EP EL Paso Corp. (Holding Co.)

We have maintained our Neutral recommendation on Kinder Morgan Energy Partners L.P. (KMP) − the largest independent owner and operator of petroleum product pipelines in the U.S.

Kinder Morgan is one of the largest publicly traded master limited partnerships (MLPs) and generally serves as a benchmark for the pipeline MLP group. A focus on fee-based and diversified businesses has enabled the partnership to distribute its business risks. In addition, the CO₂ business is a major growth avenue for the partnership with the commodity price risk being offset by a long-term hedging strategy.

Although the partnership delivered lower-than-expected first quarter results, it experienced positive performances across each of its business segments except Product Pipeline.

More importantly, the partnership hiked its quarterly cash distribution per common unit to $1.20 ($4.80 annualized), representing a 5% year-over-year growth. It was fueled by growth opportunities in the midstream energy sector, with more emphasis on the natural gas shale plays as well as in the coal export business. It expects to declare a cash distribution of $4.98 per unit for 2012, an 8% increase over $4.61 per unit for 2011.

Again, agreement between Kinder Morgan Inc. (KMI) and El Paso (EP) − believed to be one of the largest energy transactions in recent years − is also expected to dilute the impact of the partnership’s CO₂ oil business and offset a potential slowdown in demand of the refined products. We believe that the partnership remains on track to achieve its growth target, thanks to organic expansions, joint ventures and acquisitions.

However, the partnership's Products Pipelines segment is experiencing weak demand growth for refined products like jet fuel, diesel and gasoline. In the first quarter, total refined products volume declined 1.6% to 155.6 million barrels on an annualized basis. Also, Kinder Morgan does not expect demand for the refined product to recover in the foreseeable future.

Again, Kinder Morgan’s distribution growth prospects are closely linked to the successful completion of organic growth projects, which in turn might be adversely affected by operational hindrance, cost inflation and overruns, and delays in completion.

Therefore, we see the partnership performing in line with the broader market and retain a Zacks #3 Rank (short-term Hold rating).

 
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