Kinder Morgan (NYSE: KMI) is reportedly doing some shopping in the bargain bin. The energy company has reached a deal to buy some assets from bankrupt master limited partnership Southcross Energy Partners. While the transaction isn't a headline grabber, it is worth noting.
Here's a closer look at the acquisition and why it makes sense from a strategic standpoint.
Image source: Getty Images.
Drilling down into the deal
Kinder Morgan has reached an agreement to purchase two pipeline systems that the bankrupt Southcross Energy put up for sale. It would pay $76 million for the Corpus Christi Pipeline and Bay City Lateral systems, which the MLP is selling as part of its bankruptcy process. These systems transport natural gas in Texas.
While a small transaction overall, Kinder Morgan sees these pipelines as an ideal strategic fit within its existing Texas infrastructure. The company can plug them into its Texas midstream assets, which will improve its ability to move gas near the coast. That increased connectivity will come in handy as it builds new natural gas pipelines from the Permian Basin that transport the region's growing volumes to the Texas Coast.
Location, location, location
Kinder Morgan is very bullish on the future of natural gas, especially in Texas. That's due in large part to the projected growth of the Permian Basin. The region already produces 10% of America's gas volume. However, its output is on track to rise from 10 billion cubic feet per day (Bcf/d) in 2018 up to 21 Bcf/d by 2025, according to one forecast, or a 110% increase.
Kinder Morgan is working hard to capture these growing volumes. It's leading the development of the Gulf Coast Express and Permian Highway pipelines, which will move a combined 4.1 Bcf/d of gas when they come on line over the next year. It's also working on a third gas pipeline, Permian Pass, that would be a similar size.
These pipelines will push a tremendous amount of natural gas toward the Gulf Coast. That's driving investment in building new liquefied natural gas (LNG) terminals as well as petrochemical plants to consume this gas. As a result, 70% of the growth in America's natural gas demand through 2030 will come from Texas and Louisiana. Because of that, Kinder Morgan should have even more opportunities to build additional gas infrastructure in that region.
CEO Steve Kean noted this potential on the second-quarter conference call. He said that increasing flows of gas from the Permian "bring opportunities for downstream expansion and optimization as we find homes for all that incremental gas through our connectivity with LNG facilities, Texas Gulf Coast power, industrial, and petchem demand." The company already plans to invest $250 million to increase the capacity and improve the connectivity of its Texas Interstate pipeline network. The deal for these two Southcross pipeline systems, meanwhile, will help further enhance its ability to move gas in that region. These investments also position the company to capture additional expansion opportunities in the future, which would enable it to grow its cash flow at a faster rate.
Betting big on Texas
Kinder Morgan's bid to buy some gas pipelines from the bankrupt Southcross Energy is a small deal overall. However, it's part of a larger plan to enhance the company's ability to move gas throughout Texas. With so much gas flowing out of the Permian and into LNG terminals and petrochemical plants, Kinder Morgan wants to make it sure it captures as much of this growth as it can. This strategy should enable it to improve the profitability of its existing assets while further growing cash flow by building new ones. That has the potential to enrich its shareholders over the long run.
10 stocks we like better than Kinder Morgan
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has quadrupled the market.*
David and Tom just revealed what they believe are the ten best stocks for investors to buy right now... and Kinder Morgan wasn't one of them! That's right -- they think these 10 stocks are even better buys.
*Stock Advisor returns as of June 1, 2019
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.