Buy, Sell, or Hold Kinder Morgan Energy?

Investors seeking truly high yields have no doubt crossed paths with Master Limited Partnerships, or MLPs. MLPs are structured like limited partnerships, yet they trade publicly and enjoy favorable tax treatments. They're typically required to shell out a significant portion of their earnings to shareholders as a distribution, so the dividends are usually worth bragging about.

Kinder Morgan Energy Partners (NYSE: KMP  ) is the largest oil and gas MLP in the U.S., and because of its excellent returns over the last decade, it's been considered a darling stock by most investors.

Last year, Kinder Morgan completed construction of a new natural gas pipeline in Louisiana, of which 100% of the capacity has been subscribed to Chevron (NYSE: CVX  ) and Total (NYSE: TOT  ) under 20-year contracts. These situations are not atypical -- Kinder Morgan frequently engages in take-or-pay contracts where customers are under obligation to accept product or pay an appropriate fee. This had made Kinder Morgan quite profitable and helps to stabilize cash flow.

However, the field of MLPs is getting crowded, so it's worth taking a closer look at Kinder Morgan to see if it's still as hot a commodity as it once was.

Buy:

  • Staying Active: It's easy to point out KMP's 6.4% dividend yield, their 20% compound annual growth rate, or their ability to increase net income year after year. But a great company is only great if it can sustain success, and KMP is continuing to do so. In April of this year, the company announced it would acquire 50% of Petrohawk Energy's (NYSE: HK  ) natural gas business in the Haynesville shale -- a project that is expected to produce about 375 miles of pipeline. Just last week they announced a joint venture with Copano Energy (Nasdaq: CPNO  ) to transport as much as 200 million cubic feet per day of natural gas from SM Energy's Eagle Ford Shale production. These projects, along with KMP's other asset footprints, should be enough to ensure strong and steady growth in the future.
  • Latest Quarter: KMP reported an increase in all three of its operating segments -- natural gas, services, and products -- as revenues got a 20% boost compared to last year's quarter. In particular, the rebound in commodity prices helped uplift the CO2 transport business, which saw a nice 41% increase in sales. Additionally, KMP saw a 14% increase in cash from operations, bringing the total to $514.8 million.

Sell:

  • Decreasing Distributions: KMP has been able to increase its dividend for the last 13 years, but that torrent growth may not always continue. Kinder Morgan has an obligation to its general partner, and that obligation increases as its distribution to limited partners tops out at a certain point. Some analysts fear that as this point has already been passed, the company may ultimately have to decelerate its per-unit distribution growth. That's bad news for new or existing limited partners.
  • Competition: There's no shortage of oil and gas MLPs, so investors have plenty of options to choose from. For instance, Enterprise Products Partners (NYSE: EPD  ) also announced last week that it would expand its presence in the Eagle Ford Shale, of which it plans to construct about 350 miles of pipeline. In addition, Enterprise recently increased its distribution per-unit (which sits nicely at 6.4%), which represents its 24th consecutive increase. On the other end of the spectrum are companies like Linn Energy (NYSE: LINE  ) , which does more oil and gas acquisition and development. It recently spent about $90 million on natural gas and oil properties in the Permian Basin, of which it hopes will add 950 barrels of oil equivalent per day to is production levels. Linn also pays a forward dividend of 9.10%, which is almost a good three points above that of Kinder Morgan's.

Hold:

  • The U.S. Energy Information Administration expects natural gas to average $4.70 per million BTU, which represents a $0.75 increase from last year. Furthermore, the threat of hurricanes here at home should boost prices, so companies like KMP that transport and store natural gas have a positive outlook on the horizon. Although there are other MLPs that offer similar exposure, if you're already holding shares of KMP, you might be inclined to wait for a natural gas recovery.

The foolish bottom line
There's no doubt that Kinder Morgan will continue to generate cash, and led by its founder Rich Kinder, the company should be able to execute on its strategies and treat limited partners well. However, with KMP trading at $68 a share, close to its all-time high, it may be a good time to sell some of your shares and hold on to the rest for the ride.

What do you think about Kinder Morgan? Are there better MLPs out there today, or is Kinder Morgan still the cream of the crop? Sound off in the comments box below!

Jordan DiPietro owns no shares mentioned above. Enterprise Products Partners LP and Total A. are Motley Fool Income Investor picks. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.


Read/Post Comments (6) | Recommend This Article (25)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 15, 2010, at 5:24 PM, ricgre wrote:

    kmp is a great investment but I like kmr better because of the potential capital gains tax rather than ordinary income tax.

  • Report this Comment On July 16, 2010, at 10:00 AM, bricks79 wrote:

    A strong, well established MLP with a decent yield. Tax advantaged distribution makes this a good hold for me.

  • Report this Comment On August 14, 2010, at 10:11 AM, Bendguy wrote:

    Jordon,

    I've owned KMR for a couple years- its appreciated nicely and pays good dividends. What exactly is the difference in KMP and KMR and which is preferable to own? Should I switch?

    Mike

  • Report this Comment On September 02, 2010, at 1:54 AM, judithjo wrote:

    I have a decent cushion in KMP so I'm holding. Hey, there's nothing wrong with a stock that's "close to its all-time high," is there? It could go higher. All stocks that have gone higher were once "close to their all time highs," right? I guess that makes me a Pollyanna investor, but KMP hasn't shown me any reason to sell yet, and I would certainly miss those divs.

  • Report this Comment On September 02, 2010, at 2:21 AM, BearishKW wrote:

    Don't know if this is as much of a case for KMP as it is for MLPs in general.

    Low beta, high income, and tax advantaged...whether we're in rampant market swings, or range bound there are few better investments out there right now.

  • Report this Comment On October 22, 2010, at 5:19 PM, sshobe wrote:

    Just catching up on my reading, so this note is a little late. Does anyone know how to handle MLP dividends in an IRA? Tax consequences?

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