$90 Fair Value For Kinder Morgan On Rising Gas Usage, Coal Export

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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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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Investing Ideas , Stocks , US Markets
Referenced Symbols: ACI , BTU , ENB , EPD , KMP

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