Here's What's Driving Growth at Kinder Morgan

Kinder Morgan is seeing success in natural gas pipelines, and future projects will keep fueling its generous distributions.

Aug 1, 2014 at 1:26PM

Midstream oil and gas company Kinder Morgan Inc (NYSE: KMI) is sure to play a big role in America's ongoing energy boom. It maintains a vast network of pipelines, treatment facilities, and storage plants across North America and has an impressive $15 billion project backlog.

As oil and gas production in the United States grows, demand for energy infrastructure remains strong. Combined with its other various entities, including master limited partnerships Kinder Morgan Energy Partners (NYSE: KMP) and El Paso Pipeline Partners (NYSE: EPB), Kinder Morgan is one of the biggest energy companies in the United States.

Kinder Morgan is a growing company, and treats its investors well with a hefty yield. Here's why Kinder Morgan is on solid ground and set to keep rewarding investors for the foreseeable future.

Plan for growth in place
Over the first half of the year, Kinder Morgan Energy Partners generated adjusted distributable cash flow of $2.77 per unit, compared with $2.67 per unit through the first six months of 2013. This represents nearly 4% growth, which is very important since distributable cash flow is what supports the company's distributions.

The biggest driver behind growth this year has been Kinder Morgan's natural gas pipelines business. Earnings in this segment jumped 13% last quarter. Management believes natural gas demand could increase 35% over the next decade in the United States. Kinder Morgan would surely benefit from this, as its natural gas pipelines business is its largest operating segment. As a result, management expects growth in the natural gas pipelines business to exceed its stated 14% forecast for this year.

In particular, Kinder Morgan has approximately 1.7 billion cubic feet per day of pending natural gas transactions. The majority of this is in liquefied natural gas projects, where the company sees a lot of growth potential up ahead.

Separately, Kinder Morgan's other businesses are growing as well. Its carbon dioxide segment produced 3% growth in earnings, and is on track to grow 8% this year. Growth in this area will be fueled by growth in oil production and natural gas liquids sales volumes. Oil production volumes hit 56,000 barrels per day last quarter, up 6% year over year.

The company is counting on its Tennessee Gas Pipeline, where the company is working on two projects totaling $747 million in capital expenditures, to move gas from West Virginia to delivery points in Mississippi and Louisiana. These projects are slated to begin service next year and in 2017.

In the nearer term, management is counting on hitting its growth targets to meet its distribution forecasts.

Kinder Morgan on track to meet distribution targets
Kinder Morgan offers a steady business model that is especially valuable in times of volatile underlying commodity prices. Kinder Morgan's network of pipelines and storage terminals acts essentially as toll roads. The company collects fees on the volumes processed and transported, which results in a steady stream of cash flow, regardless of how commodity prices swing.

This allows Kinder Morgan to raise its distributions like clockwork, on a quarterly basis. After earnings, management declared a modest distribution increase for Kinder Morgan Energy Partners. This represents the 52nd such increase since current management took the helm in 1997.

Distributions should be protected by projects
Fortunately, due to strong success in its key initiatives, including the Tennessee Gas Pipeline, as well as additional long-term contracts in its El Paso Natural Gas business, the company should reach its goals. This will keep fueling Kinder Morgan and El Paso's distributions, which currently sit between 6%-7%.

Those distributions are are arguably the best aspect of owning Kinder Morgan Energy Partners and El Paso Pipeline Partners. Because the security of the distributions is critical for investors, it's relieving to see Kinder Morgan's impressive project backlog and growth prospects.

Bob Ciura owns shares of Kinder Morgan Energy Partners LP. 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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