ 970 million mark.

Operating cash flow the past three years has been on the rise

  1. 2009= $3.3 billion
  2. 2010= $2.5 billion
  3. 2011= 2.65 billion
  4. Projected 2011= it stands at $2.3 billion and could top the $3.00 billion mark.

  1. Dividend yield 5 year average = 2.40%
  2. Dividend rate = $ 1.04
  3. Dividend growth rate 3 year avg = 24.12
  4. Dividend growth rate 5 year avg = 19.13%
  5. Consecutive dividend increases = 7 years
  6. Paying dividends since = 1974
  7. Total return last 3 years = 178%
  8. Total return last 5 years = 46%

Energy Transfer Equity L P (NYSE:ETE)

It has a levered free cash flow of $-354 million, a current ratio of 0.79 and interest coverage of 1.50

Net income for the past three years

  1. 2008 = $375.05 million
  2. 2009 = $442.48 million
  3. 2010 = $192.76 million

2011= it stands at $224 million and could potentially top the $295 million mark.

Total cash flow from operating activities

  1. 2008 = $823.76 million
  2. 2009 = $723.47 million
  3. 2010 = $1.09 billion

  1. Dividend yield 5 year average = 6.7%
  2. Dividend rate = $ 2.44
  3. Payout ratio = 168%
  4. Dividend growth rate 3 year avg = 7.7%
  5. Dividend growth rate 5 year avg = 23%
  6. Consecutive dividend increases = 6 years
  7. Paying dividends since = 2006
  8. Total return last 3 years = 166.18%
  9. Total return last 5 years = 65.42%

Energy Transfer Partners LP (NYSE:ETP)

It has a levered free cash flow rate of -$309 million, a current ratio of 0.84 and an interest coverage ratio of 2.60

Net income for the past three years

  1. 2008= $886 million
  2. 2009= $791 million
  3. 2010= $617 million
  4. 2011= it stands at $462 million and could top the $520 million mark.

Total cash flow from operating activities

  1. 2008= $1.28 billion
  2. 2009 =$826.8 million
  3. 2010 = -$1.202 million
  4. 2011= It stands at $730 million and could top the $1.2 billion mark.

  1. Dividend yield 5 year Average 7.80%
  2. Dividend rate $ 3.58
  3. Payout ratio 260%
  4. Dividend growth rate 5 year average 7.56%
  5. Consecutive dividend increases 6 years
  6. Paying dividends since 1996
  7. Total return last 3 years 62%
  8. Total return last 5 years 26%

Boardwalk Pipeline Partners, LP (NYSE:BWP)

It has a free cash flow rate of $285million, a current ratio of 1.30 and interest coverage of 2.50.

Net income for the past three years

  1. 2008= $294 million
  2. 2009= $162.7 million
  3. 2010= $289.4 million
  4. 2011= it stands at $234 million and could top the $280million mark.

Total cash flow from operating activities

  1. 2008= $350.3million
  2. 2009 =$400.5 million
  3. 2010 = $464.7 million
  4. 2011= It stands at $345 million and could top the $447 million mark.

  1. Dividend yield 5 year Average 7.0%
  2. Dividend rate $2.19
  3. Payout ratio 171%
  4. Dividend growth rate 5 year average 10.8%
  5. Consecutive dividend increases 5 years
  6. Paying dividends since 2006
  7. Total return last 3 years 53%
  8. Total return last 5 years 2.1%

Some important ratios that traders should familiar with that were used in this article are:

Levered free cash flow is the amount of cash available to stock holders after interest payments on debt are made. A company with a small amount of debt will only have to spend a modest amount of money on interest payments, which in turn means that there is more money to send to shareholders in the form of dividends and vice versa.

Operating cash flow is generally a better metric than earnings per share because a company can show positive net earnings and still not be able to properly service its debt; the cash flow is what pays the bills.

Current Ratio is obtained by dividing the current assets by current liabilities. This ratio allows you to see if the company can pay its current debts without potentially jeopardising their future earnings. Ideally the company should have a ratio of 1 or higher.

Interest coverage is usually calculated by dividing the earnings before interest and taxes for a period of 1 year by the interest expenses for the same time period. This ratio informs you of a company's ability to make its interest payments on its outstanding debt. Lower interest coverage ratios indicate that there is a larger debt burden on the company and vice versa. Additional key metrics are addressed in this article, "5 Dividend Stocks With Yields As High As 7.8%."

Conclusion

KMP makes for a great long term play. It gets paid regardless of what price the underlying commodity is trading at. Additionally, it sports a huge free cash flow rate which is roughly enough by itself to cover its dividend payments. Net income, total cash flow from operating activities and revenues has generally been increasing for the past several years; they are definitely in an up trend. Some of its competitor also make for great long term plays, but when one takes the free cash flow rates, net income growth, growth of cash flows from operating activities, five year dividend growth rates, five year dividend average and dividend payment history, we feel that KMP is the clear winner. WMB and ETE would take close second and third places. As the markets are rather overbought we would wait for a pull back before opening up new positions in KMP.

Note that payout ratios are not that important when it comes to MLPS as they are required by law to pay a majority of their cash flow as distributions. Payout ratios are calculated by dividing the dividend/distribution rate by the net income per share, and this is why the payout ratio for MLPs is often higher than 100%. The more important ratio to focus on is the cash flow per unit. If one focuses on the cash flow per unit, one will see that in most cases, it exceeds the distribution declared per unit.

MLPs issue a Schedule K-1 to their investors. Unrelated business income (UBI) above $1,000 is taxable in an IRA. This information will appear Box 20 in the schedule K-1. UBI is typically a very small number usually well below $1000 and in some cases negative. If the MLP pays out distributions in excess of the income it generates, the distribution is classified as a "return of capital" and tax deferred until you sell your units. For more information, on this topic investors can visit the National Association of Publicly Traded Partnerships.

Growth of 10,000 charts sourced from Morningstar.com and dividend history charts sourced from dividata.com

Disclaimer: This list of stocks is meant to serve as a starting point. Please do not treat this as a buying list. Do your due diligence and then determine if any of the above plays meet with your risk tolerance levels. The Latin maxim caveat emptor applies-let the buyer beware

Source: Kinder Morgan Energy Partners A Magnificent Oil And Gas Play