Mexican Demand For Gas To Bolster Kinder Morgan’s Natural Gas Pipelines

Mexico is seeing an upsurge in natural gas usage lately and the well-positioned Kinder Morgan (NYSE:KMP) is apparently trying to take advantage of that. Natural gas exports from the U.S. to Mexico have tripled in the last decade and now stands at 500 billion cubic feet. According to recent reports, Mexico is planning to move ahead with its $8 billion expansion of 5,500-mile natural gas pipeline system. ^[1] Since Kinder Morgan derives nearly 28% value from its natural gas pipeline division, according to our estimates, the increase in gas demand from Mexico will have a significant positive impact on the company’s value.

We have a price estimate of $90 for KMP, implying a 10% premium to the current market price.

See our complete analysis for Kinder Morgan Partners here

Natural Gas Demand from Mexico On the Rise

Mexico has many shale fields enriched with natural gas as part of the gas-rich Eagle Ford shale formation falls into the country’s territory. However, the policies of the country as well as of the oil and gas companies are more inclined toward oil exploration than gas exploration. ^[2] Despite having proven reserves, they are reluctant to produce gas. On the other hand, the demand for the commodity has risen in the past at an average rate of 7% between 1995 and 2010 and will continue to rise further in the future with several upcoming gas-fired power projects under construction. This implies that the country wants to tap into the natural gas boom in the U.S. It is now focusing on building pipelines to import the U.S. natural gas, which is cheap and abundant.

Kinder Morgan is one of the pipeline companies with multiple natural gas pipelines stretching to the U.S.-Mexican border. Additionally, it is building more facilities to allow connectivity with the pipelines in Mexico. The company had previously stated that it is building an extension from its pipeline near Tucson to the Arizona border town of Sasabe. Separately, Mexican officials have indicated their intentions to construct new pipelines from Rio Grande deep into central and northwest Mexico. They are willing to spend up to $3 billion for building these new pipelines, for which they will award the contracts to the U.S. and Mexican companies in October. ^[3]

Mexico has three main sources of gas supply: domestic production, imports from the U.S., and LNG imports. It has 15 pipeline points along the Mexico-U.S. border and two LNG import facilities at Altamira and Ensenada. It is currently building another LNG import facility at Manzanillo. The country’s demand is met by 5-6.5 billion cubic feet/day (bcf/d) of domestic production, around 1.5-2 bcf/d of LNG import and the rest through imports from the U.S. Mexico’s current plan shows 500 Mmcf/d of imports from the U.S. by 2024, but the U.S. Energy Information Administration (EIA) projects U.S. exports to Mexico to rise to 2.33 bcf/d by 2025. ((NATURAL GAS EXPORTS TO MEXICO, npc.org, September, 2012)) Even if Mexico is able to keep its imports from the U.S. at 500 mcf/d, which seems unlikely, it will still offer a massive opportunity for the U.S. natural gas suppliers.

Kinder Morgan will initially export nearly 160 mcf/d of gas to Mexico, which is likely to increase in the future. It is presently handling a total of 4,000 bcf of gas shipments per year. So, on a yearly basis, 160 mcf/d will add upto 60 bcf at the present level. However, this figure will increase substantially if the EIA projections turn out to be correct. Hence, this is a great opportunity for Kinder Morgan to add additional gas shipment capacity at a minimal investment.

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

1. Multibillion-dollar pipeline expansion in Mexico means money for Texas, chron.com, August 19, 2012 [↩]
2. Structural Change in Mexico’s Natural Gas Market, presidencia.gob.mx, November, 2012 [↩]
3. Mexico aims to expand gas pipeline network, upi.com, August 20, 2012 [↩]