An Overview Of KMP’s Products Pipeline Business

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KMP: Kinder Morgan Energy Partners logo
KMP
Kinder Morgan Energy Partners

Kinder Morgan Energy Partners‘ (NYSE:KMP) products pipelines business primarily transports refined petroleum products such as gasoline, diesel fuel, jet fuel and natural gas liquids from refineries to terminals, distribution centers and airports across the United States. The division accounts for around 13% of the company’s revenues, and we estimate that it accounts for about 10% of the company’s value. In this note, we take a brief look at the division’s assets, its current performance and some of the key areas for growth.

Trefis has a $92 price estimate for KMP, which is about 12% ahead of the current market price.

See Our Complete Analysis For Kinder Morgan Energy Partners

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Stable, Fee Based Assets That Form A Vital Part Of U.S. Energy Infrastructure

Products pipelines form an important component of the United States’ midstream energy infrastructure, connecting petroleum refineries to the distribution centers and terminals through which they are delivered to consumers. Much like Kinder Morgan’s other businesses, the products pipelines segment operates relatively stable, fee-based assets that are independent of commodity pricing. Revenues for this business are driven largely by demand for gasoline and other products in the areas serviced by the pipelines. Key customers include major petroleum companies, independent refiners, refining and marketing companies as well as fuel wholesalers.

Most of the division’s operations are centered around the Western and South Eastern United States. ((KMP Products Pipelines Asset Map)) The division’s key petroleum products pipelines assets include the Pacific pipeline operations, the Plantation pipeline, the Crude and Condensate pipeline. The Cochin pipeline, which is one of the company’s longest pipelines, transports natural gas liquids between Canada and the United States. In addition to pipelines, the division also holds some associated terminals assets as well as the company’s transmix processing facilities.

Recent Trends And Performance

While overall U.S. liquids fuels consumption has been relatively sluggish of late (consumption declined by about 2% in 2012 and is expected to grow by just about 1.1% this year) KMP’s products pipelines have recorded volumes growth, owing to new capacity additions through the Kinder Morgan Crude and Condensate (KMCC) pipeline and Double Eagle Pipeline which have come online over the past year or so. ((U.S. EIA)) During the third quarter, the division’s earnings before depreciation and amortization (EBDA) grew by around 30% year-over-year to $202 million while total delivery volumes rose by around 9% to 187 million barrels. ((Form 10-Q))

Opportunities:  Shale Plays And Expansion Into The North East

Gasoline and diesel account for nearly 75% of the divisions transportation volumes, and the near term outlook for consumption for both fuels looks tepid as the U.S. EIA expects gasoline consumption to fall by 0.4% in 2014 as improvements in new-vehicle fuel efficiency more than offset the growth in highway travel. Considering the lackluster outlook, it is likely that much of the growth in KMP’s products pipelines business will come inorganically as well as through expansions to new regions.

The United States is expected to become the world’s largest oil producer before the end of the decade, driven by higher production from shale basins. KMP has been tapping into this growth by expanding its reach into some of the country’s largest shale oil plays such as the Eagle Ford. The company has projects to expand the reach of its KMCC pipeline into new regions in the Eagle Ford shale and also intends to re-purpose some of its existing pipelines to other product uses, better aligning them with current demand. KMP’s products pipelines currently have a very limited presence in the North Eastern United States and this could be another key area where the company could expand, possibly through acquisitions.

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