We are maintaining a Neutral rating on Kinder Morgan Energy Partners, L.P. (KMP).
One of the of the largest publicly traded master limited partnerships, Kinder Morgan's focus on fee-based and diversified businesses has enabled the partnership to distribute its business risks.
We remain optimistic on the partnership’s attempt to strengthen its presence in the Eagle Ford shale play in South Texas. Kinder Morgan, along with joint venture partner Copano, expects to spend approximately $300 million for building midstream infrastructure to facilitate gathering, transportation, processing and fractionation services in the region.
Moreover, we believe that Kinder Morgan is favorably positioned to meet its targeted cash distribution of $4.60 per unit for 2011, reflecting an annualized increase of 4.5%. For the first quarter of 2011, the partnership increased its quarterly cash distribution per common unit to $1.14 ($4.56 annualized), representing a 7% year-over-year growth.
However, we remain disappointed regarding the partnership’s performance in the first quarter 2011, despite strong contribution from each of its business units.
As a company operating in the energy sector, Kinder Morgan remains vulnerable to volatile crude oil and natural gas prices, fluctuating commodity prices and rising interest rates. Additionally, imbalance between supply and demand for its products can hurt the partnership’s volumes and margins.
We also believe that the partnership’s distribution growth prospects are closely linked to the successful completion of organic growth projects, which might in turn be adversely affected by operational hindrance, cost inflations and overruns, and delays in completion.
Although Kinder Morgan possesses solid cash flow stability from quality pipeline and storage assets, we believe that higher gasoline and feedstock prices will marginally increase the risk profile of the partnership’s refined product-pipeline assets.
Considering these factors, we see restricted upside potential for Kinder Morgan and expect it to perform at par with its peers such as Enterprise Products Partners (EPD) and Enbridge Energy Partners (EEP).
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