Published:
March 10, 2008
Kinder Morgan (NYSE: KMP, $57.78) is one of
the largest owners and operators of energy-related pipelines and
storage facilities in the U.S. KMP operates natural gas, refined
products and carbon dioxide pipelines that ship these
commodities around the nation.
Competitive Advantages: Pipeline and storage
assets offer large barriers to entry for would-be competitors.
Such assets require significant planning and regulatory
approvals before they're built.
Even better, most pipeline and storage owners negotiate
long-term contracts with key customers, guaranteeing a certain
minimum revenue. These long-term contracts are essentially
unbreakable, so competitors cannot compete for that business.
KMP also benefits from its huge size -- it's one of the largest
pipeline owners in North America. This gives it the size and
access to capital to fund large pipeline projects that typically
require huge up-front capital investments.
Growth Drivers: Kinder Morgan has undertaken
a
series of major pipeline projects in recent years that will
generate growth.
The largest of these new projects is the Rockies Express
Pipeline, a $2.2 billion project that will carry natural gas
from the Rocky Mountains east to the Pennsylvania/Ohio border.
The first stages of that project are already complete; the
pipeline should be totally finished by the end of 2009.
The Rockies Express Pipeline will be in high demand. It's
estimated that natural gas production from the region will grow
from 8.2 billion cubic feet per day in 2006 to more than 10.2
bcf/day by 2010. There is simply not enough pipeline capacity to
handle all of that gas -- thus, KMP has already had success
booking capacity on this pipe.
Kinder Morgan also has a large pipeline network in the Barnett
Shale area of Texas, a network it plans to expand in the coming
years to handle increased production from that region.
Valuation and Outlook: KMP is organized as a
master limited partnership (MLP), meaning that it pays no
corporate tax and offers a high yield for investors.
Typically, MLPs are not valued based on earnings and P/E ratios.
For master limited partnerships, we calculate ratios using
distributable cash flow (DCF) rather than earnings. The reason
is that non-cash charges like depreciation and amortization are
included in the earnings measure. These can be significant for
MLPs because their assets typically throw off large non-cash
depreciation charges.
Distributable cash flow is basically net income with non-cash
charges added back. From this adjusted figure we subtract
maintenance capital expenditures (CAPEX), which is a measure of
how much money it costs annually to keep up, repair and maintain
existing infrastructure. The final figure is a close
approximation of how much cash an MLP actually has on hand to
pay distributions to partners.
Kinder Morgan had distributable cash flows of $3.65 per share
for 2007 and paid out a total of $3.48 in distributions. Over
the next few years, KMP should be able to generate distributable
cash flow growth of more than +10%. Meanwhile, the shares trade
at roughly 17 times 2007 DCF, an attractive valuation for an
MLP.
Better still, KMP offers a solid 6.4% yield backed up by steady
cash flows and long-term contracts with customers. Kinder Morgan
is a solid, low-risk way to play the growth in natural gas production
from key U.S. reservoirs.
Paul Tracy
Editor
StreetAuthority
Market Advisor
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full-service brokerage operations as well as economic research work on a Money
and Banking project funded by the National Bureau of Economic Research. He has
also spent time doing outside consulting and research for the University of
Virginia, has appeared as a guest expert on several prominent financial radio
shows, and has been a featured speaker at various investment conferences across
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Paul graduated with a B.S. in Finance and Management from the McIntire School
of Commerce at the University of Virginia.
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