Kinder Morgan Shows It’s Still King

by Aaron Levitt | October 21, 2013 9:23 am

KMI KMR KMP[1]To say that the last few months for Kinder Morgan (KMI[2]) and Kinder Morgan Partners (KMP[3]) have been volatile would be quite the understatement.

Back in September, analysts at Hedgeye Risk Management asserted through a series of tweets and then a special report that the two Kinder Morgan entities — along with Kinder Morgan Management (KMR[4]) and El Paso Pipeline Partners (EPB[5]) — were ripe for a huge fall.

The market generally brushed off the report[6] … but damage from the initial tweet was widespread. KMI and its kin fell hard, and proceeded to bounce around with every rebuttal and agreement.

The good news: Believers in Kinder Morgan stock recently received confirmation that they made the right choice.

Kinder Morgan Earnings

As we’ve said before, there are nice profits to be made during volatile times[7] and those that added or initiated positions in KMI or KMP in recent months were rewarded for their risk. That’s because Kinder Morgan once again hiked its payouts to shareholders across its empire on the back of higher profits.

See, Kinder Morgan’s vast network of pipelines — around 82,000 miles worth — continues to pay benefits. Both the El Paso acquisition as well as the more recent Copano Energy buy helped move Kinder’s focus towards natural gas. That focus paid off last quarter as natural gas shipments on its expanded network rose exponentially higher.

Overall, KMP earnings[8] from its natural gas pipeline unit popped 59% year-over-year to reach $608 million. Meanwhile, Kinder Morgan revenue climbed 31%. Earnings were also rosy at the general partner, KMI. The strong performance at both KMP and results at El Paso Pipeline Partners helped the company see a 27% increase in revenue year-over-year.

Remember, by placing pipeline, storage and terminal assets into an MLP, the sponsoring firms (in this case KMI) are able to avoid taxes and receive generous distribution payments back from the MLP. Those payouts get even juicer thanks to the continued relationship between sponsoring firms and their publicly traded MLP subsidiaries.

After acquiring new pipelines or gathering facilities, sponsoring firms often will pass along or “drop down” some of the prime assets into their MLPs. These asset sales are priced at a level that guarantees cash-flow accretion for the MLPs and enables the MLPs to raise distributions at a faster rate.

That’s exactly what’s going on with KMI and the El Paso and Copano transactions. Which brings us to the second piece of good news: Distributions for shareholders are going up.

Distributable cash flows at KMP rose 22% to reach $554 million for the quarter, while KMI reported a 17% increase in cash available to pay dividends in the third quarter. Those rising and hefty cash flows are going to trickle down to shareholders via some nice quarterly dividend increases.

KMP quarterly distribution will rise 7% to $1.35 per unit, beating Wall Street projections. At the same time, KMI increased[9] its quarterly cash dividend to 41 cents per share — nearly a 14% increase over the third quarter 2012 cash dividend per share.

All in all, rising cash flows, earnings and distribution growth is certainly welcome news for shareholders of the second largest pipeline company in the U.S. — especially considering the beating that Kinder Morgan took over the last few months.

And it could continue to get better just down the road.

Billions In Expansion Projects

The recent Copano acquisition shows just how serious Kinder Morgan is about becoming the No. 1 pipeline firm. That transaction added 6,900 miles worth of pipelines into its empire. However, it’s not done yet.

During the earnings conference call, CEO and Founder Richard Kinder said that the Kinder Morgan family of companies had identified roughly $14.4 billion in expansion and joint venture investments. These include new pipelines to liquefied natural gas facilities in Georgia, new gathering systems in the Marcellus and Utica shales, as well as the 141-mile Parkway Pipeline J.V. between Kinder Morgan and Valero Energy (VLO[10]).

With all of these expansion projects and potential new acquisitions in the pipeline — excuse the pun — cash flows and distributions will ultimately be boosted across the Kinder Empire. That distribution growth should finally be the necessary catalyst to push shares of KMI back over the $40 mark and keep them there.

The bottom line: The good times at Kinder Morgan look set to keep rolling, making now the time to buy.

As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.                     

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