Kinder Morgan Expansion Readies for Oil Sands Bonanza

Kinder Morgan Energy Partners (NYSE:KMP) is pushing hard to expand its terminal capacity at various locations, keeping in mind the rapid development in the U.S. Energy sector. Previously, we discussed about its $400 million JV with TransMontaigne Partners L.P to build a new oil terminal on the Houston Ship Channel. In a recent update, the company announced a $210 million upgrade project at its Edmonton Terminal in Strathcona County, Alberta, to build seven tanks with a storage capacity of 2.4 million barrels for crude oil and condensate. ^[1] We take a quick look at the development and the value it adds to the company’s terminals business.

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.

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The project will commence with the construction of seven crude and condensate tanks in 2012 and is expected to complete in Q4 of 2013. The 2.4 million barrels capacity expansion is the first phase of the planned 6 million barrel capacity addition at the location. The capacity expansion is designed to accommodate rising production from oil sands deposits and cater to the storage requirements of oil merchants to take advantage of crude price volatility. The expansion of the terminal will also increase tanker space at the Port of Vancouver.

Kinder Morgan currently owns an interest and operates close to 180 terminals that generated $180 million in profits last quarter. The initial 2.4 million barrel and an eventual 6 million barrel capacity addition at the Edmonton terminal will create significant upside to the company’s terminals business. Compare this to the $400 million JV with a plan to build 52 storage tanks with a total capacity to handle 6.6 million barrels of residual fuel and black oils at the Houston Ship Channel.

This project is an extension of the planned expansion of Trans Mountain Pipeline (a subsidiary of Kinder Morgan) from 300,000 barrels per day (bpd) to 500,000 bpd by 2017. The subsidiary has received approval from the National Energy Board to construct merchant regulated storage tanks at the facility. The project was initially proposed in 2007, but the plan was put on hold due to the economic turmoil of 2008-2009. The Trans Mountain pipeline expansion and the capacity addition at the Edmonton terminal are strategic developments for the company, as this is the only way through which Canadian oil producers can access the Pacific markets.

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1. Kinder Morgan To Upgrade Terminal, Zacks Investment Research [↩]