KMP Q3 Preview: Natural Gas Transport Volumes, Recently Acquired Assets In Spotlight

by Trefis Team
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Kinder Morgan Partners
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Kinder Morgan Energy Partners (NYSE:KMP), one of America’s largest midstream energy companies, is expected to release its Q3 2013 earnings on October 16. We expect the company’s quarterly results to be influenced by recent acquisitions in the natural gas pipelines division, higher oil prices (which should help its CO2 business division) and strong activity and restructured contracts for its liquids terminals. Here is a quick look at some of the factors that we will be watching when the company releases earnings Wednesday.

Trefis has a price estimate of around $92 for KMP, which is around 15% ahead of the current market price.

Natural Gas Pipelines Business

Higher Gas Prices Could Impact Transport Volumes: Natural gas prices have seen an increase over the last year, rising from levels of under $3 per million metric British thermal units (MMBtu) during Q3 2012 to over $3.5 per MMBtu in Q3 2013. This has had an impact on natural gas consumption across the United States, particularly for electricity generation, since some power producers have been shifting back to coal from natural gas. According to the U.S. Energy Information Administration (U.S. EIA), total natural gas consumption in July (the most recent data available) fell from around 66.9 billion cubic feet (Bcf)/day in 2012 to around 61.6 Bcf/day in 2013. [1] We believe that the decline in consumption could have a slight impact on KMP’s natural gas pipelines division’s overall transport volumes, adjusted for recent acquisitions.

Copano Acquisition: KMP closed its acquisition of Copano Energy in May. Copanos’s assets, which include around 6,900 miles of pipelines and nine processing plants, will allow KMP to make deeper inroads into some of the country’s largest shale plays, including the Eagle Ford shale and the Barnett shale in Texas. According to the U.S. EIA, almost all of the growth in domestic natural gas production through 2040 is expected to come from an increase in shale gas production, and we believe these assets will be quite important to KMP from a growth perspective. However, for this quarter, we will be closely watching the financial performance of these assets. During the second quarter, Copano’s assets contributed around $196 million in revenues and about $58 million in earnings before depreciation, depletion and amortization (EBDA), translating to EBDA margins of about 30% which is lower than the natural gas pipelines division’s overall margins which have averaged around 40% during the first two quarters. ((Form 10-Q))

CO2 Business Could Benefit From Higer Oil Prices

CO2 Supply Volumes Will Remain Flat: The CO2 business, which produces oil and gas and also produces, transports and markets carbon dioxide for enhanced oil recovery (EOR) operations in the Permian basin in Texas, is one of  the company’s most profitable business segments. We expect CO2 supply volumes to remain flat at around 1.2 Bcf per day as production capacity will continue to prove a constraint for the company. KMP has been witnessing strong demand for CO2 from enhanced oil recovery operations in the Permian basin in Texas and its facilities have been operating at full capacity over the last year.

Oil Volume Growth Could Moderate, But Pricing Expected To Be Better: We estimate that around two-thirds of the CO2 division’s revenues come from oil and gas production. The company’s oil production has been strong  of late, with daily production during Q2 averaging around 53 thousand barrels (up by around 6% since last year), thanks to growth in output from the company’s SACROC oil fields. For this quarter, while we do not expect to see much sequential growth in oil production given the short supply of CO2 which is used to recover oil from the company’s oil fields, price realizations could be better. WTI crude prices have largely remained at above $100 per barrel over the third quarter. While KMP has hedged much of its oil production for this year, it should see better prices on its unhedged oil and natural gas liquids sales.

See Our Complete Analysis For Kinder Morgan Partners Here

Liquids Terminals Should Perform Well

The terminals business is one of Kinder Morgan’s most stable business segments thanks to its largely diversified and fee-based business model. We expect the company’s liquids terminals to continue to perform well on restructured contracts with higher rates as well as strong utilization levels. During the first half of this year, the firm recorded a utilization rate of close to 94% for its liquids terminals. [2] On the bulk terminals side, things could remain challenging given that U.S. coal exports have been on the decline this year while steel consumption growth has also been somewhat sluggish. Despite the decline in coal exports, KMP is expected to bring some new coal export facilities online over the next few quarters, and this could help the firm improve its volumes since most of these facilities are contracted under the long-term take-or-pay agreements. [3]

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Notes:
  1. U.S. EIA []
  2. Form 10-Q []
  3. Seeking Alpha []
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