Kinder Morgan Energy Partners (NYSE:KMP), one of North America’s largest midstream energy companies, reported its Q3 2014 results on October 15. The company’s earnings were driven by increased throughput from the Tennessee Gas Pipelines(TGP) on the back of ongoing growth in the Marcellus and Utica shale plays, increased oil and Natural Gas Liquids(NGL) production at Scurry Area Canyon Reef Operators Committee(SACROC) and strong results in its terminals business. While quarterly revenues grew by around 16% year-over-year to around $3.93 billion, operating income rose by around 33% to $1,161 million.  The net income attributable to KMP is up 40% over the past year’s third quarter, largely the effect of exceptional items, the most significant of which is the $230 million gain the company recorded from the early termination of a long term natural gas transportation contract. As a result, the company has increased its quarterly cash distribution by 4% to $1.40 for the quarter from $1.35 in the previous year. In this note, we take a look at some of the key factors that drove the performance of the natural gas pipeline business, which accounts for over half of the company’s revenues.
Trefis has a $82 price estimate for KMP, which is about 10% below the current market price. We are in the process of revising our model to reflect the latest earnings report.
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Natural Gas Pipelines Transportation Volumes Growth: KMP’s natural gas pipelines division saw its earnings before depreciation, depletion, amortization and certain items rise by around 9% year-over-year, to about $661 million.  The earnings growth was primarily driven by the increased demand for natural gas transportation. Overall natural gas transport volumes through Q3 rose by around 9% year-over-year to around 17,562 Bbtu per day.  This growth mirrors the disconnect between higher natural gas demand in the Gulf Coast and where most of the supply is being developed(Marcellus, Utica), which shows that there are tremendous growth opportunities for KMP going forward.
Tennessee Gas Pipeline System: KMP’s Tennessee Gas Pipeline system operates multiple-line natural gas pipelines, which extend from the natural gas producing regions of Louisiana, the Gulf of Mexico, South Texas to the North Eastern United States. The pipeline also has access to the Marcellus and Utica shale plays. During Q3, the system saw its volumes rise on the back of higher volumes from the Marcellus and Utica Shale plays as well as the effect of several expansion projects that began service late last year and early this year. While the pipeline has largely been northbound, Kinder Morgan has been undertaking some reversal projects for the pipeline, to add more south bound capacity to move gas from the Marcellus and Utica shales to the Southeast and the Gulf Coast.  In the previous quarter(Q2), the company added new long-term contracts, with an average life of about 15 years to transport about 1.4 Bcf a day on the Tennessee system.
Growth Opportunities In Mexico: The El Paso Natural Gas (EPNG) system in which KMP owns a 50% stake, saw volumes rise through Q3 aided by higher gas export volumes to Mexico, growing shale production and higher LNG exports. The company had been loading a southbound line, which was previously underutilized, with gas to export to Mexico. The rise in U.S. natural gas exports to Mexico could provide a significant growth opportunity for KMP. Over the last five years, pipeline based natural gas exports from the United States to Mexico have risen by around 80%.  This has been largely due to strong demand (brought about by the fact that Mexican gas prices are pegged to U.S. Henry hub prices plus transportation costs), weak domestic production and high costs of LNG imports to the country.
Increasing Growth Project Backlogs: According to consulting firm Wood Mackenzie, natural gas demand in the United States will rise from around 71.5 billion cubic feet (bcf) per day in 2014 to around 94.5 bcf a day by 2024. KMP could see its transportation volumes rise in tandem or possibly even faster than the national average, since it has exposure to key shale basins as well as the Mexican market. Over the quarter, the company added growth projects worth about $900 million worth to its backlog for the natural gas pipelines division, which is an increase of about $2.7 billion since its Q4 earnings release, and does not include the $1.1 billion worth of projects that became operational during the quarter and hence were removed from the backlog. Notes:
- Kinder Morgan Energy Partners Increases Quarterly Distribution to $1.40 Per Unit, up 4%, kindermorgan.com [↩] [↩]
- Kinder Morgan CEO Discusses Q3 2014 Results, Seeking Alpha, October 2014 [↩] [↩] [↩]
- U.S. Natural Gas Exports and Re-Exports by Point of Exit, U.S. Energy Information Administration [↩]