As investors, it is easy to focus on day to day headlines, short term trends, and immediate term predictions. By doing this, we can lose sight of longer term themes and growth stories that can provide strong returns for patient investors. I don't believe this tendency to focus on the short term instead of the long term is an exclusive trait of investors; it is part of human psychology. As a consequence, there are many management teams that too often focus on near term performance rather than building a solid company over the long term. For instance by cutting R&D, a company might be able to beat estimates in the next quarter, boosting the share price, but in the long run, shares and the company will suffer when it lacks quality products.
While there are plenty of examples of companies that focused on the next quarter instead of the next decade, there are obviously plenty of companies and management teams that focus on building a strong business for many years by adequately investing in growth. As I have written in the past, I believe Kinder Morgan Energy Partners (NYSE:KMP) is one such company that is investing heavily to profit from booming U.S. production, which will make pipelines very profitable for years to come. It shows the folly of the market that units of KMP and shares of sister company Kinder Morgan Management (NYSE:KMR) are hitting 52 week lows the same day the company is announcing four growth projects that will boost earnings and the distribution in 2015 and beyond.
With a backlog of $14 billion, Kinder Morgan has significant growth projects that are in development. Importantly, these projects are less speculative than typical capital expenditures. Kinder Morgan only builds the pipeline after conducting an "open season," which is essentially a period where it garners bids from suppliers (energy producers) to use the pipeline when it is completed. When the company attracts bids for enough volume, it gives the project a go-ahead. As a consequence, it knows these projects will be earning cash on day one, increasing the distribution from the outset. Every time Kinder Morgan discloses another growth project investors can predict future distribution increases with a relatively high degree of certainty.
First, KMP is filing an application to nearly triple the capacity of its trans-Canada pipeline from Alberta to British Columbia (press release here). The company addresses all of the environment and land issues inherent in the pipeline expansion and will expand the daily capacity from 300,000 barrels to 890,000 barrels, costing $5.4 billion. This project is a major expansion effort for KMP in Canada and accounts for more than a third of its backlog. Importantly, the company already has agreements for 708,000 barrels a day, which means this expansion will be profitable. I anticipate this expansion adding about $0.40-0.50 in annual distributable cash flow when it comes online in 2017. Of course, near term traders don't care about the company's growth projects that won't come on-line for four years. It is this type of planning though that will help the company maintain distribution growth above 5% through the decade, which is great for long term investors.
The company is developing a new products pipeline from the Utica shale to Ontario Canada (press release here). The Utica shale continues to exceed expectations, and KMP is increasing exposure to these high growth formations. While this is a smaller project, costing $300 million, it will add 50,000 barrels per day starting in 2017 assuming the open season concludes on time. With this pipeline and the trans-Canadian one, 2017 is shaping up to be a major year for Kinder Morgan Energy Partners.
Along the same lines, KMP announced a successful open season on a north-south natural gas pipeline out of Utica and Marcellus that will service the Gulf Coast (press release here). This project is part of KMP's long term strategy to expand its geographic exposure to shale and is in step with the above mentioned Utica-Canada pipeline. This expansion will add 500,000 dekatherms of capacity per day. Importantly, the open season was oversubscribed (more capacity was bid than available). This has two positive implications. First, KMP was able to generate a higher contract rate by choosing only a portion of bidders. Secondly, it is indicative of how much supply is coming from the Marcellus and Utica shale. Going forward, I would expect KMP to build additional pipelines from these regions to meet the exceptional amount of production. This project is costing $150 million.
Lastly, Kinder Morgan is expanding its capacity from the Marcellus shale to Niagra, which will then service eastern Canada (press release here). This project is relatively small at $29 million, though it will be online November 2015. I view this project as a stepping-stone for KMP as it looks to build a more comprehensive pipeline network out of Marcellus to Canada and the Gulf Coast.
Kinder Morgan Energy Partners has been focused on the long term since its inception, and by doing so, it has generated superb returns for long term investors. The company continues to invest in long term projects and is appropriately refocusing in high growth areas of U.S. production like the Utica and Marcellus shale. These projects may not boost next quarter's distribution. Instead, they will boost distributions in 2016, 2017, 2018, and beyond.
I am not smart enough to trade KMP day by day or week by week. Instead, I am willing to ride out short term volatility, reinvesting my distributions along the way, because I know the company is planning for decades, which will lead to continued distribution growth. Any investor who wants to be invested in the long-term U.S. energy boom has to invest in KMP, which is positioning itself for years of 5-7% distribution growth.