EP EL Paso Corp. (Holding Co.)

Kinder Morgan Energy Partners L.P. (KMP) has inked a deal to acquire SouthTex Treaters for $155 million. The acquisition will provide the pipeline operator greater exposure to the natural gas market. The agreement is slated to close in the fourth quarter.

SouthTex builds natural gas treating plants that eliminate carbon dioxide and hydrogen sulfide from natural gas. These treatment plants are often needed by Kinder Morgan in the growing shale plays. Hence, the latest agreement will enable the partnership to build amine treating plants that range from 5–1,200 gallons per minute of treating capacity and will immediately be accretive to cash for distribution to unit holders.

Kinder Morgan Energy Partners is the largest independent owner and operator of petroleum-product pipelines in the U.S. Its pipelines transport natural gas, refined petroleum products, crude oil, carbon dioxide and other products, while its terminals store petroleum products and chemicals and handle bulk materials such as coal and petroleum coke.

Recently, the partnership’s parent company Kinder Morgan Inc. (KMI) announced plans to acquire El Paso Corp. (EP) to create the largest natural gas pipeline system in North America. The purchase price, including El Paso’s $17 billion outstanding debt, stands at $38 billion. With a large trail of assets in North America, the partnership remains well positioned for future growth.

The Kinder Morgan-El Paso deal will enhance steady cash flow generation and promise growth for Kinder Morgan Energy Partners, which plans to acquire a significant portion of EL Paso’s natural gas pipeline assets over the next few years at attractive prices. The El Paso deal is also expected to dilute the impact of the partnership’s CO2 business and offset a potential slowdown in the demand for refined products.

However, Kinder Morgan remains vulnerable to volatile crude oil and natural gas prices, imbalance between supply and demand for its products, and rising interest rates. As such, we maintain a long-term Neutral recommendation for Kinder Morgan, which also holds a Zacks #3 Rank (short-term Hold rating).

 
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