Kinder Morgan Energy Partners: The Recent Weakness Is A Buying Opportunity

| About: Kinder Morgan (KMP)

Few stocks have the combination of yield plus growth that Kinder Morgan Energy Partners (NYSE:KMP) offers. Kinder Morgan Energy Partners is part of the larger Kinder Morgan family of companies, which combined, operate the largest midstream system in North America. Due to the surging amounts of energy production in both the US and Canada, Kinder Morgan Energy Partners has many avenues for potential growth. This includes acquisitions, such as its recently completed Copano Energy transaction, or organic growth, such as its plans to expand its pipeline systems in Canada. Kinder Morgan Energy Partners currently offers a $1.32 per unit quarterly distribution and yields about 6.45%.

Asset Overview

As mentioned above, Kinder Morgan Energy Partners is part of the larger Kinder Morgan family of companies. Combined, Kinder Morgan is the 3rd largest energy company in North America, with an enterprise value of over $115B. Kinder Morgan operates or has interests in the largest natural gas pipeline in North America, with over 70,000 miles of pipeline. In addition, Kinder Morgan is the largest independent transport of crude oil, petroleum products, and the largest operator of terminals.

Corporate Overview

Every discussion of Kinder Morgan Energy Partners should always mention its corporate structure. Kinder Morgan Inc (NYSE:KMI) is the General Partner of Kinder Morgan Energy Partners and El Paso Pipeline Partners (NYSE:EPB). Kinder Morgan Inc controls about 9% of the limited partner interest, 2% GP interest, and IDRs of Kinder Morgan Energy Partners. Kinder Morgan Inc also owns about 13% of the float of Kinder Morgan Management (NYSE:KMR), which is often a cheaper way to own Kinder Morgan Energy Partners. In essence, the Kinder Morgan family of companies is comprised of two distribution paying MLPs (Kinder Morgan Energy Partners and El Paso Pipeline Partners), one dividend paying corporation (Kinder Morgan Inc) and one stocks that pays stock dividends (Kinder Morgan Management).

Q2 2013 Results Overview

On July 17, Kinder Morgan Energy Partners reported its Q2 2012 results. For the quarter, Kinder Morgan Energy Partners posted adjusted net income of about $627M, up from the $467M posted last year. Note that this excludes a $383M one time gain related to a remeasurement of the company's 50% interest in the Eagle Ford JV related to its Copano acquisition. The company also posted DCF of about $505M, up 38% from $366M last year. On a per unit basis, DCF came in at $1.22, up 14% from $1.07 last year.

YTD, Kinder Morgan Energy Partners has posted DCF per unit of $2.67, up 9.4% from $2.44 for the same period last year, while YTD adjusted net income has grown 28% to $1.282B from $1.0B for the same period last year.

During the quarter, Kinder Morgan Energy Partners' best performing sector was its natural gas pipelines which saw adjusted earnings increase to $566M from $238M last year. The vast majority of this increase came from two months of contributions from the Copano transaction. The company now expects this segment to exceed its earlier projected 54% growth rate due to the Copano acquisition. Overall, the segment saw volumes decline 5% due to lower gas demand from power plants. However, intra Texas volumes were up 2% due to new sales at recently connected facilities.

Kinder Morgan Energy Partners' CO2 segment saw adjusted earnings increase 10% to $351M from $320M last year, which is above its projected growth rate of 5%. This increase was due to higher production volumes of 5%, or about 2,630 BBL/D and higher oil prices. However, this segment was impacted by weak NGL prices, which declined 11% in the quarter.

Kinder Morgan Energy Partners' products pipelines segment posted adjusted earnings of $179M, up 8% from $166 last year, above the projected growth rate of 6%. This increase in earnings was due to higher volumes and margins, especially in ethanol and butane blending and NGLs volumes. Kinder Morgan Energy Partners benefited from some completed transportation projects expansions while an unfavorable court ruling in California slightly impacted earnings.

Kinder Morgan Energy Partners terminals segment saw adjusted earnings increase 5% to $191M from $183M last year, which is well below the projected growth rate of 12%. Most of this growth came from incremental volume increases and several long-term contract restructurings. Also hurting this segment was 10% lower export coal volumes due to weaker demand and scheduled maintenance. Ethanol volumes were down 6% in this segment related to the conversion of a facility to crude oil and a contract termination. Kinder Morgan Energy Partners also noted that its systems handle nearly 30% of all the ethanol used in the US.

Kinder Morgan Energy Partners Canada actually saw adjusted earnings decline 4% to $50M from $52M last year, which is well below the projected 3% growth rate. This decline is due to the sale of the Express-Platte pipeline to Spectra Energy (NYSE:SE).


In terms capital spending, Kinder Morgan Energy Partners appears to be mostly on track. Just from organic growth, Kinder Morgan Energy Partners has identified over $13B in future capital projects. On average, this projects are estimated to have ROI of about 13.6%. Of note, Kinder Morgan Energy Partners received approval of commercial terms from the Canadian National Energy in May for its proposed $5.4B expansion the Trans Mountain Pipeline System. This expansion would increase the capacity of the pipeline to 890,000 BPD. Also note that Kinder Morgan Energy Partners still needs various other approvals and authorizations from other regulatory bodies before even any work can start. If all the approvals are received as planned, Kinder Morgan Energy Partners expects the project to be operational by late 2017.

Historical Growth

While MLPs often get a bad rap for only offering yield with subpar growth, this is not the case with Kinder Morgan Energy Partners. Assuming reinvested distributions, Kinder Morgan Energy Partners has posted a CAGR of about 24% since 1996. Over 10 years, Kinder Morgan Energy Partners has posted a 339% total return, or about 3 times what the S&P 500 posted in that same time period. Let us also not forget about distribution growth, with Kinder Morgan Energy Partners' annual distributions increase at a CAGR of 13% since 1996. Do note that this level of income growth has lowered in recent years to the high single digits.


Lastly, let us not forget about Kinder Morgan Management. For some reason, Kinder Morgan Energy Partners has always traded at a premium, which is currently 2.5%, to its sister stock Kinder Morgan Management. As shown below, KMR shares are 'pari passu' with KMP units, which means that they are proportionally equal to KMP units. KMR's dividend is equal to KMP's distribution, but paid instead of being paid in cash, the dividend is paid in additional shares. KMR shares are also more tax friendly, with no K-1 issued for them. For those considering Kinder Morgan Energy Partners, Kinder Morgan management should not be overlooked.


Not including distributions, Kinder Morgan Energy Partners has lagged the overall market, with a small 2.80% YTD gain. However, this is mostly a function of the stock being overpriced early in the year as investors crowded into most income oriented names.

Kinder Morgan Energy Partners DCF coverage ratio is slightly worrying, as it has drifted below 1.00X. However, this was clearly foretold in Kinder Morgan Energy Partners' previous guidance. The company expects that the coverage ratio will improve later in the year as more projects come online.

Kinder Morgan Energy Partners, and thus also Kinder Morgan management, seem like a decent buys at current prices. The stock is down about 6% in 3 months and most of its segments seem to be operating well. I am also eyeing the GP Kinder Morgan Inc as that stock has also underperformed YTD.

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 may go long (KMI) and (KMR) at any time. I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

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