Kinder Morgan Energy Partners (NYSE:KMP) yet again reported good results in its recently announced Q3 earnings, which were mostly in-line with our expectations.^[1] Revenues increased close to 10% as higher crude prices led to higher crude production, increasing the demand for CO2. The results were also significantly impacted by increased natural gas and natural gas liquids (NGL) volumes and increased coal export activities during Q3. Below we take a look at the important trends that affected the company’s business divisions in more detail.

See our complete analysis for Kinder Morgan Partners here

CO2 & Oil Production: In-line with our expectations, the division was one of the star performers for the company. Higher oil prices increased oil production across the country, which in turn increased the demand for carbon dioxide (CO2) which is used in enhanced oil recovery. Additionally, the company has ownership interests in several oil producing fields and owns a crude oil pipeline in the Permian Basin in West Texas. Higher oil prices boosted revenues from the company’s own production.

Natural Gas pipelines: As expected, natural gas volumes soared riding the shale gas boom as many power generators switched from coal to gas as a primary fuel. Due to lower prices, natural gas continues to replace coal in power plants, leading to higher gas transport volumes.

Terminals: 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 two most prominent trends. Ethanol demand is increasing due to ethanol blending requirements of gasoline in the U.S. imposed by the Environmental Protection Agency (EPA) in October 2010. Higher exports of coal offset declining domestic coal demand. Coal’s gradual shift towards overseas market is another significant trend observed during the quarter, which is likely to prevail in the near term.

Products Pipeline: In-line with our expectations, the division witnessed a decline in petroleum product volumes, which more than offset natural gas liquids volume, leading to a decline in overall transport volumes for the division. Demand for refined products such as gasoline and diesel has been declining as clean biofuel demand is seeing an increase. Increased shale gas production, however, boosted natural gas liquids volumes. Also, low natural gas prices are leading producers more towards natural gas liquids. The increased ethanol volumes is another emerging trend, but it is still low on scale to have a material impact.

Long Term Growth Outlook Remains Buoyant

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 strongly during Q3, but it may not stand out as the best performing segment for KMP in the future. We believe fluctuating oil prices will continue to affect oil recovery activities, in turn impacting this division’s revenues.

However, we expect the division to perform better as oil prices rise with economic recovery. While natural gas prices have recovered from their lows, natural gas demand is expected to continue to increase. Many locomotives and automobiles are expected to have gas-based technologies in the future. Natural gas liquids are also being consumed rapidly. We expect natural gas and NGL volumes to increase manifold as they extend their utility.

We are in process of updating our $90 price estimate for KMP to reflect the earnings and recent developments.

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