Don't Worry, Be Happy With Kinder Morgan

Kinder Morgan, (NYSE: KMI  ) provided its 2014 financial expectations for each of its publicly traded businesses. Also included in the announcement were the two Master Limited Partnerships, Kinder Morgan Energy Partners (NYSE: KMP  ) and El Paso Pipeline Partners (NYSE: EPB  ) . All three fell hard after the release, which indicated the market was thoroughly disappointed in what each had to say.

While it's not entirely surprising that the market would overreact, investors with a long-term focus shouldn't be disappointed. That's because each of the Kinder Morgan securities still has a lot to offer investors, both next year and beyond. Kinder Morgan and its various businesses will reap huge rewards from the booms in natural-gas adoption and domestic oil production.

Distribution outlooks disappoint
Each of the various Kinder Morgan entities declared their expected distributions for next year, which disappointed investors judging by the market's reaction. Kinder Morgan, plans to pay a $1.72 per-share dividend next year, which would represent 8% growth over what it expects to pay this year. Kinder Morgan Partners expects to raise its 2014 distribution by 5% over what it intends to pay in 2013. Lastly, El Paso Pipeline plans to distribute $2.60 per unit in 2014, only a 2% increase over its current year expected distribution. El Paso's results disappointed the market the most, which sent its units down nearly 10% on the day of the announcement.

You should consider that management may just be erring on the side of caution in its projections. The company is still expected to grow in terms of its underlying business, and insider purchases should give investors plenty of confidence. Management is entirely comfortable with Kinder Morgan's direction, which Chairman and CEO Richard Kinder proved when he purchased nearly $18 million worth of shares.

Management expects Kinder Morgan Pipelines to generate $6.4 billion in core operating earnings next year, a 13% increase over what it had forecast to earn this year. This should fuel strong results to Kinder Morgan, as well.

Kinder Morgan has plenty of growth left in the pipeline thanks to the billions in investments set aside for next year. Investing in its infrastructure is key for an energy company like Kinder Morgan. Along with the 2014 outlook, Richard Kinder stated: "We anticipate strong growth in 2014 across the Kinder Morgan family of companies. We currently have identified approximately $14.4 billion in expansion and joint venture investments that we are confident will contribute to our growth."

As far as El Paso Pipelines is concerned, growth next year will be fueled by more than $1 billion worth of its own expansion projects. These expenditures are already under contract with customers, which compels management to declare that El Paso unit-holders will benefit in 2016 and thereafter. Next year, El Paso is expected to generate $1.3 billion in core earnings, representing 7% growth compared to 2013.

Bottom line: investors are still better off
Disappointment over Kinder Morgan's 2014 financial and distribution guidance seems foolish. These stocks shouldn't be expected to produce huge distribution growth rates. That's because they already distribute the vast majority of their cash flow to investors. Consider that each stock currently provides a very high yield that is significantly above the yield on the S&P 500 Index.

Kinder Morgan yields nearly 5% at recent prices. The other two MLPs provide even greater yields; Kinder Morgan Partners pays a 6.7% distribution, and El Paso Pipelines offers a 7% yield. Plus, these yields don't include the expected raises next year. Modest distribution growth is entirely reasonable when investors are already receiving such high yields.

Moreover, underlying business conditions remain strong. Put simply, the real reasons for investing in any of the Kinder Morgan entities are steady growth along with high distribution yields. Those will entirely remain intact next year, and likely for many years after that. As a result, disappointment over next year's outlook is misplaced.

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  • Report this Comment On December 05, 2013, at 12:47 PM, MightyMinnow wrote:

    Peek oil is behind us, but they sold a lot of Cadillac's and f-150's last quarter. Even an average winter is going to spike natural gas use (and heating oil). Jet sales mean jet fuel sales and cold winter vacationers means jet fuel sales too. Demand will offset some of the supply glut and we'll get a good price and "bigger" volume.

    If these propped up market caps sink, on a tapper tantrum, we could be looking at 8% or 9 % "safe" yields. We can't lose.

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