Ever wonder how the gas extracted from the ground makes it all the way to your gas furnace, stove and/or water heater? There’s a good chance the fuel consumed by your gas appliances was at some point transported by interests owned and managed by Kinder Morgan Energy Partners, L.P. (KMP). Kinder Morgan owns and operates approximately 24,000 miles of gas pipelines -- that’s almost the circumference of the Earth at the equator (24,901.55 miles).
Kinder Morgan is one of the largest Master Limited Partnerships (MLP) in the U.S. A MLP is a limited partnership, which trades as a security. In order to qualify as a MLP an entity must distribute at least 90% of its income from qualifying sources.
In its most recent Q4 2001 results conference call, Rich Kinder, Chairman and CEO of Kinder Morgan Energy Partners stated, “2011 was a very good year. 2012 looks like it’s going to be an even better year”. He also indicated the company has the most diverse set of opportunities available to the company since the company’s inception. Mr. Kinder indicated a large portion of the available opportunities is a result of the tremendous potential future growth with respect to natural gas shale opportunities.
The company is also seeing increased demand for carbon dioxide in the Permian Basin region with respect to the production of oil. Carbon dioxide is injected into the ground in order to act as a pressurizing agent and for reducing the viscosity of the oil.
Kinder Morgan is also experiencing increased demand with respect to its Terminal group. Kinder Morgan has more than 180 terminals used for storing petroleum products and chemicals, as well as for handling bulk materials like coal, petroleum coke and steel products.
Kinder Morgan's competitors include Enterprise Products Partners (EPD), Koch Industries (private) and TransMontaigne (private).
Kinder Morgan Energy Partners stock price has increased significantly in the last three-to-four months as shown below:
(Click to enlarge)
The company pays a monstrous dividend with an annualized dividend return of 5.4%. The next quarterly dividend payment of $1.16 per share is to be paid on Feb 14, 2012 for investors of record as of January 31, 2012 with the ex-dividend date being January 27, 2012.
An investor considering investing in Kinder Morgan Energy Partners for the dividend might be a little queasy with the recent large appreciation in the price of the company’s stock. As sometimes with stocks, what goes up also comes back down.
As an alternative, an investor might consider purchasing the stock and a protective put option for Kinder Morgan Energy Partners and using the security’s dividend payment for generating income and for paying for the protective put option.
Using PowerOptions tools, a protective put option was found with a maximum potential loss of 8.7%. The 8.7% maximum potential loss includes the upcoming dividend payment. The profit/loss graph for the put position is shown below:
The specific put option to purchase is the 2012 Feb 77.50 at $0.12. The put option operates to protect the investment in the event the price of the underlying stock drops significantly. An investor entering the put position can take solace in knowing the investment risk is limited, yet still take advantage of the company’s dividend payment.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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