Kinder Morgan (KMI -2.23%) stock is trading at historic lows, but there are good reasons for Wall Street's current pessimism. The company's fee-based revenue model has taken a hit from lower oil and gas prices, which has reduced earnings and forced management to slash capital expenditures and accelerate efforts to strengthen the balance sheet.
But things are about to change -- and not just because management's efforts are paying off (though they are).
Why? There are structural changes underway in North American energy flows that will alter the global energy market for decades to come. While these are just getting underway, they'll arrive virtually overnight, with significant impacts felt by 2020. It's possible there is no company better positioned to capitalize on the long-term opportunity than Kinder Morgan. That makes the stock an awesome buy today.
North American energy flux
American shale oil and gas have quietly transformed the country's trade fortunes in the last decade. Consider that in 2010 the United States had an energy trade imbalance of negative $273 billion, which made up 43% of the country's total trade deficit. By 2016 the nation's energy trade imbalance shrunk to just negative $59 billion, which represented only 8% of the total trade deficit.
Three major things contributed to the massive decline in trade imbalances from 2010 to 2016:
- America produced more oil and gas within its own borders, allowing it to significantly reduce imports.
- The remaining energy (crude oil) that America imported last year was significantly cheaper per unit (barrel) than it was in 2010.
- Congress allowed exports of American crude oil and crude products.
Here's the scary part: these forces aren't close to being exhausted. American oil and gas production are expected to rise for the foreseeable future to account for increasing shares of domestic consumption. Meanwhile, it only became legal to export crude oil in late 2015, and the country's first major shipments of liquefied natural gas, or LNG, only began in late 2016.
The United States is now exporting 1.3 million barrels of crude oil per day, which is about 15% of total production. Why export when domestic consumption isn't fully met with domestic production? Shale crude is categorized as light and sweet, which means it is easy to refine and can be sold at a premium in the international market. That's offset by importing and processing cheaper crudes from the Canadian oilsands. While few other countries can handle these grades, American refineries are specifically outfitted to do just that.
The largest source of growth for energy exports won't be in crude oil, however, but in natural gas. At the beginning of last year, total natural gas exports were just under 6 billion cubic feet per day (Bcf/d), all from land-based pipelines to Mexico and Canada. Net exports to Mexico alone are expected to increase by 2 Bcf/d by 2021.
Meanwhile, growing LNG exports will make the United States a net exporter of natural gas in 2017. That hasn't happened since 1958 -- and Uncle Sam won't be turning back. By the end of 2019 the United States will have 9.5 Bcf/d of LNG export capacity, up from just 1.4 Bcf/d at the end of 2016.
Wall Street isn't pricing it in yet, but energy exports are the most important long-term driver for Kinder Morgan.
The company owns an unparalleled pipeline network in North America that moves 2.1 million barrels of crude oil per day and includes 70,000 miles of natural gas pipe -- longer than all pipeline infrastructure in China. It's connected to every major natural gas resource in the United States, moving about 40% of all domestic consumption. It owns the only oilsands pipeline that reaches Canada's West Coast (and is about to triple capacity). It's the largest independent natural gas terminal operator and largest transporter of petroleum products, natural gas, and CO2 on the continent.
That means Kinder Morgan will be first in line to benefit when Uncle Sam starts slinging ever increasing amounts of energy across the globe. As more export infrastructure is built on the coast, more inland oil and gas production will need to make its way to the country's shores. And if it's going to an LNG export facility, then it has to be stored somewhere. Good thing the company owns 16% of the nation's storage capacity.
Simply put, the coming golden age for American energy exports will result in higher throughput and fees for the company's pipeline infrastructure -- and that doesn't even include increased demand from new natural gas power plants.
Indeed, Kinder Morgan estimates that total American natural gas production will increase 21%, or 16.5 Bcf/d, over 2016 output by 2021. That's despite the fact that company projections for LNG exports are 2.6 Bcf/d lower than numbers from the EIA.
What does it mean for investors?
This one is pretty simple. Even though more and more domestic energy consumption will be met with domestic production in the coming years, there will still be plenty left to export. Kinder Morgan's extensive North American pipeline network means the stock is an awesome buy for investors looking to own a piece of the long-term opportunity.