Natural gas is a hot commodity these days. While its price has barely budged in the past year and is down sharply from the peak, demand is stronger than ever. That trend isn't showing any signs of stopping, as consumption is expected to increase at a healthy pace over the next several years, fueled by new gas-fired power plants and exports to Mexico as well as through newly built LNG terminals.
This forecast bodes well for gas-focused pipeline giants Kinder Morgan (NYSE:KMI) and Williams Companies (NYSE:WMB). Not only are both companies seeing record volumes flowing through their existing pipelines, but anticipated growth is also driving the need for expansion. That has the management teams of these gas-focused infrastructure companies growing increasingly bullish about what lies ahead.
Sizzling demand in 2018
Williams CEO Alan Armstrong led off the company's fourth-quarter conference call with an overview of the macro market conditions that support its strategy to focus on gas pipelines:
So if you think about our continued focus on natural gas demand and how that's driving our strategy, and you look at actually what's occurring, we really saw this start to accelerate in 2018 as we saw an 11% increase in overall natural gas demand, and I'll remind you that's on top of a big demand that we had in 2017 as well. And we also have an another expected 5% increase by most of the forecasters now for North America. So demand growth on top of demand growth, on top of demand growth.
After achieving a healthy 2.3% compound annual growth rate (CAGR) from 2014 through 2017, gas demand surged last year due in part to the start-up of new LNG export facilities. Meanwhile, forecasters anticipate seeing consumption rise at an accelerated 4.9% CAGR through at least 2021. That outlook suggests more gas will flow through Williams' systems in the coming years.
Kinder Morgan CEO Steve Kean also noted on his company's fourth-quarter conference call that the industry "experienced a record increase in natural gas supply and demand across the country," and that "2019 is projected to be another solid year of growth for U.S. natural gas." As a result, the company "experienced outstanding performance in our natural gas segment, our largest segment, where we saw significant year-over-year growth." The strong results of Kinder Morgan's natural gas segment enabled the company to deliver better-than-expected earnings growth last year even though it sold a major oil pipeline in Canada. Williams, meanwhile, achieved high-end results in 2018, thanks mainly to the strong performance of its gas-focused infrastructure.
Plenty of growth coming up ahead
Kean further pointed out that the "growth drives the value of our existing network and creates opportunities for us to invest capital at attractive returns to expand that network." That was certainly the case last year, as the company and a partner moved forward with the $2 billion Permian Highway Pipeline that will transport natural gas from the rapidly expanding Permian Basin to growing demand centers along the Gulf Coast. That was part of the $2.5 billion of mainly gas infrastructure projects the company secured last year. Meanwhile, Kinder Morgan believes it can add between $2 billion and $3 billion of new projects per year, the bulk of which will be gas-related since the industry needs to build an estimated $400 billion of new natural gas infrastructure by 2035 to support projected demand growth. That forecast positions Kinder Morgan to continue expanding its cash flow and dividend at a healthy pace for years to come.
Williams also sees lots of gas-powered growth in its future. The company's Northeast natural gas gathering and processing business, for example, anticipates that volumes will expand at a 15% CAGR through 2021. On top of that, the company has several expansion projects under way on its key Transco system that moves gas up and down the eastern seaboard and is pursuing more than 20 additional projects on that pipeline. Williams' expansion projects and prospects, likewise, position it for continued earnings and dividend growth over the next several years.
A bright outlook for gas infrastructure
The acceleration in natural gas demand over the past year is benefiting gas-focused infrastructure companies like Kinder Morgan and Williams because they're not only able to fill up existing pipelines but also break ground on new ones. That enabled them to deliver better-than-expected results in 2018 and has them on track to continue growing earnings over the next few years, which sets investors up to potentially earn some high-octane total returns.