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Kinder Morgan Putting Bulk of Investments in Natural Gas; Second Permian Line in ‘Very Early’ Discussions

The natural gas segment makes up the “vast majority” -- about 90% -- of $900 million worth of projects added into Kinder Morgan Inc.’s (KMI) backlog during the first quarter as the Texas-based company reported back-to-back quarters of transport volume growth and is eyeing opportunities for new investment, CEO Steven Kean said Wednesday.

Natural gas transport volumes were up 10% year/year in the first quarter, gas gathered rose 1% and crude gathered volumes were up 3%. The 10% increase in the transport volumes was on top of an 8% year/year increase that KMI had in the fourth quarter, “so two quarters in a row of strong year-over-year growth,” Kean said on a call to discuss first quarter earnings.

The increase in natural gas transport volumes was driven by higher throughput across the system from winter demand. There also were gains on Tennessee Gas Pipeline as projects were placed in service; on Natural Gas Pipeline Company of America (NGPL) with additional deliveries to Mexico; on El Paso Natural Gas (EPNG) because of additional Permian Basin capacity sales; and on Colorado Interstate Gas.

“Cold weather helps remind the market of the value of holding firm transportation and storage capacity,” Kean said.

But there's more going on in the gas segment than a few cold winter days, he added. Gas supply and demand is growing across the United States, and volumes are growing in the Permian and in the Bakken and the Haynesville shales, which drive producer-push activity.

Meanwhile, growing liquefied natural gas (LNG) exports are creating demand pull. “This elevates the value of our existing network and creates opportunity for new investment,” Kean said.

KMI during the quarter signed up about 1.2 Bcf of Permian capacity on its EPNG transmission lines. These are “short-haul moves,” and the expansion capital required is “very modest” for a little more than $30 million, Kean said. “This illustrates the value of having pipe in the ground while overall utilization of the network is climbing as a result of a growing supply and demand, including export demand.”

KMI also signed up the remaining capacity on its 2 Bcf/d Gulf Coast Express Pipeline Project. Kean said 94% of the capacity is now spoken for under long-term reservation-based contracts. The last 6% is a “long-term gas purchase by Texas intrastates to serve our sales business in the state of Texas.” That commitment is pending, but KMI expects to conclude it soon.

The company also is in “very early” discussions for a second pipeline in the Permian, but the CEO told investors during the call not to be “too interested” just yet. “This is a very early kind of discussion, but I think it is the view in that market that a second pipe really is needed.”

Kean said it's clear that some producers with significant production coming online have been holding commitments back to help underwrite a second pipeline. Also, finding a way to deal with the all the associated gas being produced in the Permian without having to flare it is important, and shippers are beginning to rapidly catch up to that and think about ways to relieve those constraints, he said.

Gulf Coast Express has the right make-up of partners, good upstream connectivity and great downstream connectivity to “get that gas to the markets that are really booming right now, which is along the Texas Gulf Coast, both for Mexico exports as well as power and petchem demand and LNG,” he added.

While KMI management thinks it has some advantages, any talk of a second pipeline is in the early stages. In the meantime, the company has opted to invest in smaller debottlenecking problems, including constraints on the EPNG and NGPL systems. Such enhancements could come in the form of back pressure regulators, which are inexpensive, or compression, which is more expensive, among other things, said KMI’s Thomas Martin, who is president of natural gas pipelines.

On the gathering side, “there were pluses and minuses,” Kean said. The company’s Haynesville assets boosted gathered gas volumes, while its Hiland assets in the Bakken boosted crude gathering. Those increases were partially offset by lower gathered volumes in the Eagle Ford Shale.

KMI also continued to see strong pull on the demand side. Power-generation demand was up 22% year/year, while exports to Mexico rose 2%. KMI exports about 70% of the gas delivered to Mexico.

Regarding KMI’s Elba Liquefaction Project, the first four liquefaction units have been delivered, and construction is progressing on the nearly $2 billion project. The first of 10 liquefaction units is expected to be online in the third quarter, with each subsequent unit coming online 30-45 days sequentially from that point, Martin said. The final unit is expected to come online in late 2Q2019/early 3Q2019 timeframe.

The federally approved liquefaction project at the existing Southern LNG Company facility at Elba Island near Savannah, GA, is to have a total liquefaction capacity of about 2.5 million metric tons/year, equivalent to about 350 MMcf/d. The project is supported by a 20-year contract with a unit of Royal Dutch Shell plc.

Net income in 1Q2018 was $485 million (22 cents/share), versus $401 million (18 cents) in 1Q2017. Distributable cash flow (DCF) was 56 cents/share, representing 4% growth over 1Q2017, resulting in $804 million of excess DCF above its dividend.

KMI announced a cash dividend of 20 cents/share for the first quarter (80 cents annualized), a 60% increase from the year-ago period. During 2018, the company expects to achieve a cash dividend of 80 cents/share and DCF of about $4.57 billion ($2.05/share).

The company now expects to invest $2.3 billion in growth projects during 2018 (excluding growth capital expected to be funded by Kinder Morgan Canada Ltd.), up $100 million from the budget, to be funded with internally generated cash flow without the need to access capital markets. In addition, KMI has to date repurchased 27 million shares for about $500 million as part of a $2 billion share buy-back program that began in December.

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