KMP Pipes To $87 Fair Value With Diversified Business Lines

by Trefis Team
Kinder Morgan Partners
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Kinder Morgan Partners (NYSE:KMP) is a well-diversified company with a business model that protects it from wild movements in oil or gas prices. During the past few months, the company has witnessed some weakness in its refined product pipeline business as a response to costlier crude oil, but that was largely offset by sound growth from other segments. Alternatively, KMP is increasing the amount of biodiesel and ethanol transport to prop up its product pipeline business. Kinder Morgan is a midstream company in the energy sector in North America, offering pipelines for refined petroleum products and natural gas, terminals, and provides CO2 for oil recovery. It competes with players like Enterprise Products Partners (NYSE:EPD) and Enbridge Inc. (NYSE:ENB).

Our price estimate of $87 for KMP, implying an 10% premium to the current market price.

See our complete analysis for Kinder Morgan Partners here

A quick look into KMP’s businesses

The demand for natural gas has been upbeat following the sharp drop in prices. KMP has also seen sound volume growth for gas transportation. In addition, KMP’s July 2011 acquisition of the remaining 50% stake in midstream natural gas company, KinderHawk, bolstered its natural gas pipeline business. We believe that natural gas demand will boom for a long time and transportation companies like KMP will glean through higher transport volumes.

In the company’s terminals business, liquids have seen a 9% growth in Q1 compared to the same period previous year. Drilling companies like Chesapeake Energy (NYSE:CHK) are focusing on liquid rich plays as opposed to dry gas. That bodes well for KMP as liquids are priced higher than dry gas and can also fetch better realizations.

Similarly, coal prices have dipped lately and there is a strong ramp-up in coal export activity. KMP’s coal terminals handled nearly 5% more coal during Q1 2012 compared to Q1 2011. We believe the coal companies are vying to transport coal to emerging countries to realize better prices compared to the U.S. and accordingly coal volumes will also seen an increase.

The CO2 business also witnessed super-normal growth on account of rising demand of carbon dioxide, which is used for oil recovery. Enhanced oil recovery methods have increased CO2 demand lately.

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