Zacks.com: Analyst Blog

Zacks energy sector analyst Sheraz A. Mian reduces the target price but issues a Hold rating to Kinder Morgan Energy Partners, L.P. (KMP), the largest independent owner and operator of petroleum product pipelines in the U.S.:

Kinder Morgan Energy Partners is a premier MLP (master limited partnership), with an impressive track record of distribution growth and financial discipline. The partnership has initiated over $3 billion of organic projects that should help drive growth in the coming years.

'We continue to believe that current valuation adequately reflects the partnership's risk profile and growth prospects. We do not expect the recent completion of Kinder Morgan, Inc.'s privatization to have any impact on the partnership's growth prospects. While the partnership has a number of organic growth projects currently at different stages of completion, their impact on its overall growth profile is expected to be limited, in our view.

'Given its size, acquisitions are not expected to move the needle much, either. As such, we do not expect the partnership's distribution growth to be much higher than the mid-single digits level over the next few years. This relatively weak distribution-growth profile, coupled with the GP's 50% high splits, justify its valuation discount (higher yield = lower value) relative to the pipeline MLP group's average.

'Currently, the units have a 293 basis points (bps) spread over the 10-year Treasury bond yield, compared to the peer group's average of 273 bps. Our new $48 price objective, reduced from $49, reflects an annualized distribution run rate of $3.84 per unit and a target yield of 8% over the next twelve months.

'Our yield expectation is based on a yield spread of 300 bps over our 10-year Treasury bond yield expectation of 5%, at a slight discount to the peer group average. However, our Hold recommendation remains unchanged, as we see better opportunities in the MLP space.'

Read the full analyst report on KMP.