By Ishtiaq Ahmed
Kinder Morgan Energy Partners (KMP) is an energy storage and pipeline transportation company. The company operates in North America. KMP Products Pipelines section distributes diesel fuel, gasoline, jet fuel and natural gas liquids to a variety of markets with its 8,400 miles of pipelines. KMP also holds 60 associated product terminals and petroleum pipeline transmix processing facilities. In the natural gas segment, KMP has 16,200 miles of distribution pipelines. The company also operates storage, gas treating and processing facilities.
Kinder Morgan generates stable fee revenues without exposure to unpredictable commodity prices. In the U.S. volumes of gas and oil transports have been experiencing steady growth rates. As the country is witnessing a hike in shale gas production, there is an even larger need for transportation. As a result, the future prospects for KMP are extremely bright.
Third Quarter Results:
The partnership recently announced its third quarter earnings and posted impressive results. The profits for the third quarter increased by 78% year-on-year as the company saw strength across its business segments. Revenues went up by 11% to $2.34 billion, beating the market expectations, as the market expected the revenues at $2.25 billion. The company experienced strength from natural gas pipelines, driven by the El Paso Natural Gas Pipeline (EPD) and Tennessee Gas Pipeline. The company posted a profit of $383 million, up from $215 million in the previous year.
KMP has benefited from an increase in the U.S. alternative shale fields. El Paso Pipeline profit went up by 22%, as the company benefited from its storage assets and regulated pipelines. In addition, increased demand from gas-fired power plants also contributed significantly towards increased profits.
Increase in Cash Distributions:
In my previous articles about the partnership, I have analyzed in detail cash flows, earnings and the quality of earnings for KMP. We have always backed KMP to maintain or increase its cash distributions, as we expected the cash flows and revenues to increase. KMP increased its quarterly cash distribution per common unit to $1.26 ($5.04 annualized). At the current level of distributions, the partnership offers a yield of 5.90%. There was a substantial increase in the distributable cash flows for the company.
The partnership reported cash flows available for distribution before certain items of $455 million. At current levels, the distributable cash flows are up by 15% from $394 million in the same quarter last year. Per unit available cash flow for distribution before certain items was $1.28 compared to $1.19 for the same quarter last year.
Cash Distributions and Yield Chart:
Comparison with Peers:
Debt to Equity
The comparison indicates that KMP trades at a premium to its peers. Only EPD trades at higher P/B ratio than KMP, and all of the peers have lower P/S ratio than the partnership. However, the partnership provides an extremely attractive yield. EEP is the only partnership which offers a higher yield than that of KMP. In addition, KMP has better operating margin than its peers, but net margin, ROE and debt to equity ratio are not impressive.
KMP offers extremely attractive cash distributions. In today's low interest rate environment, high yield is a massive factor for investors. However, the stock trades at a slight premium than its peers. The most recent earnings announcement indicates that the partnership is on the right track, and further growth is expected.
The partnership keeps growing through acquisitions as well as organic investments. It will be investing in a $4 billion Transmountain Pipeline expansion, to build new pipelines. Increased supply of oil and gas is also expected to continue in the U.S. As such I expect the partnership to carry on its nifty cash distributions.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.