What To Expect From KMP’s CO2 And Natural Gas Pipelines Business In 2014

Kinder Morgan Energy Partners‘ (NYSE:KMP) natural gas pipelines business and CO2 business remain the company’s bread and butter, accounting for more than 70% of its total annual revenues. Both businesses had a reasonably good 2013, with improved revenues as well as profitability. In this note, we take a look at some of the factors that will drive these two businesses going into 2014.

Trefis has a price estimate of around $92 for Kinder Morgan Partners, which is about 14% ahead of the market price.

Shale Plays And Mexican Exports Will Drive Growth

KMP’s natural gas pipelines business has been growing on the back of acquisitions, as well as robust output from shale gas plays and rising natural gas consumption in the United States. Between 2008 and 2012, the division’s transportation volumes jumped from around 2,000 billion cubic feet (bcf) to roughly 5,000 bcf as consumption in the United States grew at a CAGR of roughly 3%. However, the consumption growth is expected to moderate to about 1% per year through 2040, according to the U.S. Energy Information Agency (EIA). ^[1]  For 2014, the EIA actually expects natural gas consumption in the United States to decline slightly due to lower demand from the electricity generation sector.

Given the relatively low consumption growth environment, we believe that KMP will need to leverage production growth from shale gas plays, exports to Mexico as well as acquisitions, in order to drive business in 2014. Despite the growth in U.S. shale production, many shale fields still lack adequate pipeline infrastructure to transport gas. KMP has been expanding its presence into these plays through its acquisition of Copano Energy in early 2013 and also through its acquisition of the Tennessee gas pipeline from its parent company Kinder Morgan Inc.

Mexico could prove to be another attractive avenue for growth. The country’s natural gas imports from the U.S. have grown by around 92% since 2008 and pipelines between the two countries have been running at nearly full capacity. ^[2] KMP’s exposure to the Mexican market primarily comes from its its Mier-Monterrey pipeline and the EPNG system, which has significant transmission capacity to northern Mexico. The company currently transports around 1.8 billion cubic feet of gas to Mexico every day. ^[3] Given the strong demand and prospects, the company has a number of expansion projects underway, and we believe that this could drive growth in 2014.

CO2 Business: Capacity Expansion Is Key To Growth

KMP’s CO2 division produces oil and gas and also produces, transports and markets carbon dioxide which is used in enhanced oil recovery (EOR) operations for mature oil wells. The division had a relatively strong 2013 owing to higher oil production as well as better price realizations, although things remained sluggish on the carbon dioxide front as supply continued to prove a bottleneck. For the first nine months of 2013, oil price realizations improved to roughly $92 per barrel versus around $88 during the same period last year. Overall net oil production also grew by roughly 7% over the first nine months. ((Form 10-Q)) KMP’s CO2 supply has been holding steady at roughly 1.2 billion cubic feet (bcf) per day over the last several quarters.

Looking ahead, we believe that it will be imperative for KMP to expand the capacity of its CO2 supply operations in order to drive the long term growth of the business segment. The company is working on expanding capacity on 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. Increasing the capacity of its CO2 production could also allow KMP to improve its oil production since the company’s fields use CO2 flooding technology to produce oil.

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1. U.S. Energy Information Agency [↩]
2. Christian Science Monitor [↩]
3. Seeking Alpha [↩]