StarMine (FT Thomson Reuters) Ranked Managing Director Analyzes The El Paso-Kinder Morgan Merger In An Exclusive Interview: El Paso Rated Outperform According To Mr. Carl Kirst
April 5, 2012 - The Wall Street Transcript has just published Oil & Gas: Master Limited Partnerships Report offering a timely review of the sector. This Special Report contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. Please find an excerpt below.
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Carl Kirst, CFA, is a Senior Research Analyst and Managing Director at BMO Capital Markets Corp. covering the North American pipeline industry, a sector that operates throughout the natural gas value chain. With nearly 20 years of equity research experience, Mr. Kirst began covering pipelines in 1993 as an Associate at Rauscher Pierce Refsnes Inc.; and subsequently, as a Senior Analyst at Jefferies & Company, Inc.; Merrill Lynch & Co., Inc.; and immediately before BMO, at Credit Suisse Securities. In recent years, Mr. Kirst consistently has ranked in the top three in the Greenwich institutional survey, twice runner-up in Institutional Investor's All-America Research Team, number one and number two in the 2011 StarMine (FT Thomson Reuters) award for best stock-picking and earnings estimates in the gas utility category, respectively, and was number one in The Wall Street Journal's 2011 Best on the Street in utilities. He has a B.A. from Rice University in economics and English.
TWST: You mentioned the ongoing expansion of the shale supply and NGL supply. Please talk about what the key trends are for the industry right now, such as particular locations that are especially productive.
Mr. Kirst: It's sort of a difficult question to answer, because when you think across North America, each region has its own supply/demand constraints. I think we are going to continue to see a need for new infrastructure in the Bakken. We are going to continue to see new infrastructure from the Permian, as well as between Mont Belvieu and Conway. A lot of this infrastructure has been proposed and is expected to come on line in the next two to three years, but these are still the areas that are getting a great deal of attention, as well as, of course, something that's been dominating our media headlines for the last year - getting Western Canadian crude oil down to the U.S., I mean TransCanada's Keystone XL and the political football that's become.
TWST: What are your top picks right now and why?
Mr. Kirst: There are three names that we still have as our top picks, recognizing that none of them are stocks that you are going to retire off of given the strong performance already achieved. One thing we've done this year is taken down our expectations for what really is the upside with some of these names. That being said, Williams, for instance, the ability for them to show that they can deliver a 10% to 15% dividend growth rate over a multiyear period of time, I think it's going to prove to be a very good stock to own. We liked El Paso because it was a cheap way into Kinder Morgan. We thought Kinder Morgan was undervalued, so you wound up getting an arbitrage lift plus the upside of Kinder Morgan.
Well, Kinder Morgan year to date is now up 16% and is at $37, so that one is beginning to be a little bit closer to fair value, perhaps. I would say there is still 10% to be made in the merger over a very quick three months, and so from that standpoint, time adjusted, it's still one that screens very well to us for what I think is very low risk. But you know, Williams and El Paso, when we are talking about upside, we are talking about 10% to 15% upside, we are not talking about the 40% to 50% upside we were talking about two years ago because the stocks were so disassociated from their sum-of-the-parts valuation. Turning to Canada, risk/reward, we still very much like TransCanada, at least for those that have a one-year-plus time horizon. That's not to say that they have got the best benefit to the trends that are at hand. Quite frankly, I think you look at Enbridge, you look at ONEOK (OKE) - those are two names which have some phenomenal growth opportunities out there. We like TransCanada primarily from a risk/reward perspective.
TWST: What are your thoughts on the El Paso-Kinder Morgan merger? Is it a good deal? And does it change the industry landscape at all?
Mr. Kirst: It's certainly a deal that makes sense. It's why I have El Paso still rated "outperform." Does it change the industry? I'm not sure it changes the industry. It's not like the airline stocks, where there are so much economies of scale that when you have two companies come together, it forces the pairing up of dance partners elsewhere in the industry. There was a little bit of people immediately looking around and asking: Could Williams be next? Could Spectra (SE) be next? Is Enterprise (EPD) going to buy someone? It's not quite the same dynamics here, but I am one of the ones who do believe that footprint matters. The larger the footprint, the easier it is for you to find and leverage organic expansion opportunities, especially in different regions.
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