Kinder Morgan Acquires Assets

The largest independent owner and operator of petroleum product pipelines in the U.S., Kinder Morgan Energy Partners L.P. (KMP - Analyst Report) entered into an agreement with Crosstex Energy Inc. (XTXI - Snapshot Report) to acquire the natural gas treating business for approximately $266 million. The purchase price includes working capital and is subject to certain closing adjustments.
 
Kinder Morgan is purchasing approximately 290 amine-treating and dew-point control plants. These are predominantly located in Texas and Louisiana, with additional facilities in Mississippi, Oklahoma, Arkansas and Kansas.
 
Acquisitions remain a growth avenue for Kinder Morgan, and the partnership has been particularly active on this front. The latest on this front is the December 2008 purchase of a liquids terminal in Phoenix, Arizona from ConocoPhillips (COP - Analyst Report) for roughly $29 million. In August 2008, Kinder Morgan also acquired 2 pipeline systems from Knight Inc. (a private entity that owns the partnership’s GP) for about $116 million in Kinder Morgan units. These transactions are already accretive to cash available for distribution to the unitholders.
 
The recently acquired Crosstex natural gas treating business is fee-based and non-regulated, which will produce a stable cash flow. Upon completion of the deal (expected in the fourth quarter of this year), the acquisition is expected to be accretive to cash distributable to unitholders. The partnership is expected to offer natural gas treating services to its Texas intrastate customers and to other producers in various supply basins, including the rapidly developing shale plays.
 
A focus on fee-based and diversified businesses enabled the partnership to spread out its business risks and provided it with a stable and growing earnings profile. We believe that midstream players such as Kinder Morgan – that have strategically located assets and that can connect growing supply sources with areas of increasing demand – are in a good position to achieve sustainable distribution growth. However, these positives are already reflected in Kinder Morgan’s valuation, leaving little room for upside from the current level. Consequently, we recommend a Neutral rating.