Kinder Morgan (KMI -0.32%) is one of North America's largest energy infrastructure companies. The bulk of its assets transport, process, store, or export fossil fuels. While that makes it a key player in today's energy market, there are questions about the company's future as the economy transitions to cleaner alternative fuels.
Kinder Morgan is working to address these concerns by slowly transitioning its business toward the fuels of the future. The company recently took another step in that direction. That's only the beginning of what it sees ahead.
Adding more transitional fuel
Kinder Morgan closed its second RNG deal earlier this month. It purchased three landfill assets from Mas CanAm for $355 million, comprising an RNG facility in Texas and medium Btu facilities in Texas and Louisiana. The Texas RNG facility should produce 1.4 billion cubic feet of RNG next year. Because it's already operational, it will supply Kinder Morgan with incremental cash flow. It also has the potential to grow significantly over the next decade, providing the company with long-term upside potential.
The deal complements last year's Kinetrex Energy acquisition. Kinder Morgan paid $310 million for that company, which owned two small-scale domestic LNG production and fueling facilities, a 50%-interest in a landfill-based RNG facility, and three more construction-ready landfill-based RNG facilities. Kinder Morgan is investing $150 million to build those three facilities, which should enter service starting later this year. The company expects those three RNG facilities to produce more than 4 billion cubic feet of RNG annually.
More growth is coming down the pipeline
Kinder Morgan discussed what's ahead for its energy transition strategy on the company's second-quarter conference call. CEO Steve Kean stated, "we're close on a couple of more nice additions to our renewable natural gas business." He noted, "we are finding these opportunities and others all at attractive returns well above our cost of capital."
In addition to RNG, the company sees a lot of potential for supporting other renewable fuels. It's building a renewable diesel hub in Southern California that should be in service early next year. The company is also working to connect renewable diesel supplies at one of its marine terminals in that state to a hub. It expects to complete that project by the end of this year. Another project is constructing the initial phase of a renewable feedstock storage and logistics hub in Louisiana to support a leading renewable diesel and sustainable aviation fuel provider. It expects to start up that facility early next year.
Kinder Morgan also noted that it should be able to utilize a significant portion of its existing assets to transport renewable fuels. President Kim Dang stated on the call: "We can move renewable diesel through our pipes ... and also sustainable aviation fuel, that could be moved through our pipes as well." Kinder Morgan therefore won't have many stranded assets as the economy transitions to cleaner replacement fuels. Instead, it can repurpose them for the fuels of the future. The same applies to its natural gas pipelines, as RNG can move through those existing pipes.
Finally, the company continues to see the potential to get involved in the carbon capture and sequestration (CCS) business. It already transports and sequesters carbon dioxide to support its enhanced oil recovery business. Given its decades of experience, it sees a lot of synergies to leverage its expertise to capitalize on opportunities in CCS as they emerge.
One step at a time
Kinder Morgan is slowly capitalizing on the emerging renewable fuels industry by expanding its RNG operations. It sees more growth ahead for that business, other renewable fuels, and potentially CCS. These moves will enable the company to continue utilizing its existing assets while expanding its operations. That should give Kinder Morgan the fuel to keep growing so it can pay an attractive and steadily rising dividend. It remains an ideal stock for investors seeking to generate sustainable passive income.
