Coming off a strong quarter of growth in its natural gas business, Kinder Morgan Inc. (KMI) remains poised to capture value from connecting the sources of supply and demand burgeoning on either side of Texas.
The timeline for starting up its 2 Bcf/d Permian Highway Pipeline (PHP) has slipped a few months, but the underlying strategy set in motion by the 2 Bcf/d Gulf Coast Express (GCX), officially in service as of late September, remains as promising as ever.
“These Permian projects demonstrate us taking advantage of a very positive situation for our business,” CEO Steven Kean said during a 3Q2019 earnings conference call Wednesday. “There's large supply growth in Texas and large demand growth in Texas.
“We can bridge the two and connect to our premier Texas intrastate pipeline network on the Gulf Coast and stay entirely within the state of Texas, where we have more commercial flexibility...70% of natural gas demand growth between now and 2030 is projected to be in Louisiana and Texas, and our systems are well positioned to benefit from that.”
The growth in supply moving from the Permian Basin east to the Texas coast also presents KMI with opportunities for downstream expansion to target liquefied natural gas (LNG), power, industrial and petrochemical demand, Kean said.
“In fact, our backlog includes about $325 million to expand and improve connectivity along our Texas intrastate pipeline network in order to enable us to place the incremental volumes that will be hitting our system and are now hitting our system,” he said.
On the topic of LNG, at the end of September KMI’s Elba Liquefaction Co. placed the first unit in service at its Elba Island export facility on the Georgia coast.
“The remaining nine units are on the island, and we are expected to place three more in service this year, with the remaining six coming online next year in the first half of the year,” Kean said.
Placing the Elba and GCX projects in service reduced KMI’s project backlog by $1.6 billion to $4.1 billion as of the end of the third quarter. Still, the company has added roughly $1.2 billion in projects year-to-date, mostly in its Natural Gas Pipelines segment, management said.
“We will remain disciplined here,” Kean said. “We seek returns that are well above our cost of capital in order to deploy capital. We believe based on our historical experience and on the size of our network and the market dynamics at play, particularly in natural gas, that we'll continue to provide the opportunity to invest in $2-3 billion a year in attractive return expansion projects.
“But importantly, if we don't find that much in new opportunities, we are not going to force it. We have other opportunities to deliver value to our shareholders, and we expect to maintain our discipline. We will maintain our discipline.”
Natural gas transport volumes for the third quarter grew 13% from the year-ago period, driven by El Paso Natural Gas (EPNG), Tennessee Gas Pipeline (TGP) and Kinder Morgan Louisiana Pipeline (KMLP). Along with GCX, Colorado Interstate Gas (CIG) and Wyoming Interstate Co. (WIC) also saw volumes grow. KMI has now recorded at least 10% year/year growth in natural gas transport volumes for seven straight quarters, management said.
EPNG volumes were lifted by Permian-related activity and higher throughput for storage refill in California. TGP’s higher volumes came from projects placed into service, while the in-service of the Sabine Pass Expansion late last year helped drive the year/year gains on KMLP. Both CIG and WIC benefited from activity in the Denver-Julesburg Basin, with CIG also seeing higher volumes from coal-to-gas switching for power generation, according to KMI.
KMI’s natural gas gathering volumes grew 12% compared with 3Q2018, primarily on higher volumes on the KinderHawk, South Texas and Eagle Ford Midstream systems. Natural gas liquids transport volumes were up 10% year/year. Crude and condensate pipeline volumes were up 4% year/year, while total refined products volumes were up 1%.
KMI reported quarterly net income of $506 million (22 cents/share), versus $693 million (31 cents/share) in the year-ago quarter. Total revenues were $3.2 billion, compared with $3.5 billion in 3Q2018.