Kinder Morgan Delivers Solid Earnings On Pipelines Business

Kinder Morgan Energy Partners (NYSE:KMP), one of America’s largest midstream energy companies, released  its Q4 2012 results yesterday, reporting an overall strong set of numbers. Revenues for the quarter came in at $2.51 billion while income from continuing operations stood at $606 million, growing by around 30% and 43%, respectively, year-over-year. ^[1] While the company has largely bucked the volatility facing most energy firms in the U.S. due to its diversified business model, this quarter was particularly good with all divisions recording profit growth.

Earnings were boosted by higher demand for natural gas pipelines, a strong performance by the firm’s Canadian operations and higher oil production from the firm’s CO2 business.  (See also: Kinder Morgan Preview: Trends Driving Its Results) Here, we provide a brief overview of the performance of each business division for the quarter and what they could mean for the firm going forward.

Natural Gas Pipelines: Acquisitions And Rising Gas Demand

The natural gas business posted 64% growth in earnings before depreciation depletion and amortization (DD&A) compared to last year. While most of the growth was driven by the acquisition of a stake in the El Paso Natural Gas company and the purchase of the Tennessee Natural Gas Pipeline system, the firm’s Texas interstate pipeline and Eagle Ford pipeline displayed strong performances as well thanks to strong industrial demand and shipment demand to Mexico. Demand from power plants was also strong, and this showed particularly on the Tennessee gas pipeline system which saw volumes increase by 12%.

We expect natural gas shipments demand to rise going forward primarily due to the increase in consumption by the industrial and electric utilities sector. Particular pipelines that we believe can drive growth include the El Paso system, which will be further expanding its access to northern Mexico and the Tennessee pipeline system, which has access to key shale gas plays and large cities in the U.S. north east.

Products Pipeline: Strong Performance On Cochin Pipeline And Rising Bio-fuel Volumes

The total volume of refined products dipped marginally, in-line with our expectations, however the strong performance by the Cochin Pipeline, one of the firm’s longest pipelines, helped earnings grow by 9% year-over -year. Shipments of  bio-fuels like ethanol and bio-diesel grew by around 22% year-over-year. While the increase in volumes this quarter came primarily through the acquisition of a transloading facility in Q3 2012, volumes could grow further thanks to EPA regulations that require blending a higher proportion of ethanol into gasoline. The firm mentioned that it handles about 30% of ethanol used in the United States (via both terminal and pipeline businesses).

CO2 Business: Rising Oil Production

The firm’s CO2 business had a relatively strong quarter on increased oil production from the SACROC and Katz oil fields and higher price realization for oil. While natural gas liquids production also rose significantly, pricing was relatively weak. The average realized oil prices rose by around 16% while prices for natural gas liquids declined by over 20% year-over-year. The segment’s earnings grew by around 20% compared to last year. On the carbon dioxide front, demand remains strong from enhanced oil recovery projects for mature wells in the Permian basin where the firm is the leading provider of CO2. However, the firm has been facing capacity constraints. While Kinder Morgan has undertaken expansion projects, they are expected to come online gradually, beginning from the end of this year. We believe this could help the firm boost its realization for CO2 services in the near term.

Terminals: Coal Exports And Liquids Drive Growth

The terminals business saw earnings grow by around 7% thanks to strong liquids, coal and steel handling volumes. Business from liquids grew due to an increase in volumes, higher rates from new and restructured contracts and expansion of tank capacity. The growth in coal export volumes (38% volume growth for full year) has been particularly encouraging as thermal coal producers in the United States have been turning to export markets to offset the weaker domestic market for coal. Earlier in 2012, Kinder Morgan signed agreements with Peabody Energy (NYSE: BTU) and Arch Coal (NYSE: ACI) to provide terminal capacity for their coal exports. The firm’s strong capacity in the Gulf coast could prove beneficial as a large portion of U.S. thermal coal is bound for Europe and Asia.

Kinder Morgan Canada: Trans Mountain In The Spotlight

A strong throughput on the Trans Mountain pipeline and the Express pipeline helped Kinder Morgan Canada grow earnings by 38% for the quarter. Demand for the Trans Mountain pipeline has been strong and the firm intends to expand capacity on this pipeline from 300,000 barrels per day to around 890,000 barrels per day, with most of the capacity already committed to shippers under long-term contracts. Earlier in December, the firm sold its stake in the Express-Platte pipeline system for around $380 million, which we believe was a relatively good deal given that the annual cash flows for the investment were only around $15 million. ((BusinessWire))

We are in the process of updating our model and price estimate for Kinder Morgan following the earnings release.

Understand how a company’s products impact its stock price on Trefis

1. Kinder Morgan Form 8-K [↩]