Kinder Morgan Energy Partners (NYSE:KMP) is expected to release its Q1 2013 results on April 17. The firm has been able to avoid much of the volatility in the North American energy market thanks to its largely fee-based and diversified business model. During Q4 2012, KMP posted $2.5 billion in revenues and $606 million in income from continuing operations, posting growth of 30% and 43% respectively year-over-year. For this quarter, while we expect most of the divisions to continue their steady performance, the recent uptick in natural gas demand and a stronger performance by the firm’s new natural gas assets could boost overall results.
Natural Gas Pipelines: Higher Gas Demand And Tennessee Gas Pipeline System Will Drive Results
The natural gas pipelines division is KMP’s largest business in terms of revenues. During Q4 2012, the division recorded 64% growth in earnings before depreciation depletion and amortization (DD&A) compared to 2011, and we believe that division is likely to be the star performer for the firm yet again. In Q1, gas prices rose by around 20% touching $4 per mmBtu for the first time in 18 months, thanks to strong winter demand and growing consumption from electric utility companies. While the increased shipping demand is unlikely to result in better rates, it will contribute to higher utilization levels which would positively impact both profitability and revenues.
KMP recently acquired the Tennessee Gas pipeline (TGP) and also acquired a stake in the El Paso pipeline from its parent company Kinder Morgan Inc. (NYSE:KMI). We think these assets could bolster the firm’s quarterly performance since the TGP has access to some of the largest shale basins such as the Marcellus and Utica shale and also connects major cities on the East Coast such as New York and Boston. The pipeline also has access to the Canadian and Mexican markets.
KMP began consolidating TGP’s financials with effect from August 2012, and the pipeline has emerged as one of the the strongest performers within the division, contributing around $421 million in revenues and around $308 million in EBDA (earnings before non-cash items) during that period. Going forward, we estimate that the TGP will contribute around 25% of the natural gas pipeline division’s revenues.
CO2 Division: Higher WTI Prices Bode Well For Oil And CO2 Businesses
This CO2 division is the only division within KMP that faces direct exposure to commodity prices. During Q4 2012, the division’s earnings grew by 20% year-over-year due to increased oil production and higher price realization for oil. We believe that earnings could be poised to rise further this quarter.
West Texas Intermediate (WTI) crude oil prices have recovered through Q1 to an average of above $93 per barrel compared to prices of less than $90 in Q4 2012. Additionally, over the last few quarters, KMP has been boosting the output of its Katz and SACROC oil fields and this should help improve the division’s revenues and margins.
KMP also provides carbon dioxide (Co2) for enhanced oil recovery from mature oil wells in the Permian basin in Texas. The higher oil prices should boost demand for these services and since KMP is the largest provider of CO2 in the Permian basin, it could be poised to benefit. However, the firm has been facing some capacity constraints recently and has undertaken expansion projects to meet the shortfall. These projects are expected to come online gradually beginning from the end of this year. (See Also: The Value Of Kinder Morgans CO2 Business)
Kinder Morgan Canada: Trans Mountain Revenues Could Flatten Temporarily
Kinder Morgan Canada’s earnings before DD&A grew by around 40% to $71 million in Q4 2012 due to a strong performance by the Trans Mountain pipeline which accounts for most of the division’s business. The pipeline in the only westbound pipeline that connects Canada’s oil sands region in Alberta to export terminals in British Columbia. Shipments had been strong through most of last year as petroleum producers from Alberta sought to improve exports to Asia and reduce their dependence on the U.S. market. During 2012, the Trans Mountain pipeline delivered an average of 291,000 barrels per day (bpd) which is near its maximum daily capacity of 300,000 barrels. Given the already high capacity utilization and flat tolls compared to last year, we believe that the division’s growth could flatten out this quarter.
The Trans Mountain pipeline’s performance could improve going forward as the firm has filed for a new toll (shipping rates) settlement on this pipeline. The approval is expected to come during Q2.  Additionally, the firm intends to expand capacity on to around 890,000 bpd by 2017. (See Also: What’s The Value Of Kinder Morgans Trans Mountain Pipeline)
In December the firm announced plans to sell its stake in its Express-Platte pipeline system for around $380 million.  The sale is expected to close sometime in Q2 2013, and we believe that its impact on the firm’s performance going forward is likely to be minimal.
Terminals: Coal Exports Could Drive Results Again
The firm’s terminals business is involved in transloading and storing refined petroleum products and dry and liquid products. The terminals business grew by around 7% during Q4 2012 thanks to strong liquids, coal and steel handling volumes. For Q1, we think that the results will be aided by thermal coal exports which have been growing rapidly as U.S. coal companies look to sell their produce beyond the declining domestic market.
In 2012, KMP’s export coal handling volumes grew by around 38%. The firm’s terminal capacity in the East Coast and Gulf Coast are close to a large number of coal mines in the Appalachian region. During 2012, KMP signed agreements with Peabody Energy (NYSE:BTU) and Arch Coal (NYSE:ACI) to provide terminal capacity for their coal exports. The firm also has projects worth $1.4 billion to expand this business.
Products Pipelines: Cochin Pipeline And Crude And Condensate Pipeline
The products pipeline business transports and stores refined petroleum products, including gasoline, diesel fuel, jet fuel and natural gas liquids. The business’ revenue depends on the demand for gasoline, diesel and other products in the areas serviced by the pipelines. During the last quarter, strong volumes on the Cochin pipeline, which is one of the firm’s longest pipelines, helped the division boost quarterly earnings by over 9% year-over-year.
We believe that a continued strong performance from the Cochin pipeline and the ramp up of shipments on the crude and condensate pipeline which began operations in Q4 2012 could help the division’s results. The crude and condensate pipeline connects the Eagle Ford shale field in South Texas to the Houston ship channel refining complex.
We have a price estimate of $91 for KMP which is about 5% ahead of its current market price.Notes: