More Upgraded Expectations for Kinder Morgan and Enterprise

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The country’s two largest energy pipeline and infrastructure companies made some positive news recently for quite different reasons. Enterprise Products Partners L.P. (NYSE: EPD) raised its distribution to common unitholders by about 3.2% to an annualized $1.60 per share. Given the price pressures on oil and gas producers for nearly two years now, Enterprise’s increase appears to defy gravity.

Kinder Morgan Inc. (NYSE: KMI), once an MLP but now a C-corporation, sold a 50% interest in its Southern Natural Gas pipeline System to Southern Company (NYSE: SO) for a total value of $4.15 billion, which includes the deconsolidation of $1.2 billion in the pipeline subsidiary’s debt and wipes about $2.68 billion off Kinder Morgan’s balance sheet.

Both announcements generated new calls from analysts, who were generally positive on both moves. RBC Capital Markets, for example, already had an Outperform rating on Enterprise and a recent price target of $34. It is one of four MLPs covered by RBC that we found to have solid upside to their current share prices.

In other recent analysts’ moves on Enterprise, Capital One Securities raised its price target from $31 to $33 and Jefferies maintained a $34 price target and a Buy rating.

Following the Kinder Morgan deal, John Edwards at Credit Suisse maintained a Neutral rating on the company’s stock, but he raised his price target from $22 to $23. At the time that implied a potential gain of 20%. not including a dividend yield of 2.6%. As we noted, an implied upside of 22.2% is higher than most Buy and Outperform ratings in the big cap oil and gas sector.

S&P Global Market reiterated both its Buy rating and its $22 price target on Kinder Morgan stock based on the shares 9.6-time multiple to projected 2017 operating cash flow.

Deutsche Bank reiterated its Buy rating and $21 price target on Kinder Morgan, noting the asset sale to Southern:

The $1.47b in proceeds will be used to pay down debt at KMI. Additionally, deconsolidating SNG’s $1.2b in debt ==> will lead to a roughly $2.7b overall decrease in balance sheet debt….. We think this is a great transaction for KMI and reiterate our Buy.

Interestingly enough, Enterprise got a bigger pop from Kinder Morgan’s announcement than it did when it raised its distribution. Since the Monday announcement, Kinder Morgan shares have posted a gain of about 12.7%, compared with a gain of less than 2% for Enterprise. Does this mean that a half-cent boost in quarterly distribution payments is worth less than a financial maneuver to shed $2.7 billion in debt from the balance sheet? That’s what it looks like.

Kinder Morgan shares closed at $21.03 on Friday, up 0.6% for the day in a 52-week range of $11.20 to 38.02. The consensus price target on the shares is $21.05. The company has not yet announced when it will release second-quarter results, but analysts are looking for earnings per share of $0.15 and revenues of $3.45 billion.

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Enterprise closed down 0.7% Friday, at $29.38 in a 52-week range of $19.00 to $30.11. The consensus price target for the common units is $32.65. The company is scheduled to report second-quarter results on July 28, and analysts expect earnings per common unit of $0.31 and revenues of $5.65 billion.