Kinder Morgan is at the Center of the American Energy Boom

Source: Kinder Morgan Company Presentation

The oil and natural gas boom in the United States continues unabated, and Kinder Morgan (NYSE: KMI  ) sits right at the heart of it. Kinder Morgan posted solid growth across its major operating segments, which prompted the company to raise its dividend. Now that its quarterly results are out, let's analyze Kinder Morgan's quarterly performance within the context of its ability to pay and raise its hefty distributions.

Strong distribution coverage
For an MLP like Kinder Morgan Partners (NYSE: KMP  ) , investors count on those hefty quarterly payouts. But, it's critical to make sure an MLP can afford to pay its distribution with underlying cash flow. Importantly, Kinder Morgan Partners generated more than enough cash to pay its first-quarter distribution. In fact, it earned $76 in excess cash above what it distributed to investors this quarter. That's a very healthy coverage which allowed the company to increase distributions and therefore plan even greater cash return to investors next quarter.

Kinder Morgan Energy Partners expects to declare cash distributions of at least $5.58 per unit this year. That would represent approximately 5% growth versus last year's distribution. This is made possible by strong underlying growth across the company's operating segments, as well as positive impacts expected from the recent marine tanker acquisitions. El Paso Pipeline Partners (NYSE: EPB  ) is estimated to distribute $2.60 per unit. Although El Paso kept its dividend flat on a quarter-over-quarter basis, it still represents a 2% increase from the same quarter last year.

Spending spree paying off 
Kinder Morgan put up a solid performance across its natural gas, carbon dioxide, and oil businesses. First, its natural gas pipelines unit generated segment earnings of $723 million, up 46% year over year. Management credits its acquisition of Copano last year as a primary driver of such outstanding growth. Kinder Morgan has made significant investments in natural gas, as its natural gas pipeline segment now represents nearly half of the entire company's earnings.

However, it's important to note that Kinder Morgan Partners is still growing its businesses organically, and isn't just relying on growth through acquisitions. Even if you strip out the benefits of the Copano acquisition, Kinder Morgan's natural gas pipelines segment still grew earnings before depreciation and amortization by 12.5%, or $62 million. This demonstrates the execution abilities of Kinder Morgan Partners' existing assets, as well as the contributions from its recent investments.

Kinder Morgan's fantastic performance didn't stop there. Its carbon dioxide segment grew earnings by 7%. Management attributed solid results to higher oil production at its SACROC unit as well as increased carbon dioxide sales and transport volumes. Among the company's other operating segments, products pipelines and terminals each grew earnings by 2% and 22%, respectively, versus the same period one year ago.

Management has ambitious growth plans this year, and impressively, believes the company may beat its own lofty expectations. The natural gas pipeline segment was initially expected to produce 14% growth, but thanks to its great start to the year, management now believes the unit will likely perform above its original estimates. Strong growth is expected across Kinder Morgan's other major segments as well. For example, the carbon dioxide business is on track to grow by 8%. And, the product pipelines and terminals units are expected to grow earnings by 18% and 21%, respectively.

The Foolish takeaway
Kinder Morgan, as well as the Master Limited Partnerships Kinder Morgan Energy Partners and El Paso, are extremely valuable investments thanks to the magic of compounding interest. Not only do they provide high yields ranging from 5%-7% across the various entities, but they each plan to grow those payouts in 2014. This is made possible thanks to their highly successful oil and natural gas pipelines and storage terminals. The energy boom taking place in the United States is enriching all sorts of companies, and that certainly includes Kinder Morgan.

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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 May 01, 2014, at 11:42 AM, ferdiefor wrote:

    I don't know where this writer is getting his information but KMP barely covers its distribution with dcf overall. They may have one much better quarter but year over year they just cover their distribution and that is the way their structuring documents want it to be anyway.

    I would say EPD, MMP, and PAA are the big caps that do a much better job of covering their distributions with excess dcf and they are also at the center of this energy infrastructure build out revolution. And their cost of capital is significantly less than KMP.

    KMP was forced to sell assets to EPB in my opinion in order to avoid issuance of a lot of shares to cover their own future capex.

    KMP is no longer best of breed because of its failure to buy out its GP as EPD and MMP have done to the benefit of their shareholders and the proof is looking at five year charts for all three and you will see KMP is a significant laggard on a total return basis over the past five years.

  • Report this Comment On May 12, 2014, at 6:52 PM, Hansen wrote:

    Kinder Morgan is a Master Limited Partnership and through its subsidiaries, it is the largest independent owner and operator of petroleum product pipelines in the US http://bit.ly/1mSLVhP

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