KMP Closes Deal with Tallgrass

Kinder Morgan Energy Partners L.P. ( KMP - Analyst Report ) wrapped up its previously announced divestiture agreement with Tallgrass Energy Partners, LP.

The agreement includes the sale of 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).

The deal fetches Kinder Morgan $1.8 billion in cash. The total divestiture value however includes the proportionate amount of the REX debt. Including this, the deal amount comes to $3.3 billion.

Kinder Morgan plans to use the proceeds to repay a $2.0 billion credit facility which was issued earlier in August to acquire stakes of Tennessee Gas Pipeline (TGP) as well as El Paso Natural Gas (EPNG) from its parent company Kinder Morgan Inc. ( KMI - Analyst Report ) . During the third quarter, Kinder Morgan acquired stakes of TGP and 50% of EPNG from its parent company. This was part of Kinder Morgan Inc.’s acquisition of El Paso Corp. that entailed the divestiture of three U.S. natural gas pipelines.

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.

Recently, Kinder Morgan inked a deal with oil refiner Phillips 66 ( PSX - Snapshot Report ) for the transportation of Eagle Ford crude and condensate to the latter’s Sweeny refinery in Brazoria County, Texas.

These deals position Kinder Morgan well and ensure stable cash flow for the partnership and its unit holders going forward.

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).