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Can Kinder Morgan Continue Succeeding Where Others Have Failed?

By Matthew DiLallo – Apr 23, 2019 at 6:02AM

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The natural gas pipeline giant is working on a third gas pipeline out of the Permian Basin.

The Permian Basin is pumping out more oil and gas than the region's infrastructure can handle. That has midstream companies racing to build new pipelines as fast as they can. While the industry's current slate of projects will help ease the near-term bottlenecks, the Permian has so much running room that energy companies will need to continue building more infrastructure.

However, while many companies have proposed solutions to meet the region's future needs, not all projects are making it off the drawing board, especially those aimed at transporting natural gas. Kinder Morgan (KMI -1.32%) and its partners are the only ones to move forward with new gas pipeline solutions. That could give it a competitive advantage in developing the region's next project.

Sunset through the twists of a pipeline system.

Image source: Getty Images.

Going for the trifecta

Kinder Morgan currently has two large-scale gas pipelines underway: Gulf Coast Express (CGX) and the Permian Highway Pipeline. The company initially proposed GCX in early 2017 as a solution to move gas from the Permian to the Gulf Coast. It would go on to partner with leading regional gathering and processing companies DCP Midstream and Targa Resources (TRGP 1.10%) as well as producers Apache (APA -0.99%) and Pioneer Natural Resources. By working together, these companies secured enough committed gas shipments to fill the pipeline's 2 billion cubic feet per day (Bcf/d) capacity. That allowed them to sanction GCX at the end of 2017. They're on track to finish it this October.

Kinder Morgan took a similar path to quickly push the Permian Highway Pipeline from concept to construction. It initially unveiled the project last June as a joint venture with private equity-backed EagleClaw Midstream, with Apache signed on as a major shipper. ExxonMobil soon signed on an anchor shipper, which gave the project a huge boost. The company officially gave it the green light last September, which has it on track to enter service next October. Demand for gas transportation capacity out of the region has been so strong that Kinder Morgan and its partners recently boosted the project's size from 1.98 Bcf/d up to 2.1 Bcf/d.

The company is already in discussions with customers on a third pipe. As CEO Steve Kean said on Kinder Morgan's first-quarter conference call, "There are some discussions ongoing. There's nothing to announce, and of course it's not in the backlog because we're not under contract or anything, but the demand to get out of the Permian continues to grow and the desire to be able to unlock the value that's in oil and the NGLs (natural gas liquids), as well as the natural gas, continues to put pressure on the need for additional takeaway capacity."

A pipeline under construction.

Image source: Getty Images.

Staying ahead of the competition

Several other companies have proposed building long-haul Permian Basin gas pipelines in recent years, only to lose out to Kinder Morgan. In 2017, Enterprise Products Partners and private equity-backed NAmerico Partners each proposed pipelines. Kinder Morgan, however, beat both out with GCX, due in part to major commitments from Pioneer and Apache. Last year, meanwhile, Targa Resources joined forces with NextEra Energy (NEE -0.99%), MPLX, and a private equity-backed midstream company on the Whistler Pipeline. That project lost out to Kinder Morgan's Permian Highway Pipeline, due in large part to ExxonMobil's decision to back that development.

Targa Resources and NextEra had hoped to green-light Whistler last fall, which would have had it on track to start service late next year. However, they've had trouble securing enough long-term capacity contracts with shippers to continue with that project. Whistler's delays could provide an opening for Kinder Morgan to move forward with a third pipe. It's already in discussions with customers. Furthermore, it has a proven ability to go forward with Permian gas pipeline projects, which could give it a competitive advantage in convincing prospective shippers to sign on to its next pipeline.

Even if Kinder Morgan doesn't beat Whistler or a completing project as the third new gas pipeline out of the Permian, though, it should have plenty of other opportunities. That's because gas output from the region is on track to more than double from 10 Bcf/D last year to 21 Bcf/D by 2025. As a result, according to CEO Steve Kean on the company's first-quarter conference call, "If you look at the projections, they would show you that a GCX a year almost is what's required in order to satisfy the need for takeaway capacity and to unlock the value of the other commodities out of the Permian, I don't know that it's going to be anything like that pace or that it's going to be at that pace. But there's certainly interest already in the Phase 3." Given that outlook, it seems likely that the company will eventually have an opportunity to build more pipeline capacity out of the region.

Continued success seems likely

Kinder Morgan has already beaten out several competitors to build natural gas pipelines out of the Permian. While that doesn't guarantee it will continue winning, the company's success makes its third pipeline an easier sell to potential shippers. Because of that, and the clear need for more pipeline capacity in the region in the coming years, there's a high probability that Kinder Morgan will eventually build a third pipeline to support the Permian.

Matthew DiLallo owns shares of Enterprise Products Partners, Kinder Morgan, and NextEra Energy. The Motley Fool owns shares of and recommends Kinder Morgan. The Motley Fool recommends Enterprise Products Partners, NextEra Energy, and Targa Resources. The Motley Fool has a disclosure policy.

Stocks Mentioned

Kinder Morgan Stock Quote
Kinder Morgan
$17.54 (-1.32%) $0.23
Apa Stock Quote
$42.34 (-0.99%) $0.42
Exxon Mobil Stock Quote
Exxon Mobil
$103.97 (-0.43%) $0.45
NextEra Energy Stock Quote
NextEra Energy
$84.91 (-0.99%) $0.85
Targa Resources Stock Quote
Targa Resources
$69.02 (1.10%) $0.75

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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