As The Sweeny Lateral Expands, Kinder Morgan Partners Distribution Gets Even Fatter

May. 3.13 | About: Kinder Morgan (KMP)

On Thursday May 1st it was announced that Kinder Morgan Partners (NYSE:KMP) will expand its Sweeny Lateral pipeline to Phillips 66's (NYSE:PSX) Sweeny refinery in Texas, increasing the line's capacity to 100,000 barrels per day from its current capacity of 30,000 barrels per day. In addition to the expansion, KMP will add new pumps and an additional storage tank. In the wake of today's news, I wanted to examine several catalysts behind my decision to consider a long-term position in this oil and gas play.

Project Overview: The company's website has noted that "Kinder Morgan is proposing a $90 million expansion project to its recently constructed Kinder Morgan Crude and Condensate (KMCC) pipeline, which was placed in service in June 2012. The pipeline transports crude/condensate from the Eagle Ford Shale to the Houston Ship Channel through 65 miles of new-build construction and 113 miles of converted natural gas pipeline. The new project involves plans to build a 27-mile, 12-inch diameter lateral pipeline (Sweeny Lateral) from its existing pipe in Wharton County, Texas, to Phillips 66's Sweeny Refinery in Brazoria County, Texas. Kinder Morgan will provide Phillips 66 with a portion of the lateral pipeline's initial 65,000 barrels per day (bpd) of capacity, which is expandable to 100,000 bpd".

If the expansion is as successful as it is projected to be and completed within the parameters of the present timeline (year-end 2013), both KMP's earnings and the distribution it pays out to unit holders should see considerable growth. According to, KMP Products Pipelines President, Ron McClain "This expansion further demonstrates the strategic importance of KMCC and its role in transporting Eagle Ford product to markets on the Texas Gulf Coast. The project is expected to be immediately accretive to cash available to KMP unit holders upon completion at the end of 2013".

Will the expansion of the Sweeny Lateral impact have an effect on local economies? Although temporary, a project of this magnitude should impact, at least in the near-term, the surrounding areas economies as a good number of jobs are created as a result of the planned expansion. The company's website notes that "The KMCC expansion project will generate approximately 500 temporary construction jobs. This includes approximately 325 jobs to construct the Sweeny Lateral pipeline, 100 jobs to construct the DeWitt facilities, and 75 jobs to construct the Wharton County facilities".

Notable Distribution Behavior: The expansion of the Sweeny Lateral isn't the only catalyst income-driven investors are keeping a watchful eye on. On April 17th, many investors were pleased with the fact Kinder Morgan Partners increased its quarterly distribution by $0.01/share or 0.8%. According to Nick Chiu, "KMP's distribution has increased to $1.30 ($5.20 annualized), which is up 8% from Q1, 2012. The earnings before DD&A were $1.276B, up 24% from Q1, 2012. The distributable cash flow per unit (DCF) was $1.46 versus $1.37 for Q1, 2013". There were several performance-based catalysts contributing to the company's quarterly growth which also played a role in management's decision to increase the company's quarterly distribution. For example, KMP saw higher natural gas volumes within the Cochin Pipeline system which benefited its Products Pipeline Segment and an increase in the demand for export coal which benefited its Terminals Segment.

Conclusion: When it comes to those who may be looking to establish a position in Kinder Morgan Partners, I'd continue keep a watchful eye on not only the company's dividend behavior over the next 12 months, but any key developments that would positively affect the company's earnings growth, such as expansion initiatives similar to one announced earlier today.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in KMP over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.