We talked about the future growth potential of Kinder Morgan Energy Partners (NYSE:KMP) in our previous article and identified natural gas segment as one of the leading candidates to drive future growth for the partnership. We touched on different aspects of the natural gas assets of the partnership. However, in this article, we have decided to go into detail and provide a deeper knowledge of the partnership's natural gas assets and the growth potential to the readers; we believe this article will help KMP's current and prospective investors in understanding its natural gas potential. The partnership has a good balance of liquids and natural gas assets which provide unrivaled asset diversity and long-term profitability to KMP.
KMP has expanded organically over the last few years, and the partnership is also working hard to increase its already impressive natural gas footprints. Moreover, the growing demand of natural gas prompted the partnership to expand largely its natural gas resources. We have mainly used SEC Filings and company press releases along with the publicly available information for this article.
Natural Gas Segment: A Detailed Analysis
Being one of the biggest energy MLPs, KMP has to maintain a balance of natural gas and liquids pipelines network, which gives the partnership a level of diversification and shields it against the commodity price exposure. The partnership has a certain benefit of having proportionate oil and natural gas pipelines network compared to other industry peers. KMP's assets are spread across 40,000 miles, which includes the transmission and gathering pipelines systems. The pipelines network also caters natural gas storage, treating and processing facilities through which it is gathered, transported, stored, treated, processed and sold across the U.S. and Canada.
The robust pipelines network, which contains both interstate and intrastate natural gas storage and transportation facilities, is expected to contribute heavily towards the future growth of the partnership. Some of the assets vital to the partnership are:
- The El Paso Natural Gas [EPNG] pipelines network, spread over 10,141 miles, is the largest natural gas asset of KMP. The EPNG system extends from the San Juan, Permian and Anadarko basins to California, its single largest market, along with smaller markets in other parts of the U.S. The EPNG pipelines network reported an increase of 3.5% in the average transport and gathering volumes over the last three years with average remaining contract life of around 5 years.
- Moreover, the partnership anticipates strong growth potential in the EPNG network due to its current substantial expansion project incorporated with Sierrita Gas Pipelines. KMP has invested approximately $72 million in the proposed expansion project which includes construction of a 60-mile pipeline extending from EPNG pipeline system near Tuscon, Arizona, to the Mexican border at Sasabe, Arizona. The expanded 36-inch pipeline will have about 200 MMcf/d of capacity and is expected to be operational in September 2014. Further, this pipeline will be interconnected with 500-mile $1 billion pipeline network in northwestern region of Mexico, which will substantially increase the operational throughput of the Sierrita pipelines network.
- Copano Operations, the second largest natural gas pipelines network of KMP, is spread over around 6,805 miles. Despite having comparatively less reach than EPNG, the Copano network reported huge gathering and transportation volumes increase over the last few years. This is due to the association of the highest yielding Eagle Ford Reserve formations across the pipelines network. The Copano network reported an increase in natural gas gathering volumes of around 27% during the last three years. This has enabled KMP to largely increase its natural gas revenues during the period and allowed it to further expand the network due to high yielding Eagle Ford region.
- Moreover, the Copano gathering systems also has access to DeWitt/Karnes [DK] pipeline systems, which is undergoing a $120 million expansion to attain 24-inch diameter approximately 65 miles Southwest into Texas. This expansion is based on fee-based agreement with prospective customers which ensures robust risk-free revenue streams to the partnership in the coming years.
- The smallest asset in terms of reach in the natural gas gathering and transport segment is Camino Natural Gas Operations. The pipelines network has its roots in the resource rich area of Eagle Ford shale formations in South Texas with a natural gas gathering capacity of 150 MMcf/d. Despite being the smallest asset, the Camino pipelines network has reported an increase of 186% in natural gas transport and gathering volumes over the last three years.
- Although, KMP currently does not have any expansion plan for the Camino pipelines system, the strong growth in the natural gas gathering and transport activity should result in consistent cash flows in the future.
NGL Segment: A Brief Analysis
The U.S. Shale boom has resulted in increased oil and gas production over the last few years. The increasing demand of the natural gas liquids [NGLs] such as propane, butane and ethane, have further increased the importance of the natural gas assets to these companies. As a result, NGLs gathering and processing has been at a record high over the last few years. KMP is expected to develop new products pipelines from the resource rich Utica Shale under which it constructs and expands its 210-mile Cochin pipeline in Harrison County which will substantially increase the natural gas fractionation capabilities of the partnership.
LNG Segment Analysis
The increasing global demand for energy, driven by population growth and improved living standards, has increased the natural gas production over the last few years - especially Liquefied Natural Gas [LNG]. LNG is the liquefied form of natural gas which is converted to store and transport easily. Due to increased domestic and international demand, KMP has been increasing its LNG assets over the last few years. The EPNG Company, a wholly owned subsidiary of KMP and Southern LNG, is developing new gas supply to growth markets in the Southeastern states of U.S. Moreover, Southern LNG is expanding its Elba Island LNG receiving terminal near Georgia and completed the construction of its Elba Express natural gas pipeline. The new pipeline has an operational capacity of approximately 1.2 billion cubic feet per day and will increase the natural gas transportation capacity.
The increased demand of natural gas delivery infrastructure has resulted in further expansion projects by the partnership. KMP has started expanding the existing Elba Island LNG facility which will be expected to add around 8.4 billion cubic feet [Bcf] of storage capacity and 900 MMcf/d of send-out facility to the existing terminal. Further, KMP recently announced to build a product tanker to further exploit the growing demand. This petroleum product cargo carrier is expected to be delivered by the mid-2017 and could also be converted to carry LNG. These expansion projects will bring substantial improvement to the operational throughput of the partnership over the next few years.
Source: Press Release, KMP Website.
Natural gas and its derivatives are going to major growth drivers for the partnership over the next few years - as the expansion projects come online, we will see robust growth in revenues as well as cash flows from the natural gas segment of KMP. Furthermore, the addition of fee-based assets will result in consistent revenue stream for the partnership. We believe KMP remains one of the best picks in the sector with robust expected growth in its business and solid cash distribution history.
Disclaimer: This article is for educational purposes only and it should not be taken as an investment recommendation. Investing in stock markets involves a number of risks and readers/investors are encouraged to do their own due diligence and familiarize themselves with the risks involved.
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.