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Kinder Morgan Accelerating Plans to Tackle Permian Natural Gas Bottleneck

Kinder Morgan Inc. (KMI) management said late Wednesday it would pump $2.4 billion into growth projects this year, up $200 million from the previous forecast, as it lays the groundwork to debottleneck the juggernaut that is the Permian Basin, where oil and associated natural gas production is booming.

“There continue to be bottlenecks, and the infrastructure is trying to catch up to that now,” said CEO Steven Kean. “There’s a long-term projection for a continued strong basis between the Permian and Houston Ship Channel, and that’s a consequence of expected continued growth in oil and associated gas production. We’re trying to help our customers by debottlenecking those constraints a bit, but the growth in production continues to make those constraints and those differentials fairly persistent, which is a good thing for a company in the business of moving this stuff from place to place.”

KMI, one of the nation’s largest transporters of natural gas, moved forward late last year with plans for the now fully subscribed Gulf Coast Express Pipeline (GCX) to move nearly 2 Bcf/d from the Permian to the South Texas hub at Agua Dulce near Corpus Christi. Right-of-way acquisitions are ongoing, with mainline construction expected to start later this year. The pipeline is scheduled to enter service in October 2019.

Plans for a second gas pipeline to move volumes from the Permian are also accelerating, management said. KMI is partnering with EagleClaw Midstream Ventures LLC and Apache Corp. on the 42-inch Permian Highway Pipeline Project, which would move gas along the Texas coast and potentially into Mexico. While management is not ready to make a final investment decision (FID), Kean said “customer sign-ups and customer interest has been coming very fast.”

Given that, the company is considering increasing the size of the Permian Highway project to a 48-inch diameter pipe. More information about the plans are sometime before the end of September, Kean said. For now, the project is attractive enough that KMI would consider funding more of it if Apache, one of the biggest gas players in the Permian, or EagleClaw were unable to do so, he said during a conference call to discuss second quarter earnings. In response to a question from an analyst, Kean said management doesn’t expect funding to be an issue.

While KMI has holdings in many of the key U.S. gas basins, it’s long been focused on the Gulf Coast and surrounding regions. The Houston operator also is pursuing expansions on the El Paso Natural Gas system, the Natural Gas Pipeline Company of America (NGPL) and its Texas intrastate system.

“Texas is the biggest piece,” Kean said of the growth prospects. “If you look at the overall U.S. market, the higher value market is on the Texas Gulf Coast now...In terms of the absolute basis differentials, you have a depressed price in the Permian, West Texas, and you have a very strong price in the Houston Ship Channel because that’s where all the incremental demand is.

“So all the gas, including gas from the Northeast, including gas down the coastline on NGPL, including gas on...newbuild pipelines, they’re trying to get on our systems and others on the Texas Gulf Coast.”

When it comes to growth, the Trump administration’s move to slap a 25% tariff on steel imports has the company watching its supply for pipelines closely. Management does not think GCX will be impacted by the tariffs. About 50% of the steel for the project is being made domestically, with half from foreign manufacturers. The company has filed with the Department of Commerce for an exemption from the tariffs for GCX, and it also has an arrangement with its suppliers to help secure materials, Kean said.

Overall, KMI’s the natural gas pipelines segment’s performance in the second quarter was up 11% year/year. The company again reported an increase in transported volumes, up 12% from 2Q2017. President Kimberly Allen Dang attributed the growth on KMI’s large diameter pipes to increased supplies from the Permian and Denver-Julesburg basins, growing Mexican exports and increased power demand from projects that were placed into service. Gas gathering volumes in the second quarter were also up 7% from the year-ago period.   

Those results, however, were tempered by a $749 million noncash impairment recorded on its gathering and processing assets in Oklahoma.

“It’s frustrating to see our strong fundamental economics performance this quarter overshadowed a bit by the impairment of our investment in gathering and processing assets in Oklahoma,” Kean said. “These are not bad assets, but they are not as well positioned as our other assets, for example in the Bakken and the Haynesville. And we have adjusted-return opportunities in the portfolio, like the opportunities we’re pursuing in the Permian.

“...I’ll also note that the value of our gathering and processing assets in the Bakken and Haynesville is improving, but of course, you don’t get to write those assets up.”

While the company does not plan to sell the Oklahoma assets at this point, Kean said a joint venture or some other arrangement could be considered to help boost their value.

The company also said the Elba Liquefaction Project at the existing Southern LNG Co. facility at Elba Island near Savannah, GA, would be delayed by about three months. Dang said the 2.5 million metric tons/year facility is now expected to be in service sometime in the fourth quarter instead of the third. She added that KMI has factored the delay into its guidance.

Kinder Morgan Canada Ltd.’s sale of its Trans Mountain Pipeline to the Canadian government for C$4.5 billion ($3.6 billion) is also progressing, with some of the necessary regulatory approvals received. The company has set an Aug. 30 meeting for shareholders to approve the deal, and management still expects it to close sometime before the end of the year.

Proceeds from the sale, Executive Chairman Rich Kinder said, would help the company continue to “aggressively de-lever.”

KMI reported revenue of $3.4 billion for the second quarter, nearly flat from $3.3 billion in 2Q2017. Reported distributable cash flow was $1.1 billion (50 cents/share) for the period, a 9% increase year/year. However, KMI reported a net loss of $180 million (minus 8 cents) compared with net income of $337 million (15 cents) in the year-ago period. The net loss for was attributed to the Oklahoma asset impairments.

 

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