Kinder Morgan Inc (KMI 0.40%) recently shocked the pipeline world with its announcement that it would be exiting the midstream MLP industry it helped pioneer with its $71 billion merger of its three subsidiaries, Kinder Morgan Energy Partners (NYSE: KMP), Kinder Morgan Management (NYSE: KMR), and El Paso Pipeline Partners (EPB). I recently wrote a series of articles explaining why the second largest largest energy merger in U.S. history makes Kinder Morgan one of the best dividend growth stocks in America, and why, despite its recent run up, I expect it to greatly outperform the market over the next decade.
However, in this article I'd like to focus on the company's most recent conference call, an often underutilized resource that can be a valuable store of not just company-specific information, but information relevant to the entire industry as well.
America's gas boom is just getting started
"Given the increase in demand and the disconnect between where that demand is located, primarily the Gulf Coast, and where much of the new supply is being developed, primarily the Northeast, Marcellus, Utica, that leads to great opportunities." -- Richard Kinder, founder and CEO.
Source: EIA July Drilling Productivity Report
As the above images show, the Marcellus and Utica shale's gas production growth has truly been phenomenal. For example, the daily gas production from the Utica shale is up 10-fold in less than two years.
Meanwhile, the Marcellus, which has increased its production seven-fold in just seven years, in accordance with the fast growing Utica shale, is expected to see its production up 127% by 2035.
This will make the U.S. Northeast a dominant player in the world's gas markets, a fact alluded to by Richard Kinder:
"The EIA said on Monday that Marcellus production will be at 15.5 billion Bcf per day in August, and they projected it will surpass Qatar's gas production in September ... Now Qatar is the world's third-largest producer of natural gas. I think that gives you an idea of the extent of the production ramp-up that's occurring in the Marcellus."
In fact, the Marcellus shale's production has grown so large, so quickly that it's current gas output is just 6% behind that of the entire European Union in 2012.
The coming boom in energy infrastructure is staggering in scope
During the conference call Kinder quoted the Inga Foundation and how "they estimated that there would need to be $114 billion spent on gas infrastructure between now and 2020."
Keep in mind two things about this quote. First, that comes out to $21.7 billion per year. Second, that is only for gas infrastructure; it doesn't include oil and CO2 infrastructure, which Kinder Morgan is increasingly diversifying into as well.
In addition, Kinder's Chief Operating Officer Steve Kean added some additional scale to the size of the coming energy infrastructure boom: "$100 billion of investment in Louisiana alone, tens of billions of dollars in Texas, well over $100 billion across the Gulf Coast. And we're just on the front edge of that."
In fact, according to research and analysis firm IHS, the total amount of money to be invested into the U.S. Energy sector through 2026 is $890 billion.
This vast ocean of cash and investment opportunity means that Kinder Morgan's future is bright indeed. Which brings me to another key point, the company's vast and fast growing project backlog.
Kinder's backlog represents years of strong growth ahead
"The project backlog, which increased to $17 billion ... That's a net increase of $600 million from the first quarter, even after removing from the backlog $700 million in projects that went into service during the quarter, which means that we added about $1.3 billion to the backlog in the second quarter. The bulk of that came in our Natural Gas Pipeline business."
And that backlog doesn't even represent the total growth potential of Kinder Morgan. As fellow Fool Matt DiLallo recently wrote, Kinder Morgan has identified $18 billion in potential projects, in addition to the $17 billion its currently working on.
This includes things like the Northeast Energy Direct Project. According to Kinder, "this is a very significant project, and it could move 1 Bcf a day or more from the Marcellus supply area across New York and New England."
In addition, Kinder Morgan is continuing to identify additional opportunities in some of the hottest growing areas of the energy market such as, "LNG projects, additional infrastructure for NGL and crude and condensate transportation and the development of additional CO2 supply for the booming Permian Basin," Kinder said.
Kinder is maximizing the infrastructure it already has
"Now these LNG commitments, together with another approximately 300 million of other per day -- of other pending commitments would bring the total long-term capacity signed up across Kinder Morgan's gas pipelines to approximately 5.3 Bcf per day since the beginning of December. Now to put that in context for you, that represents over 7% of the current daily U.S. natural gas demand. So it's a very significant, very important number." -- Richard Kinder.
Actually, Kinder's new commitment figures are more impressive than even he lets on. They represent a 16% increase in gas volume in just six months, which goes to show that the company is far from succumbing to the law of large numbers.
In addition, as Kean points out, increased capacity commitments helps to maximize the value of Kinder's existing infrastructure: "this capacity sign-up is driving not only investment opportunities for us, it's also driving values on our existing system. And we're not through yet."
TransMountain pipeline delayed
As I recently wrote about, Kinder Morgan's important TransMountain pipeline is facing steep political opposition, much like the Keystone XL pipeline is in the US.
"As usual, the big story here continues to be our Trans Mountain expansion, where we're expanding our existing system from 300,000 barrels a day to 890,000 barrels we've got under long-term contracts ... Those contracts' structure and the economics are all approved. We're working our way through the NEB process, and our key objectives here are complete our work, meet the NEB standards, consult with the First Nations, accommodate provincial and local authorities...we feel like we are going to get pushed into 2018 with this order." -- Steve Kean
The TransMountain pipeline, in addition to nearly tripling Kinder Morgan's transport of Canadian tar sand (which is estimated to hold 2.5 trillion barrels of oil, the third largest oil reserves on earth) represents diversification for Kinder Morgan out of natural gas transportation, which is its historical strength, and into crude oil transportation.
With the Kinder Morgan merger expected to signal a major potential new growth phase for the company, with $1.5 trillion in potential acquisitions and investments through 2035, the success of Kinder's oil projects is something long-term investors need to watch closely.
Conference calls are a great way for investors to better get to know the companies they invest in, and Kinder's latest earnings call illustrated just why the midstream MLP industry is such a hot sector. It also shows why this energy pipeline behemoth in particular, is poised for decades of continued strong dividend growth and market outperformance. Potential investors should have no qualms about buying shares of Kinder Morgan at current prices, as it's likely to be a strong income play over the next decade.
