Will Kinder Morgan Earnings Prove Hedgeye Wrong?

Kinder Morgan Energy Partners (NYSE: KMP) will release its quarterly report on Wednesday along with its affiliated entities, and some investors are on edge about the energy infrastructure giant's results. Even though most investors still expect growth from Kinder Morgan earnings, calls from analyst Kevin Kaiser at the Hedgeye research firm have called into question whether investors should rely on the numbers Kinder Morgan has put out. Given the track record that Hedgeye has in anticipating an SEC investigation at fellow MLP LINN Energy (LINE +0.00%) and affiliated LinnCo (NASDAQ: LNCO), investors are nervous about the unwanted attention Kinder Morgan has gotten.

For years, investors have turned to Kinder Morgan Energy Partners as a way of riding the rapid rise in demand for pipelines and other energy-infrastructure assets. The boom in unconventional oil and gas productions in hard-to-reach areas like the Bakken shale play has made the pipeline and transmission business more lucrative than ever, and the master limited partnership has capitalized on growth opportunities by making major acquisitions and taking other strategic actions. But can the pipeline giant answer Hedgeye's allegations about it and MLP general partner Kinder Morgan (KMI 1.94%) and help the MLP's unit values recover? Let's take an early look at what's been happening with Kinder Morgan Energy Partners over the past quarter and what we're likely to see in its report.

Stats on Kinder Morgan Energy Partners

Source: Yahoo! Finance.

Will Kinder Morgan earnings give investors good news this quarter?
In recent months, analysts have had mixed views on Kinder Morgan earnings. They've raised their third-quarter estimates on the master limited partnership by more than 10%, but they've pulled back on their calls for the full 2013 and 2014 years. The unit price has fallen 9% since mid-July.

Kinder Morgan Energy Partners is just a part of the broader reach of KMI's energy empire, but the MLP's business has been especially lucrative for investors. As the operator of energy pipelines and storage facilities, the MLP has a higher distribution yield than the other entities in the Kinder family. Those healthy distributions have come from Kinder Morgan's diverse platform of services, which include everything from traditional natural-gas pipelines and terminals to carbon-dioxide storage.

In past quarters, Kinder Morgan has seen strength in many of its business segments, with CO2 climbing 10% in the second quarter and products-pipelines earnings up 8%. The acquisition of Copano Energy helped push earnings up sharply on the pipeline front, and a greater demand for coal companies to boost exports helped earnings at Kinder Morgan's terminal facilities.

But the Hedgeye challenge has thrown cold water on Kinder Morgan's MLP-unit performance. Hedgeye's allegations included that Kinder Morgan didn't spend enough on capital expenditure and routine maintenance for its pipeline assets, that its pipelines and facilities aren't safe, and that investors incorrectly understand both Kinder Morgan's exposure to direct production and the lack of institutional interest in shares of the MLP. Despite refutations to the contrary, investors are still taking the allegations seriously, especially in light of the big share-price drops that past Hedgeye target Linn Energy has faced in connection with Hedgeye's analysis of its proposed Berry Petroleum acquisition.

In the Kinder Morgan earnings report, watch closely to see whether or how the MLP responds to Hedgeye's allegations. Despite enough evidence to the contrary to dismiss the analysis out of hand, responding to Hedgeye's allegations would go a long way toward easing any concerns investors would have about the MLP's prospects going forward.

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