Recent Deals Bring Energy Powerhouse Back to its Roots

After a slew of announcements about expanding its terminals business and improving crude oil pipelines, midstream giant Kinder Morgan (NYSE: KMI  ) has issued two releases over the past month that bring the focus back to the company's bread and butter: natural gas.

The news
Kinder Morgan kicked August off with the announcement that its master limited partnership Kinder Morgan Energy Partners (NYSE: KMP  ) would be teaming up with MarkWest Energy Partners (NYSE: MWE  ) to form a joint venture in the Appalachian basin.

The new venture will serve producers operating in both the Marcellus and Utica shale with two key facilities. The first is a cryogenic processing complex comprised of two facilities with a combined capacity of 400 million cubic feet per day. The first facility is expected online by the end of 2014, with the second plant following shortly thereafter .

The second project is a natural gas liquids pipeline initially capable of transporting 200,000 bpd from the new complex in Ohio down to the Gulf Coast. Its capacity could be expanded to 400,000 bpd if need be. The new JV will split a 50/50 stake in the cryogenic complex, which will be operated by MarkWest, while Kinder Morgan Energy Partners would operate the pipeline and maintain at least a 75% stake .

The second bit of natural gas news comes from Kinder Morgan's other MLP, El Paso Pipeline Partners (NYSE: EPB  ) . The partnership announced an extremely successful open season for expansion on two of its existing natural gas systems. El Paso was able to fully contract close to 600 million cubic feet per day, and generated additional interest in 400 MMcf per day .

The two systems feed customers in Georgia, South Carolina, and northern Florida. The South is a big driver in American natural gas consumption, and that is only expected to increase as many power producers abandon fuel oil power plants in favor of natural gas powered facilities.

How this fits the business

For a long time Kinder Morgan Energy Partners did not operate the natural gas processing and treating facilities that many of its midstream peers did. That began to change with the Copano acquisition, and it continues to change with the MarkWest joint venture. Regardless of the specific assets, the future of Kinder Morgan is very much about natural gas.

We can see this quite clearly when we look at the partnership's segment earnings through the first six months of the year:

Source: Company release 

The Copano acquisition is a big driver of the growth in the natural gas segment, but volumes are also up on Kinder Morgan's Texas intrastate lines. The segment posted earnings of $1.06 billion through the first two quarters of this year. The chart helps reiterate that even though management is taking steps to grow the partnership's other business segments, natural gas remains the focal point for growth.

Bottom line

Kinder Morgan, is fed by two MLPs, and the success of both of them is predicated on the future of natural gas. Looking ahead, the Southeast's thirst for natural gas, Mexico's reliance on U.S. natural gas, and the momentum behind liquefied natural gas exports all support CEO Rich Kinder's bullishness on the future of the commodity.

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