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Summary

  • KMP recently announced its second-quarter earnings and declared cash distribution of $1.39 per unit.
  • The shale plays continue to post higher production growth, and KMP's assets are strategically located to capitalize on growth opportunities.
  • The recent order of constructing another Jones Act qualified vessels signifies KMP's commitment to benefit from the increasing demand for marine transportation.
  • The company has also secured long-term contracts with major oil producing companies to create stable and predictable cash flows in the long term.

Kinder Morgan Energy Partners (NYSE:KMP) reported its second-quarter earnings that missed analysts' estimates; however, the partnership did increase its quarterly dividend. Revenues increased to $3577 million from the figure attained in the second quarter of the previous year of $3017 million, reflecting an increase of 18.6 percent. Similarly, earnings from continued operations were 49 cents per unit, missing the consensus estimates of 57 cents. While the KMP failed to meet top line expectations, it increased the distribution to please the unit holders. The cash distribution per unit was raised by 5 percent to $1.39 per unit.

The higher payout is primarily due to strong performance from its natural gas pipelines. The natural gas pipelines earnings increased by 13% to $642 million. Increased earnings were primarily due to outstanding results of the Tennessee Gas Pipeline, as well as higher contributions from the 2013 Copano transaction.

Going forward, KMP expects to spend approximately $17 billion in expansion and joint venture investments, so I believe that it will be able to capitalize on the growth opportunities in the industry. Since December 1st, 2013, the partnership has entered into approximately 3.5 billion cubic feet per day of new firm transportation commitments with customers for terms averaging about 15 years. It also expects significant demand for natural gas transportation capacity to increase transportation commitments with customers.

America's Oil Boom and Kinder Morgan Energy Partners

According to the recently published energy outlook report by the US Energy Information Administration ((NYSEMKT:EIA)), by 2040, the US will have evolved from being a net importer of natural gas to a net exporter. The report also says that the contribution of shale gas to dry gas production is also expected to increase from its current level of 40% to 53% by the end of the period.

While the Bakken and Eagle Ford Shale plays continue to post higher production growth, the issue of transporting this cheaper oil is becoming an important matter of concern. The pipelines in most of the key areas such as the Gulf Coast and Mid-Continent have been operating at full capacity and cannot be utilized to transport any more oil. However, other areas such as California and the East Coast have not been receiving sufficient oil supply via pipelines, and therefore, depend on rail or boats for transportation. In such a scenario, there is a need to address the issue of transportation. As a result, there is an increase in the demand for waterborne transportation to move these products.

Marine Transportation

Kinder Morgan Energy Partners came forward and has taken the right step towards addressing this problem. In June 2014, Kinder Morgan Energy Partners announced it would order the construction of another Jones Act qualified vessel for its tanker fleet. With the thriving oil production in the United States and comparatively higher costs related to the construction of new pipelines and the expansion of already existing pipelines, transporting oil through Jones Act qualified tankers ensure a low-cost alternative, adding more cash profits to KMP's bottom line.

The construction of this tanker will start in the fourth quarter of 2015 and will be completed by the second quarter of 2017. The tanker is expected to have a capacity of 330,000 barrels. The newly ordered vessel will join the partnership's fleet of tankers that was formed as a result of KMP's acquisition of APT and State Class Tankers in January 2014. With the acquisition of these tankers, the company will now be moving into marine transportation of oil.

BY securing years of fee-based revenues, Kinder Morgan Energy Partners is taking on very little risk to build these vessels. Upon successful completion, the nine vessels will be will be adding approximately $140 million EBITDA each, making the net additions of $1.26 billion. Considering the same profitability is achieved for the newly ordered vessel, I expect the figure to increase to $1.4 billion.

Concluding Remarks

Kinder Morgan's business was previously concentrated on the transportation of petroleum products through pipelines, but the acquisition will add diversity and provide a low-cost alternative to marine transportation. With respect to growth, there is an increasing demand for waterborne transportation to move petroleum products. Moreover, KMP has already protected its revenue stream by securing multi-year contracts with major oil exploration and production companies. This will ensure KMP reliable cash flows for many years to come. With higher cash flows, the partnership is well-positioned to raise future distribution.

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.

Source: Kinder Morgan Energy Partners - Growing With The Demand For Marine Transportation