Kinder Morgan Energy Partners (NYSE:KMP) yet again reported impressive results in its recently announced Q2 earnings.  The revenues declined marginally but operating income to increase riding on significantly reduced operating expenses. The results were significant impacted by increased natural gas and natural gas liquids (NGL) volumes and increased coal export activities during Q2.
The terminals business in particular benefited from better liquids utilization, higher ethanol volumes and, coal volumes. The increased use of biofuels and natural gas are the most prominent trends and we expect their volumes will increase considerably in the next few years. Coal’s gradual shift towards overseas market is another significant trend observed during the quarter, which is likely to prevail in the near term. We have discuss the trends in more detail in the later part of the article.
We recently revised our forecasts for Kinder Morgan based on Q2 results and expansion plans and price estimate rose to $90, implying a 10% premium to the current market price. The key changes in forecasts compared to our previous estimates include increase in natural gas shipment volumes, decline in product shipment volumes, decline in near term Kinder Morgan Canada revenues and a jump in 2017 to accomodate the Transmountain expansion. We also reduced Canadian operation’s margin slightly and increased near term product pipeline’s average realization as the company reported improved tariffs in some regions.
Natural gas pipelines head for domestic growth; Coal heads for exports
The natural gas glut has resulted in gas prices falling to record low levels. As a result, many power generators switched to gas-fired plants from coal-fired ones. Coal is also getting ruled out for new power plants because of Environment Protection Agency’s recent regulation to cut green house gas emissions in upcoming plants. Natural gas has meanwhile gained traction. Many locomotives and automobiles are expected to have gas-based technologies in the future. Natural gas liquids that are produced in shale explorations are also getting consumed rapidly. We expect natural gas and NGL volumes to increase manifolds as they extend their uses. KMP’s natural gas pipelines will benefit considerably while products pipeline will be able to brush aside loses in refined product volumes by increased NGL volumes. Natural gas pipelines business contributes nearly 27% value to Kinder Morgan’s stock.
Increased exports from the Gulf Coast and East coast to Asia and Europe is a significant opportunity for terminals business for KMP. Kinder Morgan is investing nearly $400 million to expand its Gulf Coast terminal network to add 27 million short tons per year coal export capacity. It has recently announced long-term agreements with Peabody Energy (NYSE: BTU) and Arch Coal (NYSE: ACI) to secure and expand the Gulf Coast export platform for their coal.  We believe coal volumes handled by KMP terminals will significantly increase in the next few quarters as coal producers try to cover up the shortage in domestic demand by exports. The terminals business account for nearly 21% value to the company.
Kinder Morgan’s Canadian pursuits
Kinder Morgan Canada is the smallest division of KMP, but with the Transmountain expansion it could add significantly to its revenues. The project is expected to be completed in 2017. We believe, its revenues will shoot up as soon as the pipeline starts operation. In the near-term, the growth could be moderate.
Summary of the quarterly performance
We have discussed some of the major trends, but one trend that could significantly impact KMP’s second largest division – product pipeline business – is ethanol production. The demand for refined products such as gasoline and diesel is declining whereas biofuel demand is rising. Moreover, increased requirement for blending of ethanol in gasoline will drive ethanol volumes and may help buoy the product pipelines business.
In our view, natural gas, NGL and export coal will fuel growth for KMP in the near term. CO2 and oil recovery, the largest division of Kinder Morgan performed incredibly during Q2, but may not stand out as the best performing segment for KMP in future. We believe fluctuating oil prices will keep affecting oil recovery activities, in turn affecting this division’s revenues.Notes:
- Second Quarter Earnings Release, Kinder Morgan Earnings Releases [↩]
- Peabody Energy and Kinder Morgan Inc. Enter Into Long-Term Gulf Coast Coal Exports Agreements, Kinder Morgan Press Release, July 17, 2012 [↩]