Thursday, April 21, 2011

Kinder Morgan's Earnings Lead to a Distribution Boost

By David Lee Smith

From my perspective, and despite somewhat lower revenues, Kinder Morgan Energy Partners (NYSE: KMP ) produced a solid quarter from both financial and operating perspectives.

On the financial side, I'm far more inclined to point to increased profits and a hike in the distribution than to focus on a revenue decline, which is frequently beyond the company's control and not reflective of its future prospects. Indeed, of far more importance is net income, which increased by 51% year-on-year to $340.9 million, or $0.18 per share, from $225.3 million, or $0.08 per share. As a result -- and despite a 6.4% revenue reduction -- the distribution was increased by 7% to $1.07 per unit, or $4.28 on an annualized basis.

All of the company's segments pitched in to contribute to the earnings improvement. Products pipelines raised its segment earnings (before DD&A and items) by 10% to $180.3 million, while the natural gas pipelines unit upped its earnings by 2% to $222.6 million. The latter unit's earnings were affected by lower volumes at a couple of facilities, but benefited from the start-up of the Fayetteville Express Pipeline. Importantly, CEO Richard Kinder said that, "we continue to see various opportunities in the shale plays that will help drive future growth in (the natural gas) segment."

The company's CO2 business saw earnings increased by 4%, based primarily on higher oil and natural gas liquids prices. The terminals unit contributed the biggest earnings growth at 13% above the comparable quarter a year ago. Strength at the large liquids terminals on the Houston Ship Channel allowed the group to generate about 80% organic growth. Finally, Kinder Morgan Canada raised its earnings contribution by 7%, a prelude to management's expectation that the unit will exceed its forecast of 6% growth.

As is typically the case, the company is involved in a variety of capital projects. Among the more promising of which, given the changes exploration and production of gas and liquids are undergoing in the U.S., is a gathering system serving the Eagle Ford play in Texas. The project, which consists of a joint venture with Capano Energy (Nasdaq: CPNO ) , agreed to a pact in February to provide natural gas services to a unit of Anadarko (NYSE: APC ) .

At the same time, given the expected effects on the demand for coal in the terminals segment, the company has inked a pair of contracts with a subsidiary of Massey Energy (NYSE: MEE ) to handle 6 million tons of coal annually on the lower Mississippi River.

Looking ahead, Kinder noted that Kinder Morgan likely will declare cash distribution for the year of $4.60 for the year, or about 4.5% above last year's $4.40. With the budget having been based on an average West Texas Intermediate price of $89 per barrel, management expects that each $1 change in the WTI average will affect the CO2 segment by about $5 million.

We'll benefit later from added perspectives from the likes of Enterprise Products Partners (NYSE: EPD ) and El Paso (NYSE: EP ) , both of which are set to report in early May. In the meantime, I continue to watch Kinder Morgan closely, and suggest that you do the same.

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