Kinder Morgan Expands Focus On Gulf Coast With Long-Term Agreements

by Trefis Team
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Kinder Morgan Partners
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Kinder Morgan Energy Partners (NYSE:KMP) has lately increased its focus on the Gulf Coast, which is becoming more attractive to energy companies planning to tap the export market such as China and India in the future. The companies are vying to secure export facilities and terminals along the Gulf Coast. Kinder Morgan recently announced two important long-term agreements to augment its position in the Gulf Coast where it plans to invest an additional $400 million toward expansion of its terminal network. We take a quick look below at how critical is Gulf Coast for Kinder Morgan.

Our price estimate of $90 for KMP, implying an 10% premium to the current market price.

See our complete analysis for Kinder Morgan Partners here

Coal exports from Gulf Coast

Most coal companies have lost more than 50% value over the last year because of a significant decline in domestic coal demand. In view of this, the companies are streamlining operations to cater to the export markets going forward. Peabody Energy (NYSE:BTU), one of the largest coal companies in the U.S., recently announced that it will use Kinder Morgan’s Gulf Coast export platform for its Colorado, Illinois Basin, and Powder River Basin (PRB) coal products from 2014 to 2020, increasing its port capacity to 5 million-7 million tons. It has also extended its existing contract with KMP’s Houston Bulk Terminal. [1] Earlier, KMP also entered into a long-term agreement to export nearly 10 million tons of coal with another coal company Arch Coal (NYSE:ACI). KMP is investing $140 million exclusively in building export facilities across Gulf Coast.

KMP handled around 100 million tons of dry bulk in 2011, which will grow at a rapid pace from 2014 when the incremental export facilities will become operational. We estimate the dry bulk handling capacity to increase by at least 25% in 2014 compared to the exiting capacity, and this will support the earnings for the terminals business.

Oil derivatives export from Gulf Coast

Kinder Morgan is gradually moving to downstream businesses while still maintaining a fee-based model. It plans to spend nearly $200 million in building a condensate splitting facility at Houston Ship Channel, which will split condensate into various components such as naphthas, kerosene and gas oil. According to a recent deal, BP (NYSE:BP) has committed over 40,000 barrels per day (bpd) of throughput at the splitter facility, which is designed for 100,000 bpd peak capacity. [2]

Texas-based Eagle Ford shale is a major gas and NGL producing region and is geographically very close to the Gulf Coast. KMP may benefit tremendously as it is involved in transportation of condensates and gas. In June 2012, KMP started its Kinder Morgan Crude Condensate (KMCC) pipeline, which has a capacity of 300,000 bpd and connects Eagle Ford Shale to multiple terminal facilities in Gulf Coast. This will offer additional revenue streams for its terminals and products pipeline businesses. Kinder Morgan is also spending nearly $75 million to construct five tanks that will connect to its condensate fractionation facility.

Natural gas liquification could be a more lucrative opportunity for Kinder Morgan in the future. The U.S. has considerable natural gas reserves and the prices for gas have slumped lately due to oversupply. We expect gas producers to gradually move to gas export business as gas prices are still significantly higher in Asia and Europe compared to the U.S. However, gas export requires liquification – a process which converts dry gas to liquified natural gas. The liquification facilities are quite expensive and may take several years to build.

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Notes:
  1. BTU Taps Gulf Coast Export Platform – Analyst Blog, NASDAQ, 20 July, 2012 []
  2. Kinder Morgan and BP North America Enter into Long-Term Agreements, timescolonist.com []
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