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Investment Overview for Kinder Morgan Partners (NYSE:KMP)
Below are key drivers of Kinder Morgan's value that present opportunities for upside or downside to the current Trefis price estimate for the company:
Carbon Dioxide Revenues
- Carbon Dioxide Revenues: The revenues for KMP's Carbon Dioxide division are dependent on crude oil prices. Higher crude oil prices drive up the company's price realizations from its oil production and also support enhanced oil recovery operations, which results in stronger demand for carbon dioxide. We expect the company's revenues from its CO2 business to rise to around $2.40 billion by the end of the Trefis forecast period. In the event that oil prices collapse and revenues decline by around 10%, it could result in a 20% reduction to the Trefis price estimate.
Natural Gas Revenues
- Natural Gas Revenues: Many companies and users consider natural gas to be a cheaper, and more environmentally-friendly energy alternative to coal and crude oil. The utility sector in particular is expected to boost its consumption of natural gas going forward. We believe that KMP's natural gas pipeline division will see its revenues approach $10 billion by the end of the Trefis forecast period. In the event that revenues actually rise further to around $12 billion, it could cause an upside of around 10% to our price estimate. On the other hand, if the demand for natural gas remains sluggish and natural gas revenues fall to around $8 billion, it could result in a 15% downside to our price estimate.
Kinder Morgan Energy Partners LP (KMP) is a subsidiary of Kinder Morgan Inc. The company owns and operates petroleum products, ethanol, natural gas, carbon dioxide pipelines and related storage terminals in the United States. The company's Canadian operations are carried out under the name of Kinder Morgan Canada.
Kinder Morgan Energy Partners parent company Kinder Morgan Inc. recently completed the acquisition of El Paso Corp. This acquisition requires KMP to sell off some of its natural gas pipeline assets to comply with regulatory requirements by the Federal Trade Commission (FTC). However, the company will replace the outgoing assets with new assets from the KMI-El Paso deal. Therefore the company's assets and revenues are unlikely to see much of a change following the transaction.
In May 2013, KMP acquired natural gas pipeline operator Copano Energy LLC. The deal will help Kinder Morgan further its ambitions in some of the largest shale gas plays in North America. Most of Copano's assets were consolidated with KMP's Natural gas pipelines division.
Natural Gas Pipelines is the most valuable division
The Natural Gas Pipelines segment contains both interstate and intrastate pipelines and the company sells, transports, stores, gathers, processes and treats natural gas. KMP owns over 40,000 miles of natural gas pipelines and storage and supply lines. With sales of more than $7.5 billion in 2013, the division contributed more than 50% of the company's revenues. With natural gas demand increasing steadily, we believe that going forward, this division will have a greater contribution to the company's overall revenues and profits.
Demand and pricing
With the exception of periods of high product prices or recessionary conditions, the demand for petroleum products is relatively stable. Therefore the company seeks to own pipelines located in or near stable or growing markets. Pricing is based upon the tariffs that are adjusted annually based on changes in the U.S. Producer Price Index.
Strong Demand For CO2
KMP's CO2 division has been seeing healthy demand over the past few years, on the back of strong EOR operations in the Permian basin in Texas, and the company has had to pro-rate supply to several of its customers. The company has several projects under way to expand its CO2 sourcing as well as transportation.
Oil production set to increase
As major oil companies discover more oil reserves, both onshore and offshore, oil production is expected to continue strongly. With the increase in production levels and consequently the demand for carbon dioxide used in the production, shipments are likely to increase.
Shift to natural gas
In the past few years, with rapid discoveries of new reserves, natural gas has gained popularity. Besides being better than coal in terms of energy efficiency and cost, natural gas is a cleaner fuel to burn with fewer harmful emissions and is more portable than coal. Hence large road transport fleet companies and industries have already moved to using natural gas. Considering the benefits, this trend is likely to continue.
Trefis Forecast Rationale for Products Shipments (MMBbl)
This represents the liquefied products like crude oil and ethanol shipped using the company's pipeline network, represented in terms of million barrels (MMBbl).
Shipments during 2007 were 755 million barrels. This number declined by close to 5% during 2008 as the company divested its assets in the North system in October 2007. Shipments witnessed a further decline in 2009 to 704 million barrels due to a decline in industrial and domestic fuel demand. The rebound in the demand for fuel led to an increase of 1.25% in product shipments during 2010. In 2011, shipments increased negligibly and remained flat through 2012 as well. Volumes grew to around 765 million barrels in 2013, primarily due to higher condensate and gasoline shipments. In the long term, we expect that shipments will show a modest 0.5-1% annual growth through the Trefis forecast period.
Trefis considered the following factors for its forecast:
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- Pipelines capacity expansion projects
- In June 2012, KMP announced that Kinder Morgan's crude/condensate pipeline (KMCC) is operational and is available to transport volumes to the Houston Ship Channel. The project cost $215 million and can support a capacity of 300,000 bpd.
- In December 2011, the company started to build a pipeline to transport 50,000 barrels of condensate per day for Petrohawk Energy Corporation from its production area to local refineries, petrochemical plants and loading docks. The pipeline has capacity of as much as 300,000 barrels per day with an approximate cost of $220 million.
- Upcoming projects to drive volumes
- Kinder Morgan's share of the South Texas Crude/Condensate project consists of a 61-mile stretch that is a part of the 109 mile natural gas pipeline being converted to a crude carrying pipeline.
- Other new projects include the West Coast terminal expansion project and Cochin pipeline expansion project. These developments will lead to higher shipments and revenues for the division.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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