Kinder Morgan (NYSE:KMI) appears to be winning the race to build the next natural gas pipeline out of the fast-growing Permian Basin. Just days after the unveiling of a rival pipeline by Targa Resources (NYSE:TRGP), Kinder Morgan announced that it reeled in ExxonMobil (NYSE:XOM) as a major shipper for its proposed Permian Highway Pipeline (PHP). That agreement moves it one step closer to locking up its second major gas pipeline out of the region to drive growth in the coming years.
The building boom
Kinder Morgan is already building a multibillion-dollar gas pipeline out of the Permian Basin after starting work on the Gulf Coast Express (GCX) in the first quarter. The company is developing that $1.75 billion pipeline in a partnership with Targa Resources and DCP Midstream. GCX will transport up to 1.98 Bcf/d of natural gas from shippers such as Apache (NYSE:APA), which not only signed a transportation agreement, but holds an option to buy a 15% stake in the pipeline from Kinder Morgan.
However, shortly after locking that project up, Kinder Morgan indicated that a second line was already in development. The company unveiled that project in June after forming a joint venture with privately held Eagle Claw Midstream and Apache to build the PHP project, which is a $2 billion pipeline that would move 2.0 Bfc/d. Eagle Claw and Apache each committed to much as a quarter of the pipeline's proposed capacity, which they hope to bring online by the end of 2020.
ExxonMobil will now join them after it signed a letter of intent to secure space on the line, committing to ship up to 450 Mmcf/d. In doing so, it gave a big stamp of approval for the project, pushing it one step closer to becoming a reality. That's just as important to Exxon as it is to Kinder Morgan since the oil giant expects to grow its oil and gas output from the region by five-fold through 2025 as part of its ambitious expansion plan and needs a clear path to get its gas to market centers.
Staying ahead of the competition
Kinder Morgan's announcement that it has secured a significant commitment from ExxonMobil comes just days after Targa Resources announced that it had teamed up with NextEra Energy, MPLX, and a private equity company to develop the Whistler Pipeline Project, which would move Permian gas to the Gulf Coast. This pipeline would also be able to ship 2.0 Bcf/d and consists of a 450-mile mainline as well as a smaller 170-mile lateral that would connect the system to processing plants operated by Targa Resources. Those partners and their producing customers have collectively committed more than 1.5 Bcf/d to the project, which would also begin operations at the end of 2020.
While both pipeline developments have commitments representing about three quarters of their proposed capacity, Kinder Morgan seems to be out in front. With an industry leader like Exxon supporting its project, it will "accelerate our path to a final investment decision," according to Sital Mody, the president of Kinder Morgan Natural Gas Midstream, because it should quicken the pace of conversations with other shippers to firm up their commitments.
That's important because there doesn't seem to be enough gas to support to two more 2.0 Bcf/d gas pipelines out of the Permian by that end of 2020 timeframe. That's because output in the region is only expected to grow from 8.7 Bcf/d in this year up to 10.9 Bcf/d in 2021, and GCX is coming online in late 2019. Though, with output in the region expected to reach 14 Bcf/d by 2027, there's a clear need for additional pipeline capacity at some point in the future.
A big step forward for Kinder Morgan
Investors have questioned how fast Kinder Morgan can grow in the coming years after it abandoned its Trans Mountain Pipeline expansion in Canada. However, the company can provide more clarity on its growth prospects by locking up the PHP project. That's why investors should keep an eye on its progress, especially with competition heating up.