Natural gas has been one of the big energy stories in the United States over the last decade or so. And while there's a glut of the stuff domestically, that's not the case elsewhere. That's why companies like Cheniere Energy Partners LP (NYSEMKT:CQP) are working on export facilities. It's also why Kinder Morgan (NYSE:KMI) is salivating at the chance to provide the pipelines that get gas to Cheniere while at the same time building its own export capabilities.
Holy Gas Batman
The graphic below shows the massive increase in U.S. natural gas production in recent years.. Take a close look and you'll see that shale gas has been the sole source of domestic gas growth, with all other sources either flat or lower.
Essentially, horizontal drilling and hydraulic fracturing opened up what were once undesirable gas fields. And in the process flooded the United States, historically a net importer of natural gas, with the fuel. That's led to all sorts of changes, including utilities making a large scale shift to the relatively cleaner fuel. Part of that was led by an oversupply induced decline in gas prices.
But low gas prices aren't the norm around the world. In some regions gas prices are two to three times higher. That's why the energy industry has been looking to export natural gas in its liquefied state (LNG). Essentially, taking cheap U.S. gas and selling it at higher prices overseas. Being a politically stable partner is another plus for attracting customers. If you doubt the value of that, just talk to someone who relies on Russia for their gas.
That said, because the United States has historically imported gas, there's little infrastructure set up for its export. That's why Cheniere and Kinder Morgan have been working so hard to get port facilities up and running. Cheniere Energy Partners, which yields around 5.6%, is going to be among the first to export LNG. (The company's Sabine Pass LNG export project, by the way, was originally conceived of as an import facility) The company already has long-term contracts in place, but it isn't exactly up and running just yet. Construction costs will remain an issue.
That's where a company like Kinder Morgan comes in. Kinder Morgan is one of the largest pipeline owners and operators in the country and makes money right now. While Cheniere will, indeed, be the one to get the gas on the water, the partnership can't do anything if there's no pipelines bringing the gas to Cheniere. The pair already have an agreement in place for the Sabine Pass facility.
But that isn't where the relationship ends. Cheniere Energy Partners' parent, Cheniere Energy (NYSEMKT:LNG), just inked another deal with the pipeline Goliath, whereby Kinder Morgan will provide natural gas to another facility being contemplated in Corpus Christi, Texas. According to Corey Grindal, vice president of supply and marketing for Cheniere, "This agreement builds on our existing relationship with Kinder Morgan," and, "Access to multiple and diverse supply basins and an extensive pipeline network are both important factors for securing the natural gas required to meet our customers' needs."
In other words, a giant like Kinder Morgan has the scale and industry footprint to ensure Cheniere can get the gas it needs from, virtually, anywhere in the United States. As others look to get gas on the water, they'll likely be touching Kinder Morgan's pipes, too. If not directly, then indirectly. This makes Kinder, which yields around 4.3%, something of a backdoor play on LNG exports.
The best part of this, however, is that Kinder is not just supplying gas and storage to other companies looking to send LNG overseas. It's also building its own facility in Mississippi and working with Shell (NYSE:RDS-B) on another. It will, clearly, benefit from its own extensive network of pipes at these projects. Thus, while Kinder is using the newly forming LNG export opportunity to expand its fee-based pipeline empire, it is also setting itself up to benefit directly with its own facilities.
Take a step back and think about that: Kinder is going to be supplying what are, essentialy, competitors. It's playing both sides of the LNG export opportunity and it's getting away with it. That's what the company's massive size and reach allow.
A simpler company
One of the interesting things about Kinder Morgan is that it recently went through a complicated consolidation. That's over with, so it is a kinder, gentler company today. And for those seeking dividends, the company's stated goal is to increase distributions by 10% annually between 2015 and 2020. That will take today's $2.00 a share disbursement and increase it to around $3.20. Over $18 billion worth of growth projects are what the company expects to supply that growth. And, yes, a part of that growth will be driven by deals like the ones Kinder Morgan has with Cheniere.