Kinder Morgan (NYSE:KMP) is a unique company that is benefiting from higher oil prices while also maintaining healthy natural gas margins despite a dip in natural gas prices.  Moreover it has also signed five new contracts for the sale of CO2 in the first quarter of 2012.  The company’s business strategy regarding midstream operations in petroleum, gas and CO2 has done wonders for it because it provides a shield from the adverse impacts of commodity price fluctuations. This has ensured stability in its cash flow. While Kinder Morgan could easily enter the lucrative upstream businesses – which offer better margins – it has restricted itself to its core midstream domain, as evidenced by its planned acquisition of El Paso which excludes El Paso’s exploration and production business.  Kinder Morgan has positioned itself as a strong midstream player among competitors like Enbridge Inc (NYSE:ENB) and Enterprise Products Partners (NYSE:EPD). Below we take a look at how oil and natural gas prices impact the company.
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Dip in Natural Gas Price
Natural gas prices are at decade low levels, but Kinder Morgan is performing strongly despite significant natural gas exposure. Even in an environment of falling natural gas prices, there is still a need to store the existing supply, and here Kinder Morgan’s storage depots come in handy.
Rise in Oil Prices
When oil prices rise, oil producers have an incentive to produce more crude to increase revenues and improve margins. Kinder Morgan helps these companies transport their crude and refined petroleum products through its pipelines.
KMP’s revenues are linked to the volumes it transports. So, higher oil prices may not directly impact the average shipping realizations per unit volume, but volumes will increase and in turn so will revenues.  This also improves the company’s ability to ask for higher realizations.
Additionally, CO2 is used for oil recovery operations, which are growing as oil prices remain elevated.  The company recently entered into several Co2 sales contracts, which is another way it is benefiting from high oil prices. The chart below shows how product shipments can impact the Trefis price estimate for KMP’s stock.
Our current price estimate for Kinder Morgan Partners stands at $78.24, which is about 10% below the current market price. We are in the process of revisiting our forecasts to incorporate these recent developments.Notes:
- Kinder Morgan has a pipeline of stronger earnings in the offing, Reuters, April 2012 [↩] [↩]
- Kinder Morgan Enters into Significant CO2 Sales Contracts, Company Press Release [↩] [↩]
- El Paso to Sell Exploration and Production Company, Company Press Release, Feb 2012 [↩]