We are downgrading Kinder Morgan Energy Partners (KMP) to Underperform from Neutral. While the partnership’s growth prospects are closely linked to a successful completion of organic growth projects, we believe it may face challenges.
These challenges include executing more growth-bearing projects following the completion of three large natural gas pipeline projects — REX, MEP and Louisiana. We are also concerned about the partnership’s increased dependence on its CO2 business, which is more closely related to the economics of oil than its other fee-based businesses.
Our $58 price objective reflects an annualized distribution run rate of $4.40 per unit (4.8% above current levels) and a target yield of 7.59%. Our yield assumption is based on a 334 bps spread over our 10-year Treasury bond yield expectation of 4.25%.Zacks Investment Research
