Kinder Morgan Energy Partners (NYSE:KMP) will release its Q3 earnings on October 17 and we expect KMP to register moderate growth in this quarter as we believe that the natural gas and ethanol volumes will more than offset coal and refined product volume losses. Strong coal exports could also lend support to the growth in revenue. In addition, margins could also improve owing to its commission based model, in which its realizations are highly dependent on the volumes. During the course of the article, let’s look at the impact of the important trends during the quarter on individual divisions in more detail.
We have a $90 price estimate for KMP, implying an 5% premium to the current market price.
How trends in Q3 could impact individual KMP divisions
Natural Gas pipelines: Undoubtedly, this division is going to perform well because of the shale gas boom, which continued into 2012. Many power generators switched from coal to gas as a primary fuel, leading to higher gas transport volumes. We expect revenues for natural gas pipelines and CO2 as well as the oil production divisions to increase significantly as the natural gas usage surged and oil recovery activities increased during the quarter.
CO2 & Oil Production: CO2 is the primary input used for oil recovery. We believe that CO2 consumption might have increased in Q3 as higher crude prices usually lead to higher production. Oil prices have been on a roller-coaster ride this year, but they were mostly higher in the Q3 quarter. Additionally, the company has ownership interests in several oil producing fields and owns a crude oil pipeline in the Permian Basin in West Texas. The crude oil production from the Permian basin has risen over the last few months. Hence, we believe, this division will continue to show strong growth.
Terminals: The terminals business could continue to see a fall in coal volumes due to gas replacing coal in power generation. However, an increase in ethanol volume, because of increased ethanol blending requirements of gasoline in the U.S. imposed in October, 2010 by the Environmental Protection Agency (EPA), will lend support to the division. Also, higher exports of coal could offset domestic coal demand volumes to some extent.
Products Pipeline: During Q3, we could see a decline in refined petroleum products related revenue, primarily distillate fuel oil and residual fuel oil. However, increased shale gas production has boosted natural gas liquids volumes. The increased ethanol volumes is another emerging trend, but, it is still low on scale to have a material impact. On a consolidated basis, the reduced petroleum product volumes could more than offset natural gas liquids volume, leading to a decline in overall transport volumes for the division. However, one will have to closely watch the product pipeline’s average realization as the company reported improved tariffs in some regions in last quarter.
Kinder Morgan Canada: Kinder Morgan Canada’s results could be impacted by consumption patterns in the U.S. as majority of the crude is transported to the U.S. by KMP’s Canadian pipelines. The results are likely be moderate from this division.