Proof That Kinder Morgan's Best Growth Days Lie Ahead

Kinder Morgan's family of pipeline companies and MLPs represents one of America's largest energy empires but recent fears of a growth slowdown have resulted in its under performance. This article explains why those fears are overblown and provides proof that Kinder Morgan's best days still lie ahead.

Jul 8, 2014 at 12:15PM

Earlier this year negative media attention and fears of a growth slowdown caused Kinder Morgan Morgan Energy Partners (NYSE:KMP), Kinder Morgan Inc (NYSE:KMI), Kinder Morgan Management (NYSE:KMR) and El Paso Pipeline Partners (NYSE:EPB) to fall to valuations not seen since the financial crisis of 2009.

Kinder Morgan responded by reiterating its distribution growth guidance of 5% for Kinder Morgan Energy Partners, 8% dividend growth guidance for Kinder Morgan Inc, and pointed to its $14.8 billion project backlog as evidence of future growth. That backlog increased to $16.4 billion by the time Kinder Morgan announced record-breaking first quarter results, when it beat its guidance and increased its distribution by 6% and dividend by 8%. This represented 12 out of 13 years in which Kinder Morgan has met or beaten distribution/dividend growth guidance. 

Recently three exciting pieces of information have come to my attention. They illustrate why Kinder Morgan's family of companies/MLPs represents some of the best long-term income investments in America.

America's gas future
The Energy Information Administration (EIA) recently published its 2014 energy outlook report, and here are two major highlights:

  • By 2040 America's gas production will increase by 56%.
  • Before 2020 America will be a net exporter of LNG (liquefied natural gas). 

According to a study by IHS, this increased production will require $780 billion in new midstream and downstream (refining and processing) infrastructure by 2025.

This means that Kinder Morgan's current project backlog represents just 2% of this necessary spending, a drop in the bucket that means plenty of potential growth ahead. I've recently learned that Kinder Morgan's potential growth pipeline stands at $15 billion -- representing a near doubling of its current backlog but still representing only 4% of the coming energy infrastructure boom. 

Energy megatrends that will drive Kinder Morgan's growth
Kinder Morgan is predicting four key megatrends will drive an increase in natural gas demand of 36% or 23.6 Billion cubic feet/day (Bcf/d) over the next decade: 

  • Exports to Mexico: +2.5 Bcf/d.
  • Natural Gas Liquid exports and petrochemical industry boom: +3.8 Bcf/d.
  • Power Generation: +7.2 Bcf/d.
  • LNG exports: +10.1 Bcf/d.
Supplying this demand will be the Marcellus and Utica shales, which are expected to increase production 36-fold between 2007 and 2035 and contain as much as 480 trillion cubic feet of natural gas. In fact Kinder Morgan is so confident in the Marcellus and Utica shale that $7.7 billion of its potential project pipeline is in some way connected to the two formations.
Kinder Morgan's Mexico export initiative consists of a potential $2.8 billion investment over the next 15 years. Northern Mexico is currently building or converting 19 power plants to run on gas and this will generate 2.1 Bcf/d of additional demand.
Kinder Morgan is currently spending $480 million on five expansion projects of its Tennessee gas pipeline, which would connect the Marcellus and Utica shale gas fields to the north east and LNG export facilities along the Gulf Coast. These projects will expand this system's capacity by 1.86 Bcf/d by 2018. 
The Tennessee gas pipeline is also important because Kinder Morgan is partnering with Markwest Energy and Targa Resources, to repurpose sections of the pipeline system to carry natural gas liquids (NGLs) such as ethane. The system will span 1,000 miles from the Marcellus and Utica shale to the Gulf Coast, where 148 petrochemical facilities are being constructed or upgraded, part of a $176 billion NGL megatrend.
The largest opportunity for Kinder Morgan lies with LNG exports. By 2019 five export facilities along the Gulf Coast will open with a combined export capacity of 9.3 Bcf/d, or 10.8% of total 2019 projected U.S. gas production.
LNG export terminals and pipelines represent long-term guaranteed cash flows, with an average remaining contract of 18.4 years.
LNG exports are especially important to El Paso Pipeline Partners, which operates the Elba Island LNG liquefaction terminal and related pipelines. El Paso's distribution growth rate has been been halted until 2017 due to lower rates on its Wyoming pipeline system and the Federal Energy Regulatory Commission forcing it to cut rates in two cases. The good news for El Paso unit holders is that its $1 billion backlog (through 2016) 
is set to triple, with Kinder Morgan outlining $2.06 billion in additional potential projects in El Paso's future. 
Kinder Morgan Management has said El Paso Pipeline Partners' distribution growth will resume in 2017 and this $3.06 billion in new projects is strong evidence in support of that guidance.
Foolish takeaway
Kinder Morgan Energy Partners, Kinder Morgan Management, Kinder Morgan Inc, and El Paso Pipeline Partners represent a $110 billion energy empire that is the fourth largest energy company in America. However, it is merely a large fish in an oncoming tsunami of oil and gas money that is sure to drive strong and consistent dividend/distribution growth for decades to come. This is why Kinder Morgan's family of pipeline companies is likely to remain one of the best income growth choices in America.

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Adam Galas has no position in any stocks mentioned. The Motley Fool recommends El Paso Pipeline Partners and Kinder Morgan. The Motley Fool owns shares of Kinder Morgan. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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