Kinder Morgan Energy Partners
(
KMP
) is one of the energy companies that has consistently performed
well largely because of its business model, which is
commission-based and diversified. The company's realizations are
linked to the volumes it transports rather than the prices of the
commodities it handles. While the company is least affected by
commodity price fluctuations, the increase in commodity prices do
enable it to charge higher prices. Moreover, its diversified
business model also helps it compensate volume losses in one
division by volume gains in another.
We have a
price estimate of
$90 for KMP
, implying a 10% premium to the current market price. Below we take
a look at the most important factors that justify our price
estimate for Kinder Morgan. Our bullish estimate for the
company primarily reflects the increasing natural gas volumes,
emerging coal export activities, and improving utilization levels
of Kinder Morgan's terminals.
See our complete analysis for Kinder Morgan
Partners here
Natural Gas Pipelines Business
Natural gas usage has consistently risen over the last two
quarters and this trend is likely to continue mainly because of two
reasons: the environment friendly nature of the fuel and its
relatively cheap price. Many utility companies have migrated to
gas-fired power generation. Moreover, the Environment Protection
Agency has imposed stiff regulations that require all upcoming
power plants to adhere to reduced norms of carbon emissions. This
is likely to result in a higher number of gas-fired power projects
over coal-fired in the future. There have been initiatives by gas
exploration companies to increase gas usage, especially in
locomotives. We believe gas usage will tremendously increase in the
future, which will increase Kinder Morgan's gas shipments. We have
previously seen gas prices rising since its slump in April. This is
expected to continue as gas producers have reduced exploration and
production efforts for dry gas while the demand for gas is still on
the rise. We can expect Kinder Morgan to raise shipping costs as
gas prices rise significantly.
CO2 & Oil Production
There is an increased rush for finding crude oil when oil prices
rise. Though the crude prices keep fluctuating, they have
maintained at significantly high levels. This has resulted in
explorers digging deeper and in diverse locations in search for oil
within the country. Kinder Morgan's CO2 & oil production
division primarily focuses on providing CO2 for oil recovery or
transport oil while owning interests in some oil producing fields.
Most of the company's crude oil pipelines are located in the
Permian Basin region of West Texas, which has witnessed a
significant increase in oil production lately. CO2 and oil
production is the company's largest division and performed
incredibly well during Q2. While we expect revenues in this
division to continue to rise in the future, fluctuating oil prices
could affect oil recovery activities and may in turn hamper the
division's revenues.
Terminals Business
In Q2, the terminals business benefited from better liquids
utilization, higher ethanol volumes, and coal volumes. The use of
bio-fuels is expected to increase considerably in the next few
years. Moreover, the demand for thermal coal outside of the U.S.
has been rising lately, particularly from Asian countries.
Presently, thermal coal accounts for nearly 40% of the total U.S.
coal exports. Kinder Morgan manages off-coast coal handling
terminals as well as export facilities. Increased exports from the
Gulf Coast and East coast to Asia and Europe is a significant
opportunity for the company's terminals business.
Kinder Morgan is investing nearly $400 million to expand its
Gulf Coast terminal network to add 27 million short tons per year
coal export capacity. It previously announced long-term agreements
with Peabody Energy (
BTU
) and Arch Coal (
ACI
) to secure and expand the Gulf Coast export platform for their
coal.
We believe coal volumes handled by Kinder Morgan's terminals
will significantly increase in the future as coal producers try to
compensate the shortage in domestic demand by exports. And the
increasing natural gas liquids and ethanol consumption will also
raise the liquids volumes handled by the company. Going forward,
better capacity utilization levels will also improve margins for
the terminals division, which accounts for nearly 21% value of the
company, by our analysis.
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