What The KMI-El Paso Merger Means To KMP

Kinder Morgan Inc. (NYSE:KMI) recently announced that it completed the acquisition of El Paso Corporation. KMI is a master limited partnership (MLP) with general partner interests in Kinder Morgan Partners (NYSE:KMP). This acquisition requires KMP to sell off some of its natural gas pipeline assets to receive regulatory approval by the Federal Trade Commission (FTC). KMP has agreed to the divestment of some of its assets for KMI to be able to acquire El Paso, and the asset sales will be executed by the end of 2012. These assets could have been vital for KMP as natural gas is considered an important fuel in the U.S. energy landscape going forward.

Our price estimate for KMP stands at $87, nearly 10% above the current market price.

See our complete analysis for Kinder Morgan Partners here

KMP has agreed to sell some of its assets so that KMI can successfully complete the acquisition of El Paso. These assets include Kinder Morgan Interstate Gas Transmission natural gas pipeline system, Trailblazer natural gas pipeline system, Casper and Douglas natural gas processing operations, and its 50% stake in the Rockies Express natural gas pipeline system. ^[1]

The asset sales will likely be complete by the third quarter of 2012, and can impact the valuation of the company. If the assets are sold for a value higher than the discounted realizable cash flows of the pipelines, the valuation would increase – resulting in an upside to our price estimate. On the other hand, if the realization from asset sales are lower than realizable cash flows on a discounted basis, this would lead to downside.

The pipeline business is a commission-based business where the realization is linked to gas shipment and corresponding gas prices, although indirectly. The higher the natural gas price, the greater KMP’s ability to bargain with its customers for higher realized shipping price per million cubic feet of gas. Hence, at the present depressed levels of natural gas prices, we think the assets are undervalued.

However, natural gas prices have started recovering in the last month. KMP should look for an ideal time to sell off those assets when the natural gas outlook in the U.S. is conducive. In any case, the natural gas shipments by KMP will reduce and will be reflected as cash when the divestiture takes place.

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1. A Closer Look At Kinder Morgan Energy Partners’ Distributable Cash Flow As Of 1Q 2012, seekingalpha.com, May 24, 2012 [↩]