For the second time in less than a year, Kinder Morgan (NYSE:KMI) has given the green light to a new natural gas pipeline project, this time making a final investment decision on the Permian Highway Pipeline. In doing so, the company is adding a bit more clarity to its growth prospects, which dimmed earlier this year after it sold the Trans Mountain Pipeline and its controversial expansion project to the Government of Canada. While the company hasn't yet replaced what it lost by jettisoning that project, it's working fast to lessen the blow.
Details on the latest project
Kinder Morgan initially unveiled the Permian Highway Pipeline project in late June, announcing that it signed a letter of intent with private equity-backed EagleClaw Midstream and Apache (NASDAQ:APA) to develop another new gas pipeline out of the Permian Basin. That project got a big boost of confidence last month when ExxonMobil's XTO Energy subsidiary signed on to be an anchor shipper. The partners would go on to secure additional shippers for nearly all the pipeline's remaining capacity, which allowed them to officially sanction the project this week.
Kinder Morgan and EagleClaw expect to invest about $2 billion in building the 430-mile pipeline that will move up to 2 billion cubic feet of natural gas per day from the Permian to the Texas Gulf Coast. The companies anticipate that it will enter service in late 2020, as long as they receive all the required regulatory approvals. That time frame is about one year after the planned completion date of Kinder Morgan's Gulf Coast Express gas pipeline.
Kinder Morgan and EagleClaw each currently own 50% stakes in the Permian Highway Pipeline and will, therefore, fund half of the construction costs going forward. However, Apache has the option to buy a 33% interest in the pipeline from those partners, which it has assigned to its new midstream company Altus Midstream. Other major shippers in the line have options to buy stakes, too. If all option holders exercise their rights, Kinder Morgan's interest will fall to 27%, which would give the company more cash that it could reinvest into other expansion projects.
A $400 billion opportunity up ahead
With the addition of the Permian Highway Pipeline project to its backlog, Kinder Morgan now has more than $7 billion of expansions underway. While that's well below the roughly $12 billion backlog it had at its analyst day earlier in the year due to the sale of Trans Mountain, the company is beginning to replace that lost growth. In its current estimation, it believes it can secure enough new projects to invest about $2 billion to $3 billion per year.
Driving that view is the fact that the energy industry needs to spend more than $400 billion to support the growth of the natural gas market in North America over the next 20 years. The company sees five major drivers of this growth:
- Pipeline to move natural gas from the Marcellus shale to demand centers in the South.
- Natural gas storage to support renewable power generation and LNG exports.
- Demand-related infrastructure to support the growth of the Permian Basin.
- Additional pipelines to transport gas for LNG exports.
- Infrastructure to support the rebirth of the Haynesville shale.
The company plans to remain disciplined as it pursues these new opportunities, focusing on investing to earn good returns rather than growing for the sake of growth. Kinder Morgan noted earlier this year that a $2 billion annual capital investment at the low end of its return hurdle rate could generate $300 million in annual EBITDA, which represents a 4% yearly growth rate. Meanwhile, investing at the top end or above its range and at a higher rate of return would generate even faster growth. Add to that the potential for the company to resume making acquisitions, and Kinder Morgan could deliver meaningful growth in the coming years.
Getting ready to start growing again
Kinder Morgan's growth engine stalled out in recent years due to the impact of recent asset sales and the oil market downturn. However, the company expects to return to a growth mode this year and has a clear path to continue driving earnings and cash flow higher over the next few years given the increasing number of projects now in its backlog. While its near-term growth wont be as fast as once anticipated, now that it no longer has Trans Mountain, the company has a massive opportunity in front of it that should fuel solid growth rates in the decades to come.