Kinder Morgan to Divest Assets - Analyst Blog

By Zacks | August 21, 2012 AAA

Pipeline operator, Kinder Morgan Energy Partners L.P. (KMP) recently announced that it will divest certain assets for $3.3 billion to Tallgrass Energy Partners, LP. The sale includes Kinder Morgan Interstate Gas Transmission, Trailblazer Pipeline Company, the Casper-Douglas natural gas processing and West Frenchie Draw treating facilities in Wyoming and the partnership's 50% interest in the Rockies Express Pipeline (REX).

Per the deal, Kinder Morgan will receive $1.8 billion in cash. The total divestiture value however includes the proportionate amount of the REX debt.  The deal is expected to close by the fourth quarter of this year subject to requisite approvals and fulfillment of necessary conditions.

Kinder Morgan plans to use the proceeds to repay a $2.0 billion credit facility which was issued earlier this month to acquire stakes of Tennessee Gas Pipeline as well as El Paso Natural Gas from its parent company Kinder Morgan Inc. (KMI).

The agreement will ensure stable cash flow to Kinder Morgan and its unit holders over the future.

Kinder Morgan Energy partners is one of the largest publicly traded master limited partnerships and generally serves as a benchmark for the pipeline master limited partnership (MLP) group. A focus on fee-based and diversified businesses has enabled the partnership to spread its business ventures. In addition, the CO2 business is a major growth avenue for the partnership with the commodity price risk being offset by a long-term hedging strategy.

However, as inherent in all oil and gas majors, Kinder Morgan remains vulnerable to volatile crude oil and natural gas prices, imbalance between supply and demand for its products and rising interest rates. Such factors can hurt the partnership's volumes and margins.

As such, we see the stock performing in line with the broader market and maintain our long-term Neutral recommendation, supported by a Zacks #3 Rank (short-term Hold rating).

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