Late last month, in an article on Kinder Morgan (NYSE:KMI), I had pointed out the fact that the stock looks like an attractive bet at current levels considering that it is trading at a discount in terms of distributable cash flow per share. But, apart from Kinder Morgan's impressive cash flow generation and cost savings, another reason why investors should remain positive about the stock is because of the improvement in natural gas consumption in the U.S.
Now, improving natural gas consumption in the U.S. will prove to be a tailwind for Kinder Morgan in the long run since the company has control over 38% of the natural gas pipelines in the U.S. with an infrastructure of 69,000 miles. More importantly, Kinder Morgan has been increasing its footprint to capture more of the natural gas transportation market, and this will prove to be a tailwind for the company in the long run. Let's see why.
Improving natural gas prospects are good news for Kinder Morgan
In the past three months, the Henry Hub Natural Gas price has recovered over 60% after falling to its lowest level of $1.73 per MMBtu in March 2016. This recovery in the natural gas price is driven by the inventory drawdown during the injection season as more natural gas is being used to generate electricity.
Historically, it has been witnessed that a period of low inventory is followed by a peak in the natural gas market, and during this period, the price of the commodity rises. This is shown in the chart given below:
Thus, going forward, the price of natural gas in the U.S. will rise due to higher demand, as a result of which Kinder Morgan will witness a rise in its transportation volumes. Moreover, an expected increase in the price of natural gas will also lead to an increase in Kinder Morgan's fee-based revenue as it transport higher volumes at higher prices.
More importantly, it is anticipated that the rise in natural gas demand will continue over a longer time period along with better pricing. Let's see why.
Natural gas demand in the U.S. will continue increasing
According to the EIA, total natural gas consumption in the U.S. will average approximately 76.6 Bcf/d in 2016 and about 77.8 Bcf/d in 2017. These numbers are higher than the consumption of 75.3 Bcf/d in 2015. The key factor driving this increase in natural gas demand will be the increasing usage of natural gas by the electric sector, where demand is set to rise 5.1% this year.
Additionally, natural gas consumption in the industrial sector is also expected to grow by 2.7% in 2016 and by 1.7% in 2017. This will be a result of new fertilizer and chemical projects that are expected to come online in the next couple of years.
In all, Kinder Morgan expects the demand for natural gas in the United States to rise 27% through 2020, driven by growth in both the electric power and industrial sectors. Kinder Morgan also expects the use of natural gas in the electric power sector to increase by 16% to 30.5 Bcf/d in 2020 from 26.2 Bcf/d in 2015, while the industrial use of natural gas is estimated to rise by 17% to 24.3 Bcf/d in 2020 from 20.7 Bcf/d reported in 2015. The following chart shows the rise in natural gas demand across various sectors in the U.S.:
Source: Kinder Morgan
As seen in the table above, demand for natural gas is expected to remain strong going forward, which will eventually be matched by an increase in supply. This will ultimately lead to growth in the transportation and storage business of Kinder Morgan.
Thus, apart from being cheap on a distributable cash flow per share basis at present, another reason to buy Kinder Morgan is the strength in natural gas consumption going forward. Natural gas is becoming the fuel of choice for electricity generation in the U.S., while its usage in the industrial sector is also rising. This will lead to an increase in transportation of natural gas from the shale areas, thereby leading to an increase in Kinder Morgan's business.
So, it will be a good idea to remain invested in Kinder Morgan for the long run given the company's improving end-market prospects even though it has gained almost 25% this year.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within 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.