Kinder Morgan Energy Partners (NYSE:KMP) released its Q3 2013 earnings on Wednesday, displaying a relatively strong set of numbers that were primarily driven by recent acquisitions in the company’s natural gas pipelines division. While quarterly revenues grew to around $3.3 billion from $2.5 billion in the same quarter last year, operating income rose to about $867 million from $669 million. ((Kinder Morgan Press Release)) The company does not break down the results of its acquired assets in its press release.
The other factors that influenced earnings include higher oil production and price realizations in the CO2 division, a robust performance by the products pipeline division as well as higher activity in some of the company’s liquids terminals. In this note, we take a brief look at the performance of the natural gas pipelines division and the CO2 division, which are two of the company’s largest businesses.
Natural Gas Pipelines: Acquired Assets Drive Earnings, Adjusted Transport Volumes Decline
The natural gas pipelines division reported earnings before depreciation, depletion and amortization of around $608 million, up from around $383 million last year, bolstered by acquisitions. KMP acquired the Tennessee gas pipeline and a 50% stake in El Paso Natural Gas (EPNG) from its parent company Kinder Morgan Inc in August 2012 and in 2013, the company purchased the remainder of EPNG and also closed its acquisition of Copano Energy.
However, overall natural gas transport volumes declined from around 1,498 billion cubic feet (Bcf) in Q3 2012 to around 1,412.2 Bcf (volumes of acquired assets are included for both periods) primarily due to lower consumption from power plants. Natural gas prices in the U.S have risen from levels of under $3 per million metric British thermal units (MMBtu) during Q3 2012 to over $3.5 per MMBtu in Q3 2013, and this has prompted some power producers to shift back to coal from natural gas. However, we believe that the long-term outlook for this division remains strong. KMP expects natural gas demand in the US to rise from levels of around 70 Bcf per day currently to close to 90 Bcf per day over the next decade.  Given that KMP has the largest network of natural gas pipelines in the country, it is likely to be a prime beneficiary as transportation volumes grow. Moreover, some of the company’s recent acquisitions have been directed at assets in shale gas plays, and this could bode well for the company since most of the growth in natural gas production in the United States is expected to come from shale gas.
CO2 Business: Better Price Realizations And Marginal Improvement in Oil Production
KMP’s CO2 business, which produces oil and gas and also produces, transports and markets carbon dioxide for enhanced oil recovery (EOR) operations, saw its earnings before DD&A rise by around 5% over the same quarter last year to around $349 million aided by stronger oil production as well as improved price realizations for oil. Oil production over the quarter stood at around 53.9 thousand barrels per day, growing by around 3% since last year and around 1.5% sequentially owing to production from the Goldsmith Landreth San Andres unit which the company acquired earlier this year. Excluding the acquisition, however, production was almost flat. Realized prices rose to around $96 per barrel versus around $89 in 2012.
On the CO2 supply front, KMP has been witnessing strong demand from enhanced oil recovery operations in the Permian basin in West Texas, and its facilities in Southwest Colorado continued to operate at their full capacity of around 1.2 Bcf per day. However, the company has been executing on its expansion projects and is looking at opportunities to increase production and transportation of CO2. The company mentioned that it is aiming to expand total system capacity to about 2 Bcf per day by 2017.Notes: