Shares of master limited partnerships, or MLPs for short, have fallen dramatically on taper talks by the Fed. However, according to Credit Suisse, when interest rates rose between 2004 and 2007, MLPs outperformed the S&P 500 and other yield-oriented asset classes like utilities and bonds . This pullback could be the buying opportunity we have all been waiting for and Kinder Morgan Energy Partners (UNKNOWN: KMP.DL ) is the best of breed in the industry.
Kinder Morgan Energy Partners is the leading pipeline transportation and energy storage company in America. With over 50,000 miles of pipeline, 180 terminals, and a mostly fee-based structure, Kinder Morgan has been a top beneficiary of the United States' energy revolution.
Source: Kinder Morgan
Second quarter 2013
On July 17, Kinder Morgan reported second quarter earnings and it showed incredible growth.
- Earnings per share of $1.41 vs. a loss of $0.53 year-over-year
- Revenue rose 50.1% to $3.017 billion year-over-year
- Net income rose 732% to $1.01 billion year-over-year
Acquisition, Expansion, Innovation
Kinder Morgan has been one of the most active acquirers in the pipeline industry. On May 1, its acquisition of the aforementioned Copano Energy was completed, just one year after the acquisition of El Paso Corporation. The El Paso deal made Kinder Morgan the largest midstream and third largest energy company in North America, and Copano added to the fact.
Kinder Morgan has also been active in forming joint ventures, the most notable being with MarkWest Energy Partners and Keyera Corporation. The deal with MarkWest is to build processing plants and pipeline to support producers in the Utica and Marcellus shales. The Keyera deal is to construct a crude oil rail loading terminal in Edmonton. Keyera is one of the largest midstream companies in Western Canada, so it was a wise choice by management. Kinder Morgan's relationship with Copano began as a joint venture, so MarkWest and Keyera could be the next takeover targets.
Lastly, Kinder Morgan has been finding areas to expand the services it offers. In June, management announced its plan to enter into the business of owning, leasing, and acquiring natural resource properties. In this new business, Kinder Morgan will lease its properties to current customers to extract the resources in return for royalty payments. This is a very strategic, win-win situation, because Kinder Morgan can use its existing relationships to lease the properties and this will cause the client increase their usage of Kinder Morgan's storage facilities.
Fiscal 2013 expectations
In its second quarter report, management increased its 2013 outlook citing the Copano acquisition as a driver of continued growth. The new expectations call for $5.4 billion in earnings with cash distributions reaching $5.33 per unit. These new numbers represent a 7% increase from prior projections.
Distributable cash flow
Kinder Morgan reported $505 million in distributable cash flow on July 17, up a strong 38% year-over-year. This distributable cash flow is a measure of the company's ability to pay dividends to its shareholders. After this large increase, the company raised its quarterly dividend to $1.32 per share, which represents an annual yield of about 6.4%. The most incredible statistic to note is that its dividend has been raised 48 times since 1997. Needless to say, this is one of the most dynamic dividend payers you will find.
|Company||Kinder Morgan||Plains All American||Energy Transfer|
|Market Cap||$35.78 billion||$17.97 billion||$18.28 billion|
|Miles of pipeline||50,000+||16,500+||47,000+|
|Return on Assets||5.01%||4.05%||6.27%|
(Source: Yahoo! Finance)
Plains All American and Energy Transfer are very strong companies. Both have thousands of miles of pipeline and have safety in earnings due to fee-based services, along with high dividends; however, Kinder Morgan's underperformance year-to-date gives it much more upside going forward. Also, although Energy Transfer has the highest yield, it has not raised the dividend since 2008. Kinder Morgan's has been raised over 48 times since 1997 and Plains All American has had increases for 14 consecutive years.
The bottom line
Master limited partnerships are in a great position to outperform the overall market for the rest of the year and throughout 2014. The group has been beaten down from their highs on taper talks and rising interest rates, but they have outperformed in this situation before. Kinder Morgan is the strongest company in the space and will provide high dividend income along with any price appreciation.