KMP Earnings: Acquired Assets And Strong CO2 Business Drive Earnings

Kinder Morgan Energy Partners (NYSE:KMP) released its Q4 2013 earnings on January 15, reporting a good set of numbers that were driven by recent acquisitions in the company’s natural gas pipelines division, higher oil production from the company’s CO2 business and strong activity in the company’s products pipelines and terminals businesses. The company’s quarterly revenues were up by around 29% year-over-year to around $3.47 billion while net income was up 26% to $809 million. The distributed cash flow (before certain items) for this quarter, a key metric for master limited partnerships such as KMP, was  up by around 28% year-over-year to around $635 million. ^[1] The company does not break down the financial results of its acquired assets in its press release. Here is a brief overview of some of the factors that drove the performance of KMP’s two largest business segments.

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

Natural Gas Throughput Declines, But Acquisitions Help Results

KMP’s natural gas pipelines division saw its earnings before depreciation, depletion and amortization (DD&A) and certain items rise by around 40%  year-over-year to around $665 million, driven by the Copano energy acquisition as well as drop down assets that KMP acquired from parent company Kinder Morgan Inc in 2012.  However, overall transport volumes were actually down by around 5% compared to last year (including volumes of acquired assets for both periods). This is primarily because natural gas prices have increased from levels of around $3.50 per million metric British thermal units (MMBtu) during Q4 2012 to close to  $4.50 per MMBtu currently, leading to a scale-back in natural gas consumption particularly in the electricity generation sector.

KMP said that its Tennessee Gas pipeline, which it acquired from its parent company, continued to see strong shipping demand driven by growth in the Marcellus and Utica Shale plays as well as from some expansion projects that began operations throughout the quarter.  The El Paso Natural Gas (EPNG) system also saw higher output driven by higher natural gas export volumes to Mexico. Shale gas plays and exports to Mexico are expected to be key drivers of the company’s growth going forward, considering the relatively sluggish outlook for U.S. natural gas consumption growth. End-use is expected to grow by just about 1% per year through 2040, according to the U.S. EIA. (Related: What To Expect From KMP’s CO2 And Natural Gas Pipelines Business In 2014)

Oil Production And CO2 Supply Rise

The CO2 business, which is one of KMP most profitable divisions, produces oil and gas and also produces, transports and markets carbon dioxide for enhanced oil recovery operations in the Permian basin. The business did well this quarter, with earnings before DD&A rising nearly 16% compared to Q4 2012 to around $392 million. Total net oil production grew to around 39.8 thousand barrels (MBbl) per day from around 36.9 MBbl per day in the previous quarter, although price realizations were sequentially lower. SACROC, the company’s largest oil field, saw its net production rise from around 24.6 MBbl per day in Q3 2013 to about 26.9 MBbl per day.

KMP’s CO2 supply business has been facing capacity constraints given the strong demand from enhanced oil recovery operations in the Permian basin in Texas. However, the business also finally saw some growth, with supply rising to around 1.3 billion cubic feet per day (Bcf/day) from around 1.2 Bcf/day in Q3, ending several quarters of stagnation, as the company’s expansion of the Doe Canyon CO2 source field came online ahead of schedule. 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 since the oil production business is also based on Co2 flooding technology.

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1. KMP Press Release [↩]