Sometimes a series of conditions coincide to give prospect investors the opportunity to collect rewards. For example, finding a market leading firm with stock selling at a discount and high earnings per share does not occur daily. The situation is all the more particular when analysts at financial institutions give the stock a positive review and expansion plans continue to be announced by management. Today, all that points straight at Kinder Morgan Partners (KMP). The largest independent owner and operator of petroleum product pipelines in the U.S. has however, not seen much transactions by gurus since the third quarter of 2013. So, why have gurus not bought into this stock when analysts continue to recommend it?
Analysts, Projects and Performance
Kinder Morgan Partners recorded a 26 percent in the fourth quarter of 2013. The great performance granted the firm’s stock a “Buy” rating by 6 financial institutions with an average $74 target price. At the same time, management has made public the intention to invest around $1 billion in assets. Most importantly, CEO Richard D. Kinder stated, “2014 is off to a great start and the future outlook for the Kinder Morgan companies remains very bright.”
Future prospects for Kinder Morgan Partners are based on $14.8 billion in expansion and joint venture investments. So far, $962 million has been used for the acquisition of crude oil tankers that are engaged in marine transportation for U.S. domestic trade. That investment is the backbone supporting the announced declared distributions of $5.58 per share for 2014.
The CO2 expansion project by Kinder Morgan Partners is key to sustaining long-term growth. The pipeline’s importance lies on the youth of the Eagle Ford shale, and the quality of oil produced by at the site. Capacity has been declared at 300 million standard cubic feet per day and will support current and future enhanced oil recovery projects owned by the firm, and other operators in the Permian Basin of West Texas and eastern New Mexico.
Where Are the Gurus?
What is interesting about the company is the absence of gurus’ purchases or sale since September 2013. Most interestingly, the latest two transactions completed by gurus concerning Kinder Morgan Partners is the total sale of John Keeley (Trades, Portfolio) and Ruane Cunniff (Trades, Portfolio)’s positions. And the largest stockholder, Renaissance Technologies, has not registered a change since the first quarter of 2013.
Looking forward, growth for Kinder Morgan Partners have received a great push with the addition of Tennessee Gas Pipeline and a portion of El Paso Natural Gas. Management has continued to arrange complementary partnerships to augment revenues, and drive greater volume through the assets acquired. An additional project hinted by management is the conversion of part of the El Paso Natural Gas to oil to transport West Texas crude to refineries in California.
The greatest downside to Kinder Morgan Partners is the above-average cash distribution to unit holders. Other associated risks derived from volatile crude oil and natural gas prices, and higher gasoline and feedstock prices. Additional difficulties are identified in the complex business structure built, and challenges implied to understand future performance. But the greatest obstacle to growth in the impossibility to replicate a similar rise of oil prices experienced during the last decade.
Currently trading at 19.5 times its trailing earnings, Kinder Morgan Partners trades at 50% discount to the industry average. Additionally, revenues and net income have increased throughout the last three years. However, debt continues to rise exponentially without being addressed.
Taking a position on the stock for a long-term investment is not recommended at this time. More specifically, current market trends are driving away from onshore exploration and production. Although midstream oil & gas companies may see no considerable change in performance yet, the trend has been confirmed by the move of many explorers to the Mexican gulf.
Disclosure: Vanina Egea holds no position in any of the mentioned stocks.