Kinder Morgan's (NYSE:KMI) current Chief Operating Officer, and eventual CEO, Steven Kean, recently spoke at an energy conference to update analysts and investors on the company's future outlook. There was one overriding theme that ran though his talk and it wasn't the current plunge in oil prices due to oversupply. Instead, he spent most of his time talking about the demand side of the equation and how much more important that was to the company's business. However, the demand isn't so much for an energy commodity, but for something else, which is demand for energy infrastructure. It's what is driving the investing thesis for Kinder Morgan.
The demand story
Mr. Kean spent a good portion of his talk discussing the great need for additional energy infrastructure in North America. This demand is the key to his company's future. He drove this point home:
Our business is driven by not so much the supply and demand for a particular commodity. It's really the demand for North American energy infrastructure. Do people need to store and transport and process energy commodities? That's what drives our demand. And that demand is still very robust.
He went on to discuss why this demand for energy infrastructure to move and store energy was so important for the company's various businesses:
And most of these businesses are in the business of transporting and storing energy for a fee. We're getting paid a fee. In a lot of cases, that fee is -- a demand charge, for example, is paid irrespective of whether the capacity is actually used and it's paid irrespective of what the underlying commodity price is. Now, the demand, we believe, for that infrastructure remains strong. We've got about a $18 billion backlog of projects that I'll go through in just a minute. People still need to move and store energy.
Kean noted three very important factors, here. First, his company earns a fee for transporting and storing energy. Second, that fee is earned even if customers don't use the capacity on its pipelines that they are paying to use. And finally, the fee is paid no matter what the price of the underlying commodity is at any given time. Those three factors working together provide the company with a very, very secure source of revenue.
When push becomes pull
As Kean mentioned, Kinder Morgan currently has a very robust $18 billion project backlog. The company currently expects these projects to be built over the next five years. However, because of the demand story, and the direction it's heading, the company believes there are enormous growth opportunities still ahead.
Kean specifically pointed out a notable shift in the demand for energy infrastructure:
Let's talk about specifically natural gas. We had a lot of projects in the natural gas sector in recent times that we've signed up that are really what I would call supply push projects. So, these are the producers who are trying to get their gas out of the Marcellus and Utica and get it someplace else. And we'll still have some more of those, but we're just at the beginning of the demand pull projects. And by demand pull, I mean LNG. LNG, liquefaction facilities, are now signing up for transportation and have just recently started signing up for storage capacity as well, because these lower natural gas prices are a good thing for exports, exports to Mexico, LNG exports. Gas has maintained its relative advantage to oil in the LNG sector. There's also a demand pull associated with petchem and industrial. Now, those don't always turn up in firm, long term transportation agreements, but it shows up in terms of additional demand for the network.
Kean is noticing a subtle shift: Instead of producers seeking to get their gas out of shale basins, he's seeing end users seeking to gain access to this gas. This is bringing a new type of investment opportunity for the company, as it's now starting to sign up to build pipelines to supply and store gas for LNG export facilities. Further, it expects new projects to start coming from other end users, like petrochemical plants and large industrial users, which isn't a surprise considering that around $100 billion of investments are being made along the Gulf Coast to build these end-use facilities. This is why Kean noted that he's starting to see demand for push projects crest while demand for pull projects is just beginning to manifest.
Kinder Morgan's story is founded upon robust demand for energy infrastructure in North America. What's really interesting is that the story is about to turn the page into a new chapter as the company goes from supporting the push of supply to the pull of demand. Because this chapter is just starting, investors could enjoy this growth story for a long time to come.