Kinder Morgan's (KMI 2.58%) growth engine has been running low on fuel in recent years. The company's earnings have only risen 9% since 2016, while its cash flow from operations is up 11% over that time frame. That's primarily due to a sizable decline in expansion-related spending as it's finding fewer attractive opportunities to grow its core fossil fuel infrastructure footprint.
While the company has started transitioning to lower-carbon fuels, like producing renewable natural gas and handling renewable diesel, they're minor growth drivers. However, one potential game-changing growth opportunity it's evaluating is the emerging carbon capture, utilization, and sequestration (CCUS) sector. It already has expertise in transporting and utilizing carbon dioxide, making it an ideal extension of its existing capabilities.
A leader in carbon dioxide
Kinder Morgan operates a leading North American energy infrastructure business. It has the largest natural gas pipeline transmission network. It's also the largest independent transporter of refined products and the largest independent terminal operator. These businesses supply the company with about 91% of its earnings.
The rest of Kinder Morgan's earnings come from its carbon dioxide segment. It owns 1,500 miles of carbon dioxide pipeline that can transport 1.5 billion cubic feet per day. That's the largest capacity in the country. The company transports carbon dioxide produced from naturally occurring underground reserves in the Rockies to the Permian Basin. Kinder Morgan and its customers inject the gas into legacy oil fields through a process known as enhanced oil recovery (EOR) to increase pressure, boosting their oil output. Kinder Morgan makes money selling carbon dioxide, oil, and natural gas liquids.
Kinder Morgan believes it can leverage its expertise in carbon transportation and utilization to capture opportunities in the CCUS market. The company formed a new business unit in 2021, new energy ventures, to pursue commercial opportunities from the low-carbon energy transition. Its focus since then has been on growing a leading renewable natural gas platform. However, the company believes that CCUS commercial opportunities will emerge over the next five years.
Tax credits going into effect in 2027 will make it more economical to capture carbon dioxide at large industrial facilities and power plants. That could provide Kinder Morgan with opportunities to repurpose existing pipelines (and build new ones) to transport captured carbon to EOR sites or for sequestration in other underground formations.
A potentially massive market opportunity
The oil industry believes CCUS will grow into an enormous market over the next several decades. Oil giant ExxonMobil (XOM 2.87%) sees CCUS becoming a $4 trillion market by 2050, putting it at about 60% of the size of the oil and gas market it expects by that year. Meanwhile, rival Occidental Petroleum (OXY 2.11%) believes CCUS could be a $3 trillion to $5 billion market opportunity. Because of that, the company estimates it could eventually make as much money on CCUS as it currently does from producing oil and gas.
That's leading both to invest heavily in CCUS opportunities. Occidental is investing $1.1 billion to build the first large-scale direct air capture (DAC) project in the Permian Basin. It will use the carbon dioxide captured from the atmosphere for EOR. The company envisions building 100 DAC facilities by 2035. It has already started to commercialize its first project. It has sold carbon removal credits to Airbus and the Houston Texans while agreeing to supply SK Trading with net-zero oil.
Meanwhile, ExxonMobil signed the largest-of-its-kind commercial agreement with leading global hydrogen and nitrogen products maker CF Industries. The landmark deal will see Exxon capture up to 2 million tons of carbon dioxide from CF Industries' manufacturing complex in Louisiana. Exxon will transport the captured carbon via pipelines owned by EnLink Midstream to a sequestration hub it's developing.
EnLink is one of several midstream companies looking to capitalize on the CCUS opportunity by repurposing underutilized pipelines and purpose-building new pipes to transport the captured greenhouse gas. Midstream giants Enterprise Products Partners (EPD 1.39%) and Enbridge (ENB 2.29%) have partnered with Occidental Petroleum to pursue potential carbon dioxide transportation and sequestration solutions where each has extensive existing infrastructure. Enterprise is jointly working on a project focused on the greater Houston to Beaumont/Port Arthur areas, and Enbridge is seeking to develop a solution in the Corpus Christi area. Kinder Morgan also has extensive infrastructure in the Gulf Coast region, making it an ideal partner for a large oil company pursuing a CCUS solution.
A potentially magnificent growth driver
Kinder Morgan's growth-related spending has declined in recent years due to the increasing uncertainty about the future of fossil fuels, causing its growth rate to slow. However, it could reaccelerate if the CCUS market develops as many oil companies anticipate. That would significantly extend the life of its existing fossil fuels business while supplying opportunities to repurpose pipelines and build new ones dedicated to transporting the greenhouse gas. That superb upside opportunity adds to Kinder Morgan's appeal because it could give the company lot more fuel to grow its nearly 6%-yielding dividend.
