KMP’s Earnings Preview: Copano Merger In Focus

Kinder Morgan Energy Partners (NYSE:KMP) is expected to publish its Q2 2013 earnings on June 17, reporting its first set of quarterly results following the Copano Energy acquisition. During the first quarter, the firm put up a solid performance with quarterly revenues growing by around 43% year-over-year to $2.66 billion while income from continuing operations grew by around 65% to $794 million, boosted by some natural gas assets it had acquired from its parent company, Kinder Morgan Inc. ^[1] Here is a quick overview of what to expect from KMP’s key segments as well as some of the important factors that we will be tracking in the earnings release.

Natural Gas Pipelines: Copano Merger Takes Center Stage

KMP’s natural gas pipeline business has been performing quite well of late. In Q1, earnings before depreciation, depletion and amortization (DD&A) grew by around 78% year-over-year to $497 million, thanks to a strong contribution by the recently acquired Tennessee gas pipeline (TGP). (Related read: A Closer Look At KMP’s Tennessee Gas Pipeline)

KMP completed its $5 billion acquisition of Copano Energy in early May. For this quarter, excluding the Copano merger, we believe that natural gas shipments could decline slightly, as the heating load seen in the winter months will decline. While this quarter marks its first quarterly earnings consolidating Copano’s results (most of Copano’s assets have been absorbed by the natural gas pipelines division), we do not see a significant jump in quarterly earnings, since the company expects the acquisition to only be moderately accretive to its results for this year. However, we believe that the Copano acquisition augurs very well for KMP in the long run due to its exposure to some of the most promising shale plays in the United States. According to the U.S. EIA, almost all the growth in domestic natural gas production through 2040 is expected to come from an increase in shale gas production and Copano’s, assets are likely to be very important from a growth perspective. (Related read: Kinder Morgan Makes Deeper Inroads Into Shale Plays With Copano Energy Acquisition)

CO2 Division: Hedging Could Limit Price Gains Despite Uptick In WTI Prices

KMP’s CO2 division produces crude oil and also supplies carbon dioxide that is used in enhanced oil recovery operation for mature oil fields. This is KMP’s only business division that is exposed to the commodity price fluctuations. During Q1, the CO2 business posted earnings before DD&A of around $340 million, which was almost flat year-over-year. However, we expect the division to perform relatively better this quarter due to an increase in crude prices and also due to strong demand for carbon dioxide in the Permian basin.

While WTI crude prices have increased slightly over the quarter, currently ruling at around $99 per barrel, KMP’s price realization could be lower that the market since it hedges a significant portion of its oil production. However, it could see some upside in the unhedged portion, pushing up overall price realizations compared to the previous quarter where realized prices were just $87 per barrel.  ((KMP Sec Filings))

We expect demand for CO2 to continue to be strong. However KMP has been facing some capacity constraints and production has plateaued at around 1.2 bcf per day. The firm is now working on expanding capacity in its Colorado unit from around 1.2 bcf a day to about 1.4 bcf per day by 2014, and is also working on a new source field on the Arizona/New Mexico border that should add an additional 200 million cubic feet a day in supply. ^[2]

Kinder Morgan Canada: Capacity Constraints And Oil Leaks Could Hinder Quarterly Growth

The Trans Mountain pipeline system, which connects Canada’s oil sands region in Alberta to the West Coast, forms the heart of KMP’s Canadian operations. The pipeline has been in the news for the wrong reasons this quarter, following two minor oil leaks in June. This caused the pipeline to be shut down for a few days, and we believe that this could impact delivery volumes and revenues for Q2, albeit marginally.

Leaving the oil leaks aside, the pipeline has been experiencing strong demand over the last few quarters and utilization rates have been high, giving very little room for growth.  KMP has announced plans to boost the capacity of the pipeline from around 300,000 barrels per day (bpd) to around 890,000 bpd, but this new capacity is only expected to come online in 2017. (See Also: What’s The Value Of Kinder Morgans Trans Mountain Pipeline)

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

1. Press Release [↩]
2. Seeking Alpha [↩]