Kinder Morgan's (KMI -0.64%) earnings have been stuck in neutral over the past few years, averaging about $7.7 billion annually. The company has faced headwinds from expiring contracts, which have rolled over to lower rates due to lower utilization. That has offset the positive impact of acquisitions and expansion projects.
However, the company's contract headwinds are fading as demand for gas rises. Meanwhile, it sees a massive growth tailwind ahead from LNG export facilities, which should drive significantly more gas demand in the future. That catalyst could fuel meaningful earnings and cash flow growth for the pipeline giant in the coming years. It could enable the company to grow its 6.6%-yielding dividend (which is already in the top 5% highest yields in the S&P 500) even faster.
LNG-fueled demand growth
Kinder Morgan's co-founder Richard Kinder discussed the LNG opportunity on the company's third-quarter conference call. He highlighted two forecasts for LNG-fueled natural gas demand in the U.S. over the coming years. First, he noted, "S&P Global Commodity Insights estimates LNG feed gas demand at 13.1 Bcf a day for 2023 and projects that it will grow to 24.7 Bcf a day in 2028 and to 27.5 Bcf a day in 2030." Meanwhile, he pointed out that the "International Energy Agency estimates that U.S. LNG exports, as a share of global LNG supply, will grow from 20% in 2022 to almost 30% in 2026."
Supporting these forecasts are LNG export facilities that have already made a final investment decision (FID), many of which are currently under construction. Meanwhile, there's upside potential to these forecasts. Several companies are also working toward FIDs on additional LNG export projects in the U.S.
Kinder noted that surging gas demand from LNG facilities will have a major impact on the midstream energy industry. "To meet this increased feed gas demand, the country is going to need additional pipelines and not just header pipelines to the export terminals, but also significant expansion in the pipeline infrastructure upstream from those header systems and terminals."
Perfectly positioned to capitalize on this demand
Kinder then discussed how the LNG boom will impact Kinder Morgan specifically. He noted that one of the big beneficiaries will be producers in the gas-rich Haynesville of Louisiana due to its proximity to LNG facilities in Louisiana and South Texas. However, that isn't the only region that will benefit, as gas will need to flow into the Gulf Coast from multiple production basins to meet LNG demand.
While other midstream companies will benefit from growing gas demand, Kinder believes his company is ideally suited to capitalize on this opportunity. He noted that Kinder Morgan, "which is currently transporting a little less than half of all U.S. LNG feed gas, is in an excellent position to take advantage of this tremendous opportunity because of the extensive footprint of our pipeline network, particularly in Texas and Louisiana, where so much of the additional demand will occur."
Image source: Kinder Morgan.
As that slide shows, the company has expansive pipeline infrastructure connected to LNG export terminals in Louisiana and Texas. That puts it in a strong strategic position to supply more gas to the region as the industry builds additional capacity over the next few years.
The company is pursuing several LNG-related expansion opportunities. CEO Kim Dang noted that some of the LNG facilities under development don't have existing header pipelines. That could provide Kinder Morgan with the opportunity to build and operate these pipes. Meanwhile, many companies are seeking to lock up natural gas supplies further upstream. That could enable Kinder Morgan to expand existing pipelines in the Southeast to transport more gas toward the Gulf Coast region.
A growth reacceleration ahead
Kinder Morgan appears poised to break out of its recent earning rut. The company sees tremendous opportunities to capitalize on growing natural gas demand from LNG export terminals. That should increase utilization across its existing pipelines while providing new opportunities to expand, boosting its cash flows. This growth would give the company more fuel to increase its already attractive dividend. It would make the pipeline company an even more attractive investment for those seeking a high-yielding and steadily rising income stream.
