Kinder Morgan: Is The Party Over?

Jun.20.14 | About: Kinder Morgan, (KMI)

Summary

The EIA recently published its 2014 Annual Energy Outlook report. The report details a vast increase in natural gas production and consumption.

Kinder Morgan stands to benefit greatly regarding this development. The company’s already enormous natural gas pipeline footprint will facilitate further expansion in all regions.

This will be a four part series due to the amount of growth and expansion in all four Kinder Morgan regions. This is part two.

In the following article we will drill down on the company’s Western region expansion plans and growth prospects.

Overview

The EIA recently published its 2014 Annual Energy Outlook report. The report details a vast increase in natural gas production and consumption. Kinder Morgan (NYSE:KMI) (NYSE:KMP) stands to benefit greatly regarding this development. The company's already enormous natural gas pipeline footprint will facilitate further expansion in all regions. In the following sections, we will drill down on the company's Western region expansion plans and growth prospects.

EIA Annual Energy Outlook 2014 - Natural Gas

This is the second installment in this series of articles regarding Kinder Morgan's natural gas expansion opportunities. If you have read the previous one, you can skip this section. The EIA puts out a report each year regarding the organization's outlook for the energy industry. The following excerpt from the report details the three main takeaways from the natural gas section of the report as I see them. The report gives much more information regarding the state of affairs for natural gas.

Three major takeaways

1) Shale gas provides the largest source of growth in U.S. natural gas supply.

A 56% increase is expected in total natural gas production from 2012 to 2040 resulting primarily from increased development of shale gas, tight gas, and offshore natural gas resources.

(Source: EIA.gov)

Shale gas production is the largest contributor, growing by more than 10 Tcf, from 9.7 Tcf in 2012 to 19.8 Tcf in 2040.

2) Natural gas production is currently growing faster than use. The EIA predicts the U.S. will become a net exporter of natural gas before 2020.

The EIA predicts natural gas production will grow by an average rate of 1.6% per year from 2012 to 2040. This is more than double the 0.8% annual growth rate of total U.S. consumption over the same period.

(Source: EIA.gov)

The growth in production is met by increasing foreign demand. Pipelines will increase to facilitate certain exports. The United States becomes a net exporter of natural gas before 2020. Growing LNG exports also support higher natural gas prices.

3) The industrial and electric power sectors will be key drivers of growth in U.S. natural gas consumption.

The EIA predicts U.S. total natural gas consumption will grow from 25.6 trillion cubic feet (Tcf) in 2012 to 31.6 Tcf in 2040.

(Source: EIA.gov)

Natural gas use increases in all of the end-use sectors with the exception of residential. Natural gas use for residential space heating declines as a result of population shifts to warmer regions of the country and improvements in appliance efficiency.

My Take

There you have it folks. This is a long-term secular growth story just on the cusp of being realized. Kinder Morgan is the leading provider of natural gas pipeline transportation at the moment. With the company's unparalleled footprint already in place, countless expansion places are currently underway with countless more in backlog. In the following section, I will give you a quick overview of the infrastructure in total and then drill down on the Western region's current status and prospects for growth specifically.

Kinder Morgan North American Natural Gas Pipeline Infrastructure Map

Click to enlarge

(Source: KinderMorgan.com)

As you can see, Kinder Morgan already has an expansive and intricate natural gas pipeline network across North America. The company breaks it down into four major regions - East, West, Central and Midstream.

Click to enlarge

(Source: KinderMorgan.com)

There is so too much expansion in Kinder Morgan's natural gas pipeline footprint going on, I can't cover it all in one article. This article will focus on the Western region's expansion projects. I will then follow up on the three other regions in subsequent articles. The following is a breakdown of the current expansion plans underway and the backlog for the Western region.

Western region detailed review

The following information was provided by Tom Marlin, the president of Kinder Morgan's Natural Gas Pipeline Group. The information details Kinder Morgan's Natural Gas Pipeline segment's enormous growth underway and mounting backlog.

Western Region Natural Gas Pipeline current asset map

Click to enlarge

(Source: KinderMorgan.com)

Expansion drivers' breakdown

The current asset footprint provides a base for serving growing and supply-constrained markets from both traditional and developing supply regions.

EPNG - Sierrita Pipeline Expansion

The EPNG - Sierrita Pipeline Expansion project's capacity is 204 MDth/d. The capital expenditure for the project is (KM share) $71.5 million. Phase I of the project is estimated to be in service by October 2014. Project scope:

  • Sierrita Pipeline Co. - JV, Kinder Morgan 35% ownership interest and operator
  • 60 miles of 36-inch pipeline west of Tucson to border near Sasabe

The commercial benefits of the project are low-cost gas supply for future gas-fired generation and displacing current oil-fired generation. The average contract term is 25 years. The project started construction this month.

CIG - High Plains Expansion

The CIG - High Plains Expansion project's capacity is 600 MDth/d. The capital expenditure for the project is (KM share) $11.2 million. Phase I of the project (DCP) was placed in service in November of 2013. Phase 2 (Anadarko) is estimated to be in service by July 2014. Project scope:

  • 8 miles of 24-inch pipe, regulation, and metering at Cheyenne into WIC
  • Lancaster Meter Station (Anadarko) and LaSalle Meter Station (DCP)

The commercial benefits of the project are the expansion of the joint venture with Xcel to move growing DJ Basin supply to Cheyenne WY Hub. The average contract term is 10 years.

CIG - DJ Basin Project

The CIG - DJ Basin project's capacity is 100 MDth/d. The capital expenditure for the project is $14.7 million. The project is expected to be placed in service by the first quarter of 2015. The company is currently in negotiations with the customer. Project scope:

  • Connect 7.6 miles of pipe to CIG for $12.0 MM
  • Build 3.3 miles of 16-inch pipe to CIG High Plains
  • Metering

The commercial benefits of the project are to connect processing plant within the DJ Basin to CIG and High Plains.

Summary

The Western region's large asset footprint provides numerous opportunities for expansion and capital investment. West Region pipelines reach back to all Rocky Mountain Basins. Growing liquids and oil production in the region are creating expansion opportunities for associated gas and conversions.

Conclusion

The immense growth of North American natural gas production coupled with the increase in demand from around the globe will keep Kinder Morgan very busy for years to come. This secular growth story should provide investors with steady and predictable income streams for the foreseeable future. When you make an investment such as this, you want to have visibility as to the future prospects for organic growth. I can think of none better than the enormous growth projected for the pipeline industry in general and Kinder Morgan specifically. Be on the lookout for my next piece detailing the Central region's current status. Kinder Morgan is a buy here. Nevertheless, always layer into positions over time to reduce risk.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.