KMP Pumps Up To $87 Exporting Coal Through The Gulf Of Mexico

Kinder Morgan Energy Partners (NYSE:KMP) is looking to gain from the declining domestic coal demand as coal companies are pushing for greater expansion of coal exports. This could open opportunities for KMP to build terminals along the Gulf of Mexico to support exports. The terminals business is critical for KMP’s growth as it contributes more than 20% value to its stock price.

Our price estimate of $87 for KMP, implying an 15% premium to the current market price.

See our complete analysis for Kinder Morgan Partners here

Terminals business could pump KMP

The West Coast is geographically better located than the Gulf coast for exports to Asia, but it has encountered stiff opposition by the environmental groups for port expansions. As a result, coal companies are forced to use the Gulf coast for export activities.

KMP has been proactive in developing coal handling facilities and terminals in the Gulf coast. And the urbanization of Asian cities, and the increased American coal exports bode well with its plans. In January 2012, KMP announced that it will invest $140 million to expand coal export facilities along the Gulf Coast. It also entered into long term agreement with Arch Coal to ship a minimum guaranteed coal volumes using KMP’s terminals.

KMP plans to increase terminal capacity along Gulf of Mexico for coal handling to 8 million tons from previously projected 2.5 million annually. ^[1] Previously, it announced that it will acquire 50% Stake In KKR-El Paso JV, which will also boost its terminals business as it received substantial oil gathering facilities as a part of the acquisition.

Dual benefit if domestic thermal coal demand also revives

Low natural gas prices have led domestic utility companies to favor it over thermal coal. While the power producers have lately migrated to gas-fired plants, switching back from gas to coal is seamlessly easier than it is perceived. ^[2]

Moreover, the demand for thermal coal outside U.S. has been rising lately, particularly from Asian countries and has reached nearly 40% of the total U.S. coal exports. As KMP manages off-coast coal handling terminals as well as export facilities, it could benefit if coal companies like Alpha Natural Resources (NYSE:ANR) produce a mix of thermal and met coal that is enough to satisfy domestic as well as export demand, going forward.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. US coal industry to boost exports through Gulf of Mexico, steelguru.com, June 26, 2012 [↩]
2. Coal Substitution is Temporary, seekingalpha.com, June 27, 2012 [↩]