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Analyst Blog

On Jun 7, 2013, Zacks Investment Research downgraded midstream giant, Kinder Morgan Energy Partners LP , to a Zacks Rank #3 (Hold).

Why the Downgrade?

Kinder Morgan is a publicly traded master limited partnerships (MLPs) and generally serves as a benchmark for the pipeline MLP group. Like all other oil and gas majors, Kinder Morgan remains vulnerable to volatile crude oil and natural gas prices, an imbalance between supply and demand for its products and rising interest rates. Such factors can hurt the partnership’s volumes and margins.

Moreover, Kinder Morgan’s distribution growth prospects are closely linked to the successful completion of organic growth projects, which in turn might be adversely affected by operational hindrance, cost inflation and overruns, and delays in completion.

Additionally, although Kinder Morgan possesses solid cash flow stability from quality pipeline and storage assets, we believe that higher gasoline and feedstock prices will marginally increase the risk profile of the partnership’s refined product pipeline assets.

Moreover, though the partnership distributes above-average cash to unit holders, Kinder Morgan may face challenges, given its high distribution rate for general partners and greater capital requirement for new projects. In addition, in the last four quarters, the partnership delivered an average miss of 4.7%.   

Stocks to Consider

In the energy sector, three firms that are expected to significantly outperform the broader U.S. equity market over the next one to three months are InterOil Corporation (IOC - Snapshot Report), Ferrellgas Partners LP (FGP - Analyst Report) and EQT Midstream Partners LP (EQM - Snapshot Report). All three companies sport a Zacks Rank #1 (Strong Buy).

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