Seeking Alpha
Profile| Send Message| ()  

We have a positive stance on Kinder Morgan Partners L.P (KMP) given its high dividend yield, high expected hydrocarbon production in North America, high prices of hydrocarbons due to an economic recovery in global markets, and the company's stable business model.

Company overview

Kinder Morgan Partners L.P , a midstream company, is a market leader in pipeline transportation and energy storage, with operations in North America. KMP's general partner is Kinder Morgan, Inc (KMI). KMP owns and operates about 29,000 miles of pipelines and 180 terminals. The company's pipelines transport refined crude oil, petroleum products, natural gas, carbon dioxide and other products; while the terminals store and handle chemicals, petroleum products, ethanol, coal, petroleum coke and steel. The company is also involved in the production and transportation of carbon dioxide to enhance oil recovery from oil drilling and production projects in North America.

Factors Affecting Business

KMP's business is affected by the prices of oil, natural gas and NGLs, and the volumes that move through the pipelines and terminals used for the company's storage.

Business Segments

The following is a breakup of the reported business segments of KMP.

  • Natural Gas Pipelines: involved in the gathering, transportation, processing, treating, storage and sale of natural gas.
  • Products Pipelines: involved in the transportation and terminal storage of refined petroleum products, including gasoline, diesel fuel, jet fuel and natural gas liquids.
  • Terminals: involved in the storage of refined petroleum products, coal, petroleum coke, cement, alumina, salt and other bulk chemicals.
  • CO2: involved in the production and sale of crude oil, and the transportation and marketing of carbon dioxide to increase the recovery of crude oil from mature oil fields
  • Kinder Morgan Canada: involved in the transportation of crude oil and refined products from Alberta, Canada, to marketing terminals and refineries in British Columbia, Canada, and locations in the U.S.

Earnings Review

The company reported revenues of $1.85 billion for the second quarter of 2012, showing a decrease of 8.3% compared to the revenue for the same period last year; missing the mean revenue consensus by 15.7% for the reported quarter.

The company reported EPS of $0.37 for the second quarter of 2012, showing an increase of 23% compared to 2Q2012 EPS of $0.3. EPS for the reported quarter missed analyst consensus EPS estimates of $0.49 by 23.9%. The earnings came in below expectations due to the falling prices of natural gas liquids (NGL) in the reported quarter.

Segment earnings before depreciation, depletion and amortization expenses (EBDA) are internally used by the company as a measure of profit and loss used for evaluating the segment's performance, as shown below. As can be seen in the table, the EBDA of all segments witnessed healthy YoY growth, with the exception being Kinder Morgan Canada. Overall, the total EBDA for all segments witnessed an increase of 18% as compared to the same period last year.

Earnings witnessed a negative pressure in the second quarter of 2012 due to lower crude oil, natural gas and natural gas liquid prices, which were offset by production increases from Eagle Ford, which were higher than expectations.

$ Millions

2Q2012

2Q2011

Change

% change

Products pipelines

166

165*

1

0%

Natural gas pipelines

190

135

55

41%

CO2

327

266

61

23%

Terminals

195

171

24

14%

Kinder Morgan Canada

52

54

(2)

-4%

Total segment earnings

930

791

139

18%

*Adjusted for onetime expense related to rate case liability and income from disposal of property.

Dividend Payout Policy and Yield

As per KMP's partnership agreement, the company is required to payout 100% of its available cash (defined as all cash receipts, less cash disbursements and changes in reserves) to partners on a quarterly basis. Due to the constraints mentioned above, KMP has to maintain a high dividend payout policy, and it is offering a dividend yield of 6.1%. The company maintained that it expected to increase its cash disbursements by 7% going forward.

Acquisition of Tennessee Gas Pipeline and El Paso Natural Gas Pipeline

KMP announced that it will acquire a 100% stake in Tennessee Gas Pipeline (TGP) and a 50% stake in El Paso Natural Gas (EPNG) from Kinder Morgan Inc for about $6.22 billion. It is expected to fund the acquisition through debt, KMP units, Kinder Morgan Management (KMR), and through proceeds of divestures.

Threats

KMP could be negatively affected by declines in the prices of crude oil, natural gas and natural gas liquids , and the production of hydrocarbons in North America. Economic downturns would also have a negative impact on KMP's performance.

Outlook

With the prices of crude oil, natural gas and natural gas liquids rebounding and an expected increase in the production of hydrocarbons in the U.S. will be beneficial for midstream companies such as KMP. The company is also expected to benefit due to increased export of coal, which will increase the revenue generated from its terminal business, and the increased demand of carbon dioxide to stimulate the recovery of hydrocarbons from mature fields.

KMP is trading at EV/EBITDA, P/B, and P/S multiples of 13.6x, 3.78x and 3.46x, and offers a dividend yield of 6.1%. We have a positive stance on the company due to the expected future growth and the high dividend yield offered by the stock.

Name

P/E

EV/EBITDA

Dividend Yield

ROE (%)

P/B

P/S

Kinder Morgan Energy Partners LP

35.93x

13.6x

6.01%

17.09

3.78x

3.46x

Magellan Midstream Partners LP (MMP)

20.15x

13.03x

4.78%

28.34

6.10x

5.10x

NuStar Energy LP (NS)

29.93x

15.57x

8.27%

7.97

1.31x

0.57x

Spectra Energy Partners LP (SEP)

19.12x

20.16x

6.00%

10.78

1.87x

15.50x

Source: Buy Kinder Morgan: Stable Business Model, High Dividend Yield