As a believer in the philosophy of midstream MLPs, naturally I've owned one or more of the Kinder Morgan affiliated entities almost as long as I can remember. These of course include Kinder Morgan Management LLC (UNKNOWN:KMR.DL), Kinder Morgan Inc (NYSE:KMI), Kinder Morgan Energy Partners (UNKNOWN:KMP.DL), and EL Paso Pipeline Partners (UNKNOWN:EPB.DL). Obviously, the floundering share prices of these holdings have been disappointing as of late, especially since the market has outperformed the Kinder entities by a long shot. This is especially so for El Paso, as this entity experienced a harsh beating after Q4 2013 results disappointed. However, is the tide ready to turn for this natural gas heavyweight and the rest of the Kinder Morgan family as well?
On April 16, Kinder Morgan announced earnings for all three entities, and what I heard was reassuring. As much as I was impressed by the solid dividend increase for each unit type, increased free cash flow, and $2.4 billion in backlog additions, I won't harp on these metrics in this article. Instead, what really captured my attention and willingness to continue believing in the Kinder story for quite a while longer, is what CEO Richard Kinder said about rising long-term natural gas demand.
During the Kinder Morgan conference call, Wood Mackenzie, a research firm, was quoted giving its 2014 preliminary outlook for natural gas demand, which forecasted demand of 71.5 Bcf/day for 2014. Also, they projected 94.5 Bcf/day, or an increase of 23 Bcf/day demand, by 2024. This was a small increase, but Richard Kinder briefly explained that it could be an understatement due to lack of accounting for Mexican demand of imports from the U.S.
The below charts from the EIA display the energy consumption situation for Mexico over the past 20+ years. The first shows immense growth in Mexican NG demand:
Now, if we also examine growing electricity consumption, which has been mainly generated by coal and oil, it's rather easy to connect the dots:
After peering at this situation, it doesn't take a genius to figure out what would happen to NG demand if Mexico transitions from oil to this cheap fuel source for energy generation, as Richard Kinder forecasted is going to happen in the conference call.
Bradley Olsen, of Tudor Pickering & Holt, asked Richard Kinder to share more color on growing Mexican demand for natural gas and how this may impact the company. Mr. Kinder said:
...we believe that over the next 10 years demand will more than double from the present throughput that goes into Mexico today, and the reason is very simple. They are converting electric generation at industrial use from oil to natural gas, the opening of the energy business in Mexico we believe will concentrate primarily on oil not on natural gas and the only alternative as we switch to natural gas is to import.
Early in the Q1 conference call, Kinder mentioned that the El Paso Natural Gas (EPNG) unit is filling its previously under-utilized south line largely with exports to Mexico and will be expanding the system later this decade to fulfill growing demand. EPNG is a 10,200-mile NG pipeline system that transports natural gas from the San Juan and the Permian and Anadarko basins to California -- its single largest market. More importantly, EPNG moves product to Arizona, Nevada, New Mexico, Oklahoma, Texas and northern Mexico.
Apparently, Kinder's interest in Mexican demand is not a new idea, despite the recent excitement that seemed to sucker punch the Kinder Morgan bears. Back in November of 2012, An affiliate of EPNG, the Sierrita Pipeline project, announced a ~200 MCF/day capacity pipe that would extend 60 miles from EPNG's existing south mainlines, near Tucson, AZ, to the U.S.-Mexico border. The Sierrita Pipeline would interconnect via a new international border crossing with a new 36-inch diameter natural gas pipeline to be built in Mexico:
Subject to regulatory approval, construction of Sierrita's proposed lateral pipeline would begin in June of 2014, with anticipated service beginning late 2014. However, the project seems destined for approval, since Mexico's Comisión Federal de Electricidad (CFE) awarded two contracts to Sempra International's Mexican business unit to build a $1 billion pipeline, which is due to interconnect with the Sierrita pipeline network. Obviously, to see signs of pipeline development that will take decades to pay for itself, on both sides of the border involving multiple companies and billions of dollars, only supports projects of higher Mexican demand for the long term. In fact, Kinder Morgan has identified some 19 new electric generation projects in Mexico, all of which are staged for production over the next 15 years:
Obviously, Kinder Morgan management has done its homework regarding Mexican demand, and I feel the excitement and attention garnished in the Q1 2014 conference call was well deserved. Richard Kinder has renewed my long-term conviction in the Kinder Morgan enterprise, and especially El Paso Pipeline Partners, the NG heavyweight of the enterprise. It seems clear growing Mexican demand could be the big catalyst shareholders have been waiting for.