Earnings Preview: Natural Gas Transportation Volumes Should Drive KMP’s Earnings

Kinder Morgan Energy Partners (NYSE:KMP), one of North America’s largest mid-stream energy companies, is expected to publish its Q3 2014 results on October 14. The company’s performance over the last few quarters has been driven by acquisitions in its natural gas pipelines division as well as strong oil production volumes in the CO2 business. In Q2 2014, the company’s revenues grew by around 16% year-over-year to about $3.94 billion while operating income increased 31% to $1,013 million. Below we take a look at some of the factors to watch, and what to expect from the company’s natural gas and products pipelines business when it releases earnings.

Trefis has a price estimate of $83 for KMP, which is about 8% below the current market price.

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Natural Gas Pipelines: Transportation Volumes Expected To Remain High

In Q2, KMP’s natural gas pipelines division saw its earnings before depreciation, depletion, amortization and certain items rise by around 14% year-over-year, to about $642 million. ^[1] The earnings growth was primarily driven by the increased demand for natural gas transportation. Overall natural gas transport volumes through Q2 rose by around 9% year-over-year to around 16,948 Bbtu per day. ^[1] This growth mirrors the disconnect between higher natural gas demand in the Gulf Coast and where most of the supply is being developed(Marcellus, Utica). The U.S. Energy Information Administration(EIA) pointed out earlier this week that production in the Marcellus shale would surpass the production of the Cutter shale, the world’s third-largest producer of natural gas play, by September. This shows that there are tremendous growth opportunities for KMP going forward.

For this quarter, among the company’s pipelines, we will be watching the performance of the Tennessee Gas pipeline (TGP) and the El Paso Natural Gas (EPNG) system. KMP’s Tennessee Gas Pipeline system operates multiple-line natural gas pipelines, which extend from the natural gas producing regions of Louisiana, the Gulf of Mexico, South Texas to the North Eastern United States. The pipeline also has access to the Marcellus and Utica shale plays. During Q1 and Q2, the system saw its volumes rise on the back of higher volumes from the Marcellus and Utica Shale plays as well as the effect of several expansion projects that began service late last year. While the pipeline has largely been northbound, Kinder Morgan has been undertaking some reversal projects for the pipeline, to add more south bound capacity to move gas from the Marcellus and Utica shales to the Southeast and the Gulf Coast. The company has also added new long-term contracts, with an average life of about 15 years to transport about 1.4 Bcf a day on the Tennessee system.

Products Pipeline Business: Watching The Crude and Condensate Pipeline

KMP’s products pipelines business primarily transports refined petroleum products such as gasoline, diesel fuel, jet fuel and natural gas liquids from refineries to terminals, distribution centers and airports across the United States. While the consumption of liquid fuels in the U.S. grew by around 2.1% in 2013, volumes are expected to remain relatively flat this year. ^[2] However, we believe that Kinder Morgan could see some  year-over-year transportation volumes growth, particularly from its Crude and Condensate pipeline.

The Crude and Condensate pipeline extends from the liquids rich Eagle Ford Shale in South Texas to the Houston ship channel. The shale has been witnessing a sharp increase in oil production, with volumes soaring from around 123,000 barrels per day in 2010 to around 1.2 million barrels per day in December 2013. ^[3] The production from the shale is expected to exceed 1.5 million barrels per day by 2015 and this could bode well for shipment volumes for pipeline operators in the region (see Why The Crude and Condensate Pipeline Is Important To Kinder Morgan).

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1. Kinder Morgan CEO Discusses Q2 2014 Results, Seeking Alpha, July 2014 [↩] [↩]
2. U.S. Petroleum and Other Liquids, US EIA, April 2014 [↩]
3. New Frontiers: Eagle Ford vs. Permian, the great Texas oil showdown, Platts, February 2014 [↩]