Best of Breed Investing: Kinder Morgan Energy Partners

Joseph is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Investing is all about picking the right companies at the right time. You can rarely ever go wrong with a company that's the best at what they do. Enter Kinder Morgan Energy Partners (NYSE: KMP), the largest midstream and the third-largest energy company (enterprise value) in North America.

Kinder Morgan owns over 75,000 miles of pipeline that transport natural gas, refined petroleum products, crude oil, carbon dioxide, and more. It also operates more than 180 terminals, which store products and are used to fill tankers. In these terminals, they handle several more products such as gasoline, jet fuel, coal, ethanol, petroleum coke, and steel. Kinder Morgan plays a major role in the energy industry. 

Important Facts about Kinder Morgan

  • Largest natural gas pipeline and storage operator in the United States
  • Largest independent transporter of refined petroleum products in the United States
  • Largest independent terminal operator in the United States
  • Largest transporter and market of carbon dioxide in the United States
  • The only oilsands pipeline serving the West coast of Canada. 

How They Make Money

This company makes money from other energy companies using their pipelines, services, and terminals. It's basically a "toll road" for the energy companies, as Kinder Morgan puts it. This is a major advantage because they are not as sensitive to changes in commodity prices. Most of their contracts include set fees for several years, so there is not constant negotiation between Kinder Morgan and their customers. Therefore, as commodity prices sway back and forth, a drop in this stock is purely an opportunity to buy. 

Expansion & Acquisitions

Kinder Morgan Energy Partners has been investing billions of dollars each year to build new infrastructure and expand existing assets. Each year, the total miles of pipelines and terminals seems to grow substantially. On top of their own expansion, they have been actively acquiring other pipeline companies. Most recently, Kinder Morgan purchased Copano Energy (NASDAQ: CPNO) for $3.2 billion in a deal worth a little over $5 billion total. Copano is a pipeline and natural gas services company with over 7,000 miles of pipeline in Texas, Oklahoma, and Wyoming. The two companies actually held a joint venture together, servicing the Eagle Ford Shale. Kinder Morgan publicly stated that this deal was made because they are "bullish on the domestic shale plays and believe they will drive substantial future growth." I could not agree more.

In 2011, Kinder Morgan bought El Paso Corporation for over $21.1 billion, in a deal valued at over $38 billion. Before the buyout, Kinder Morgan and El Paso were the two largest natural gas pipeline operators. This is the deal that made them become the largest pipeline company in North America. There was speculation that the deal would be blocked, but the acquisition was finalized in 2012 and they have not looked back since. I do not think Kinder Morgan Energy Partners is close to being done with acquisitions and should continue to make deals going forward.

Joint Venture

Kinder Morgan entered into a joint venture with Martin Midstream Partners (Nasdaq: MMLP) in 2012. Martin Midstream Partners operates terminals and storage facilities, and offers natural gas, marine transportation, and sulfur services to the energy industry. This company focuses primarily in the Gulf Coast region of the United States. 

The joint venture was to build a multi-commodity rail terminal in west Texas with Watco Companies, the largest privately held short-line railroad company in the United States. The terminal began operations on May 1, 2012, and now provides a wide array of services to the booming oil and gas industry in the Permian Basin. Some of these services include crude oil hauling, storage, trans-loading, and marketing. Kinder Morgan and Martin Midstream are now in talks to develop other operations in surrounding counties, such as a frac sand unit train terminal. This relationship is strong and should flourish for years to come, or Kinder Morgan may decide to acquire them like they did with Copano Energy.


They reported fourth quarter earnings on Jan. 16 and earnings per share came in at $0.75, beating analyst expectations of $0.68. Total revenue for the quarter increased 59% year-over-year to $3.079 billion. Total revenue for 2012 rose to $9.973 billion compared to $7.943 billion in 2011.

In 2013, Kinder Morgan expects to earn $2.57 per share. This would represent an 11.3% growth from 2012. In 2014 and 2015, they expect earnings of $2.81 and $3.11 per share. These estimates can easily be exceeded due to increased shipments of gas, as was the case for the fourth quarter. This earnings growth alone makes this a stock worth owning.

Dividend Growth

Kinder Morgan Energy Partners has one of the highest dividends and strongest track record of raising its dividend you will find. They currently pay out $5.16 annually, or 5.96%. This dividend has been raised for the last 17 consecutive years, including the last four consecutive quarters. With their growing earnings and performance, I think Kinder Morgan can continue to raise this dividend for over 50 years like Coca Cola. 

Bottom Line

This is the best pipeline company and dividend play in the market. It currently trades at $86.55, 4.5% below its 52 week high of $90.60. With the strong earnings growth, high dividend, dividend growth, increased shipments, and great moves by management, Kinder Morgan belongs in your portfolio. It will outperform this market, so I am initiating an outperform on CAPS. I am looking to pick up shares on any weakness because I believe this stock is heading to $100. Kinder Morgan Energy Partners is a long term BUY.

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JoeySolitro1 has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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