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Kinder Morgan Is Teaming Up to Capture a Slice of this Rapidly Expanding Market

By Matthew DiLallo – Updated Apr 22, 2019 at 11:46AM

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The pipeline company is forming a joint venture with Tallgrass Energy for a new oil pipeline to support the fast-growing Rockies region.

While natural gas is the main fuel driving Kinder Morgan (KMI 1.69%) forward considering that it's the largest gas pipeline company in the country, it has been working to capture opportunities in the fast-growing oil infrastructure market. The company recently partnered up with Canadian oil pipeline giant Enbridge (ENB 1.40%) to jointly develop an offshore oil export facility. It then followed that up this week by unveiling another joint development, this time with Tallgrass Energy (TGE) on an oil pipeline project in the Rockies. This latest partnership will enable both companies to leverage their existing assets so that they can quickly meet the needs of customers to move their rapidly growing oil volumes out of that region to market centers closer to the coast.

Drilling down into the latest development

The proposed joint venture between Kinder Morgan and Tallgrass Energy will increase the existing oil takeaway capacity in the Powder River and DJ Basins as well as add incremental capacity to the Bakken Shale region and Western Canada. The system would include both existing and newly constructed assets.

Two people shaking hands with an energy facility in the background.

Image source: Getty Images.

Tallgrass Energy would contribute its Pony Express Pipeline System, which moves oil from Wyoming and Colorado -- as well as from North Dakota and Western Canada through a joint tariff with other systems -- to a major oil hub in Cushing, Oklahoma. The company has been working to expand that pipeline so that it can capture some of the anticipated regional growth, which Tallgrass estimates could be between 600,000 and 1.5 million barrels per day (BPD) over the next five years.

Kinder Morgan, meanwhile, will contribute portions of its Wyoming Interstate Company system and Cheyenne Plains Gas Pipeline -- which it will convert to crude oil service -- to the partnership. In addition to that, the companies will construct 200 miles of new pipeline. Overall, the system would be capable of transporting 800,000 BPD of light crude oil (produced out of shale plays like the Bakken and Powder River Basin) and 150,000 BPD of heavy oil (produced in Canada's oil sands region), which would boost current capacity by 550,000 BPD. The system would move this oil to Kinder Morgan's Deeprock terminal in Cushing. From there, it could move toward the Gulf Coast on either an existing pipeline or a future one such as Seahorse, which Tallgrass is working to develop. If the companies secure enough customers to justify the investment as well as obtain the necessary permits and approvals, the new system could be in service and generating incremental cash flow by the second half of 2020.

Facilitating future investment

In addition to boosting regional oil pipeline capacity and the cash flows of the partners, this joint venture could also play an important role in enabling both companies to move forward with additional expansion projects in the future. In Tallgrass Energy's case, expanding Pony Express is a key component of its longer-term growth strategy, since it could enable the company to move forward with two large-scale projects it has under development. The first one is the Seahorse Pipeline, which would transport oil from Cushing to Louisiana, where the company is also developing the Plaquemines Liquids Terminal that would export oil to global markets. Late last year, Tallgrass secured a major partner for Seahorse after a third party agreed to be not only an anchor shipper but an equity investor, which increased the likelihood that it will move forward with both projects. Those odds will further increase with the Kinder Morgan joint venture.

Meanwhile, this partnership will enable Kinder Morgan to solve another problem. On its recent fourth-quarter conference call, CEO Steve Kean said that the company was working on solutions to get oil from the Bakken shale to Cushing so that it could expand its Double H Pipeline system in North Dakota, which it would accomplish with this joint venture with Tallgrass. 

In addition to that, the company is working with Enbridge on the Texas COLT oil export terminal off the coast of Freeport, Texas. More oil potentially heading to Cushing as a result of the joint venture with Tallgrass could improve the likelihood that Kinder Morgan and Enbridge move forward with this project, since several pipelines, including those operated by Enbridge, can then transport this oil from Cushing to Freeport.

A growth driver in both the near and long terms

The proposed joint venture between Kinder Morgan and Tallgrass Energy could be an important growth driver for both companies in the coming years. In the near term, it could provide the partners with some incremental cash flow when the expanded capacity comes online in the second half of next year. Meanwhile, it could enable them to move forward with other expansions such as Seahorse and Plaquemines for Tallgrass and Double H and Texas COLT for Kinder Morgan. Those future expansions would bolster the cash flows of both companies, which could support future dividend growth. That's why investors should keep a close eye on whether this joint venture officially moves forward. 

Check out the latest Kinder Morgan earnings call transcript.

Matthew DiLallo owns shares of Enbridge and Kinder Morgan. The Motley Fool owns shares of and recommends Kinder Morgan. The Motley Fool recommends Enbridge. The Motley Fool has a disclosure policy.

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