Kinder Morgan Inc. moved back to the positive side of the ledger during the third quarter, but management for the midstream giant remains keenly aware of the lingering uncertainties facing the oil and gas industry.

Kinder Morgan Inc.

“We’re not on the other side of the downturn of the U.S. energy industry,” CEO Steven Keen said Wednesday during the quarterly conference call. “We’re not on the other side of the virus. I think there remains a fair degree of uncertainty out there.”

The Houston operator reported a 2% decline in gas volumes moving through its systems in the quarter, particularly on the Kinder Morgan Louisiana Pipeline and the Natural Gas Pipeline Co. of America because of the unprecedented decline in liquefied natural gas (LNG) demand. The Ruby Pipeline also suffered from increased competition from Canada, while the Wyoming Interstate Co. was hit by falling Rockies production. Gathering volumes were down 13% year/year.

Despite the lower volumes on the network, there were some upshots. The midstreamer reported greater contributions from the Elba Liquefaction project and Permian Basin pipeline Gulf Coast Express. The final three trains of the fully contracted 10-train Elba LNG project were brought into service during the quarter.

After sinking to record lows over the summer amid bloated storage inventories worldwide, LNG demand is starting to rise with the arrival of colder weather in Asia and Europe. Analysts expect U.S. feed gas to stabilize around 9-10 Bcf/d during 4Q2020 from an average around 6 Bcf/d in September.

No Overnight Development

Although oil prices continue to languish near $40/bbl, Kean acknowledged the more positive outlook for gas prices, which are starting to reflect the tightening supply/demand balance resulting from higher export demand and lower associated gas output. The November New York Mercantile Exchange contract reached the $3.00/MMBtu level on Wednesday for the first time in nearly two years. Even stronger pricing is expected in 2021.

Kean said prices affect producers more than they do the midstream sector, but there are some benefits related to storage that impact Kinder. Nevertheless, conversations with producer customers have been “good.”

The company chief expects the recovery in the gathering and processing (G&P) segment to be gradual, but said the oily Bakken Shale may make a “big comeback.” Kean also expects the Haynesville Shale to start recovering soon in order to compensate for lower associated gas output and a boost in LNG exports. The Eagle Ford Shale may straggle behind.

It’s important to remember “there is a lag in making a switch” from associated gas to dry gas, Kean told investors.

Tom Martin, president of the Natural Gas Pipelines Group, agreed that dry gas development “doesn’t happen overnight.” He expects balances to be “fairly tight” in the first half of 2021. “We really need to see the response from the producer community for the second half of 2021 and beyond.”

Since 2Q2020, mergers and acquisitions (M&A) have ramped up in the exploration and production (E&P) community. This week alone, Permian pure-play Pioneer Natural Resources Co. and Parsley Energy Inc. agreed to tie up, while independent ConocoPhillips agreed to pay $9.7 billion to buy Concho Resources Inc. Chevron Corp. bought out rival Noble Energy Inc. in July. Devon Energy Corp. also is taking over WPX Energy Inc. 

Kean viewed the consolidation as being good for the E&P sector and indirectly for midstream, as it results in more “well capitalized players” that could continue to develop resources. “They’re doing it in a way that doesn’t harm the entity going forward.”

Kinder is going to be “very conservative” and “disciplined” in its participation in M&A activity, but Kean expects to see more asset packages coming into the market. “If we find something attractive, we’ll look to act on those.”

Expansions Progressing

Kinder continues to work toward bringing online the Permian Highway Pipeline (PHP) in the early part of 2021 even “under very difficult circumstances.” The 2.1 Bcf/d project is 97% mechanically complete despite local opposition, permit challenges “and by the way, a global pandemic too,” said the CEO.

Even though associated gas output in the Permian is expected to remain slow given the weak oil price environment, Kean said PHP’s in-service would not be to the detriment of Kinder’s other gas systems in the basin since most of the existing takeaway is under reservation, fee-based contracts. However, the chief noted that with West Texas being less constrained, “there is less of the short-term business that we were doing and getting nice rates for.”

Work is also progressing on a $260 million expansion project designed to increase capacity by 1.4 Bcf/d on Kinder’s Texas intrastate system to serve future LNG, industrial, electric generation and local distribution company expansions along the Texas coast. The project is expected to be completed by the end of the year.

The midstream company also received “significant” customer commitments through a recent open season and is moving forward with the Mier-Monterrey Pipeline system expansion project serving Mexico. The $22 million project, expected to be in service in 3Q2021, involves expanding the system’s existing capacity by 35 MMcf/d and is supported by long-term take-or-pay contracts.

On Tuesday, Kinder also received federal approval to start construction on the Acadiana  expansion project to provide 945,000 Dth/d of capacity to serve the sixth production unit at Cheniere Energy Inc.’s Sabine Pass LNG facility. The midstreamer is targeting early 2022 in-service.

Earlier this month the company completed another expansion on NGPL that also delivers to Sabine Pass, while an expansion of NGPL’s Gulf Coast System is expected to be placed in service by the end of March.

Lower Outlook 

Distributable cash flow (DCF) is still expected to come in slightly more than 10% below the $5.1 billion budgeted for 2020. The budgeted $2.4 billion of expansion projects and contributions to joint ventures are projected to be lower by around $680 million.

Kinder expects to use internally generated cash flow to fully fund its 2020 dividend payments and discretionary spending. The board approved a cash dividend of 26.25 cents/share for the quarter, $1.05 annualized, which represents a 5% increase over 3Q2019.

Kean said while the company has become more efficient, management continues to examine how the company is organized and how it operates. It is “centralizing certain functions in order to be more efficient and effective, and we are making appropriate changes to how we manage and how we are staffed, and I believe that we will achieve substantial savings.”

The CEO also discussed the role of gas amid the ongoing energy transition. Believing that gas is “essential to meeting the world’s energy needs and meeting climate objectives,” Kean said Kinder’s assets are “well-positioned to benefit from that opportunity.”

More important to the company, though, is “the value of what we specifically do,” which is providing transportation, storage capacity and deliverability. “The value of that increases for the power sector as more intermittent resources are relied on for power generation,” he said.

The executive said the company would continue to look for ways to benefit from the long-term energy transition, including the role of its infrastructure in firming intermittent renewable resources. Further down the road, this could include hydrogen blending opportunities in its gas pipelines and “if the incentives are adequate,” captured man-made carbon dioxide (CO2) to be transported via its CO2 pipelines and used for enhanced oil recovery.

In California, where Gov. Gavin Newsom wants to require all new in-state vehicles to be zero-emission by 2035, there may be opportunities to develop additional facilities to handle increases in the renewable diesel.

“California is heavily subsidized and so it will make sense for people to make those investments, and we’re looking for ways that we could participate,” Kean said.

There is downside to any mandate that would ban diesel-fueled vehicles, but the CEO said it takes about 10-12 years to roll over the vehicle fleet, and there are a number of things that mitigate the impact for Kinder on the refined products side. Kean also noted that not all of its volumes move to California; it also serves Arizona and Nevada.

Kinder reported a net income of $455 million (20 cents/share) for the third quarter, down from $506 million last year. DCF was $1.085 billion (48 cents/share), compared with $1.140 billion (50 cents) in the year-ago period.