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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: We expect carbon dioxide revenues to rise owing to the expected increase in fuel prices in the future. However, many analysts believe that crude oil prices at more than $100 a barrel are not sustainable for the global economy. The present dip in crude oil to sub-$100 levels may persist into the future. In the event that fuel prices do not recover and remain at current levels, the company's stock could face a 10-15% downside with the decline in revenues from the division.
Natural Gas Shipments
- Natural Gas Shipments: Many companies and governments are looking to natural gas as a cheaper, more environmentally-friendly energy alternative to coal and crude oil. We expect that natural gas prices will eventually increase to more normal levels as demand catches up to production. However many utilities and other companies have already committed to natural gas going forward. If prices remain low and demand surges further the company's natural gas shipments could exceed 6 trillion cubic feet by the end of our forecast period. This would present a potential upside of 5-6% to the Trefis 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.
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. Within this segment, KMP owns over 15,000 miles of natural gas pipelines and storage and supply lines. With more than $4.3 billion, the division contributed more than 50% of the company's revenues in 2011. 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.
Increase in fuel demand
According to the American Petroleum Institute, total petroleum product demand rose 0.5% in May 2012 over the same period in 2011. Gasoline demand was up 0.4 percent, and distillate demand was up 2.0 percent in May 2012. The trend is expected to continue for the next few years as the industrial output is expected to grow, in turn pushing up demand for the shipment and terminal businesses.
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.
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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