How Will Kinder Morgan Benefit From Rise In Natural Gas Consumption: A Look At Kinder Morgan’s Natural Gas Assets

KMP: Kinder Morgan Energy Partners logo
Kinder Morgan Energy Partners

The Natural Gas Pipelines business contributes around 46% to our valuation of Kinder Morgan Energy Partners (NYSE:KMP), the largest midstream company in North America. The contribution is likely to grow in the future as the production and consumption of natural gas is set to increase. The industrial and electric sectors in U.S. are shifting from conventional coal-fired power generation methods towards the more environmentally friendly and low cost natural gas power generation. According to the U.S. Energy Information Administration(EIA), the consumption of natural gas is set to increase from 25.6 Trillion Cubic Feet(Tcf) in 2012 to 31.6 Tcf by 2040. [1] Natural gas consumption in the industrial sector is expected to increase at an average rate of 1% each year. The Power generation sector is estimated to increase its consumption of natural gas at an average rate of 0.8% each year as regulatory requirements and cost disadvantages make coal-powered electricity increasingly unfeasible. This increase would mean that the share of electricity generated from natural gas will increase from 15% in 1998 to 40% by 2020.((The Market for Gas TurbineElectrical Power Generation, Forecast International[PDF]))  Further, the increase in demand for natural gas will put upward pressure on the prices of natural gas, leading to improved margins for energy companies and hence higher revenues for transportation companies.

Accordingly, firms involved in the business of transportation of natural gas will have to build the infrastructure necessary to support this growth. An estimate by the Interstate Natural Gas Association of America estimates this need for infrastructure in excess of $600 billion of pipeline, storage and related equipment during the next 20 years. [2] Kinder Morgan, with its unparalleled natural gas asset footprint, is well-positioned to benefit from the rising natural gas demand. KMP pipelines run more 70,000 miles in the U.S. and are spread out across all geographies. Moreover, the company has a huge backlog of more than $15 billion worth of upcoming natural gas pipelines expansion projects.

Trefis has a price estimate of $83 for KMP, which is slightly ahead of the current market price.

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See Our Complete Analysis For Kinder Morgan Energy Partners

El Paso Natural Gas Network[EPNG]: This pipeline network is KMP’s largest natural gas asset. The network, which spreads out over 10,000 miles, extends from the San Juan, Permian and Anadarko basins to California. California is the biggest market for this pipeline network but it also serves many smaller markets in other parts of the country. This pipeline network is tied into contracts with an average remaining length of 5 years and has reported an average increase in production and gathering of around 3.5% over the last three years. A potential source of revenue growth for this network is the expansion project incorporated with Sierrita Gas Pipelines(SGP). The project involves, among other things, the construction of a 60-mile pipeline extending from Tuscon to Sasabe on the Arizona border with Mexico. This pipeline will be connected with 500-mile pipeline network in northwestern region of Mexico, thereby carrying the potential of substantially increasing the throughput of the Sierrita pipelines network. [3]

Copano Operations: This is KMP’s second biggest natural gas pipeline network, covering about 7,000 miles. Even though this pipeline network has lesser reach as compared to EPNG, it has reported a higher(27% vs 3.5%) increase in transportation and gathering of natural gas over the last three years due to its association with Eagle Ford Reserve, one of the highest yielding rock formations in the U.S. Copano’s gathering systems also have access to the DeWitt/Karnes[DK] pipeline systems, which is currently being expanded to attain 24-inch diameter approximately 65 miles Southwest into Texas. This expansion project is already locked into fee-based commitments with credit worthy customers, ensuring a risk-free cash flow in the future.

Camino Natural Gas Operations: Compared to the previous two, this is a smaller asset both in terms of gathering capacity and transporting capacity. However, given its proximity to the Eagle Ford shale formations in South Texas, this network has reported a 186% increase in gathering and transportation volumes over the last three years. If the network maintains the same rate of gathering and transportation, its revenue contribution can rise to similar levels as that of the other two networks.

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  1. EIA Natural Gas Forecasts, []
  2. Kinder Morgan: The energy boom’s mighty middleman, Fortune, June 2014 []
  3. Sierrita Gas Pipeline Project, []