Kinder Morgan's Growth in Bakken, Eagle Ford Shales Offsets Weak Commodity Prices in Second-Quarter 2015

Researched by Industrial Info Resources (Sugar Land, Texas)--Energy pipeline transportation and storage company Kinder Morgan Incorporated (NYSE:KMI) (KMI) (Houston), which moves about one-third of all natural gas consumed in the U.S., reported solid profit gains and a sharp backlog increase in the second quarter of the company's 2015 fiscal year, despite an ongoing weakness in commodity prices. The Products Pipelines and Terminals segments led the growth, bolstered largely by take-or-pay contracts. Net income was reported to be $333 million, a 17.25% increase from second-quarter 2014.

Industrial Info is tracking nearly $24 billion in projects involving KMI, including the $350 million construction of a natural gas liquids (NGL) pipeline from Harrison County to Fulton County, Ohio. The 241-mile, 12-inch-diameter pipeline will transport up to 50,000 barrels per day (BBL/d) of refined or fractionated NGLs, including ethane and propane, out of the Utica Shale. The capacity eventually will be expandable to 75,000 BBL/d. Hatch Mott MacDonald (Holyoke, Massachusetts) was awarded a design-engineering contract for the project, which is set to be completed in first-quarter 2018.

Total revenues stood at $3.46 billion, a 12.04% decrease from the same period last year. The company's largest segment, Natural Gas Pipelines, saw stronger volumes from increased production in the Eagle Ford Shale; a stronger performance from the Southern Natural Gas Pipeline, which spans the Gulf Coast region, partly due to lower natural gas prices; and similarly strong results from the El Paso Natural Gas Pipeline amid strong demand from Mexico. Much of the segment's growth was driven by contributions from its $3 billion acquisition in February of Hiland Partners, which primarily serves the Bakken Shale area, and stronger results from the EagleHawk Pipeline, which serves the Eagle Ford area.

The Hiland Partners acquisition also brought KMI the Double H Pipeline in the Bakken Shale, the improving performance of which was among the factors that boosted results in the Products Pipelines segment. Higher volumes on the Kinder Morgan Crude and Condensate Pipeline in the Eagle Ford also helped the segment, which now expects to exceed its published annual budget growth of 29%, as did the startup of a petroleum condensate-processing facility on the Houston Ship Channel.

Lower commodity prices negatively impacted the CO2 segment, where demand remains stable but is not really growing. Still, oil-production volumes increased 5% from second-quarter 2014 to 59.8 million barrels per day, with production at the SACROC oil field in Texas' Permian Basin on track for record annual production.

Sustaining capital expenditures for the quarter were reported to be $141 million, compared with $128 million in the same period last year.

Big Plans for Texas, New England, Georgia
KMI executives say the company now has a backlog of about $22 billion in expansion and joint-venture investments; in the second quarter alone, the company placed almost $700 million of projects in service and added about $5 billion of new projects.

"We continue to see promising opportunities in the Houston Ship Channel, which we are actively pursuing, some of those are in the backlog, there are others that we're pursuing that are not yet in there," said Steve Kean, the president and chief executive officer of KMI, in a conference call. "We've built great positions in two very important hubs, Edmonton [in Alberta] and Houston. In Edmonton, our expansion projects, when complete, will bring our merchant crude storage positions to 12 million barrels, the largest in the area, and up from zero ten years ago. In Houston, our expansions will get us to 43 million barrels of liquid fuel storage, 45 when you count our recent Vopak acquisition."

KMI executives also announced that they had authorized subsidiary Tennessee Gas Pipeline Company (TGP) to extend its existing pipeline with the $5 billion Northeast Energy Direct (NED) project, which will transport natural gas from Wright, New York, to Dracut, Massachusetts. Executives expect the extension to help alleviate New England's high energy costs, which is due partly to the region's limited natural gas transportation capacity. The project is subject to applicable regulatory approvals, including those from state public utility commission. The project has an expected in-service date of November 1, 2018.

"Besides NED, we added $700 million of investments to the Elba Island liquefaction project [in Georgia], primarily as a result of buying out Shell (NYSE:RDS.A) and taking 100% of the ownership and management of that project," Kean said. "Shell remains the off-taker for 100% of the project capacity under a 20-year contract. This deal represents a restructuring of the previous arrangement that we had with Shell. The main benefits we are getting here are, of course, the opportunity to invest $2.1 billion at an attractive return. And, secondly, we get control of the project and with that control we still expect a late 2017 in-service date. Shell benefits from secured cost reductions on the total project, which we expect to achieve and still earn an attractive return on the all-in investment."

Executives noted that natural gas demand is expected to rise nearly 40% to about 110 billion cubic feet per day over the next 10 years. In the last 18 months, KMI entered into new and pending firm transport capacity commitments totaling 8.7 billion cubic feet per day, including 1.4 billion added in the second quarter.

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