Kinder Morgan Recap: Well Positioned for Broadbased Growth
Kinder Morgan Energy Partners (NYSE: KMP) released its third quarter earnings a few days back. [1] The operating income for the quarter was $449 million, up 10 percent from Q3 last year. The company has witnessed a modest growth across most of its divisions and is well on course to post significant jump over the 2010 earnings. Kinder Morgan Energy Partners faces direct competition from other pipeline and energy companies like Enterprise Products Partners (NYSE:EPD), Williams Companies, Inc. (NYSE:WMB) and from pipeline subsidiaries of energy giants like Exxon Mobil Corporation (NYSE:XOM).
We have a $78.24 price estimate for KMP, which is roughly in line with the current market price.
The quarter was marked with developments in key projects we discussed in our pre-earnings outlook for the company. The growth in the revenue was attributable to the higher volumes handled across all the divisions and increase in the selling price of natural gas and carbon dioxide.
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Below we take a look on key drivers that will continue to drive the company’s growth through 2011.
Natural Gas Shipments
KMP’s acquisition of the remaining 50 percent interest in Kinderhawk Field Services will help the division to post a healthy rise in the revenues for 2011 over the previous year. Fayetteville Express Pipeline, which came into full service at the start of the year will continue to add to the volume handled by the division. We estimate a 15 percent rise in the 2011 natural gas shipments over 2010.
Carbon Dioxide Sales Growth
The company projects a 14 percent annual growth for the revenues from carbon dioxide sales. Carbon dioxide is used in enhanced oil recovery projects as a flooding medium for recovering crude oil from mature oil fields. The demand from oil producing regions is expected to remain strong in the future as the oil mining companies look forward to enhance the productivity of existing fields by using techniques like horizontal drilling combined with carbon dioxide injection, which helps in better recovery of oil from the wells.
Product Pipeline Shipments
The volume of refined products handled by the company in Q3 2011 was down 0.4 percent over the Q3 2010 due to weak market demand. Natural gas liquid (NGL) shipments rose by 14 percent and ethanol shipments increased by 6 percent over Q3 2010 with increased commercial shipments. As per the company’s estimates, the segment may fall short of the earlier projected annual revenue growth of 6 percent. NGL will continue to remain in demand as industries continue to switch to natural gas from coal due to stricter environmental regulations and the ease of handling and shipping natural gas. Ethanol demand is also expected to rise as the demand for blended gasoline continues to rise.
KMP’s extensive network of pipelines, connecting the country’s largest shale gas basins will continue to drive the volumes for the company going forward. Strong fundamentals will continue to support the company’s $78.24 price estimate.
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