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The Pipeline the Permian Basin Has Been Waiting For Is Finally Finished

By Matthew DiLallo – Sep 25, 2019 at 6:02PM

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Kinder Morgan announced that the Gulf Coast Express pipeline has stared service ahead of schedule.

Energy companies have drilled so many new wells into the Permian Basin in recent years that it has unleashed a torrent of oil and gas supplies. This gusher has overwhelmed the region's infrastructure, which pushed down prices.

Natural gas has been especially hard hit, with prices at two regional hubs falling into negative territory earlier this year. Because of that, many producers chose to flare their natural gas output as opposed to selling it at a loss. At one point, they were burning off enough gas to power every home in the state of Texas.

Pipeline companies like Kinder Morgan (KMI 0.29%), however, have been racing to solve this problem by building new infrastructure. The company recently brought the much-needed Gulf Coast Express Pipeline (GCX) online slightly ahead of schedule. That project will provide a welcome boost for oil and gas producers in the region as well as its developers.

A twist of pipelines with a bright sun shining between them

Image source: Getty Images.

Monetizing a wasted commodity

Kinder Morgan announced that its GCX pipeline began full commercial service this week, which is slightly ahead of the initial view that it would start up in October. As a result, the pipeline will now be able to transport up to 2.0 billion cubic feet per day (Bcf/d) of gas from the Permian to Texas Gulf Coast markets. That's a significant amount of new capacity for a region that currently produces 10 Bcf/d, though a small fraction of the need given that output is on track to top 21 Bcf/d by 2025.

The incremental gas shipping capacity from GCX will provide some relief for producers in the Permian Basin. Large-scale drillers like Apache (APA -1.48%) and Pioneer Natural Resources (PXD -0.11%), for example, will now be able to ship more of their gas to higher-priced Gulf Coast markets. That will enable them to earn some incremental cash flow. Pioneer's CEO Scott Sheffield made a note of this impact on the company's second-quarter call. He said:

Once Gulf Coast Express comes on in the fourth quarter, we will move about 300 million cubic feet a day to the Gulf Coast and price that on a Ship Channel price index. And at that point, virtually all of our gas will be sold outside of the Permian Basin.

Even drillers that didn't sign up for space on this pipeline will benefit. That's because it will help ease the region's gas glut, which should boost prices. That will enable them to stop flaring their gas, allowing them to make some money on a commodity they were previously wasting.

Pipelines at twilight

Image source: Getty Images.

A boon to pipeline companies, too

The pipeline's investors -- Kinder Morgan, DCP Midstream (DCP -0.14%), Targa Resources (TRGP 0.63%), and Apache's midstream arm Altus Midstream (KNTK) -- will also benefit from the project's completion. They'll collect a share of the steady fees this system produces from the long-term contracts backing the project.

Among the biggest beneficiaries will be Altus Midstream. The company currently expects to generate between $70 million and $85 million of adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) this year. However, after only producing $16.3 million of adjusted EBITDA during the first half, this forecast implies that Altus will experience a significant earnings jump in the back half of the year. That's due in large part to the completion of GCX.

DCP Midstream and Targa Resources, meanwhile, will enjoy an additional boost in their gas gathering and processing (G&P) operations. These companies buy raw gas directly from producers that they then process and sell to end users. GCX will not only boost regional gas prices but also enable them to get more of this gas to higher-priced Gulf Coast markets, which should enhance the profitability of their G&P operations.

Targa Resources' CEO Job Bob Perkins pointed out this positive impact on his company's second-quarter call. That's why his company is "greatly looking forward to GCX coming online, and we will see higher Waha prices (the Permian's gas hub), which will benefit us on the equity side of our volumes."

Some relief now, with more on the way

The completion of the GCX pipeline will provide some much-needed relief to producers in the Permian. It will not only enable them to ship more gas to higher-priced Gulf Coast markets, but it will also help boost depressed regional prices. Meanwhile, it will be a boon to the pipelines' investors, too. They'll enjoy its steady cash flow and the impact higher prices will have on their gathering and processing operations.

GCX is just one of many new Permian pipelines on the way. Kinder Morgan expects to finish its Permian Highway pipeline next year, while another developer recently approved the Whistler Pipeline. Meanwhile, Kinder Morgan also has Permian Pass in development. Given this large slate of new pipelines, it seems like the Permian's gas infrastructure problems are a thing of the past.

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

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