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Children's Morgan: Well Positioned For Natural Gas Growth – Children's Morgan, Inc. (NYSE: KMI)



On Thursday, May 16, 2019, pipeline and midstream energy giant Kinder Morgan, Inc. (KMI) presented a presentation at the Barclays America Select Franchise Conference. As is usual for presentations of this type, Kinder Morgan discussed its position within its industry and made an investment thesis to potential investors. The company also spent a great deal of effort discussing the prevailing trends in the North American energy industry. There are some strong trends in the energy industry right now and Kinder Morgan is well placed to take advantage of them and, in doing so, deliver the child of growth that has made the company a favorite of dividend investors for years.

Kinder Morgan is the largest pipeline company in North America. The company boasts approximately 70,000 miles of natural gas pipelines, 6,900 miles of refined products pipelines, 5,800 miles of crude oil and natural gas liquids pipelines, and 157 terminals.

] Source: Kinder Morgan

This gives the company a presence in every major basin in which oil and natural gas is produced. This is a good position for the company, because there are different dynamics to play in each of these basins. For example, the Permian has been delivering much stronger than other basins in the United States over the past few years. Other areas like the Marcellus and Utica shales in Appalachia do not produce any crude oil, so their development is not particularly dependent on crude oil prices. In addition, each of these basins is expected to grow its production at a different rate going forward. For example, the current projection for natural gas production growth by basin over the next decade:

Source: Kinder Morgan

By having operations in these various basins, Kinder Morgan is able to take advantage of the different opportunities that

Of course, this production growth would be pointless if there was no demand for the incremental production. Fortunately, that's not the case. One of the biggest demand drivers for natural gas is the export market, which is expected to increase its consumption of natural gas at 496% over the next 10 years:

] Source: Kinder Morgan

Natural gas consumption in the United States, including the export market, is expected to increase more than oil consumption. This is mostly due to natural gas's perception as a cleaner-burning fuel, which is leading a worldwide push to utilize it in place of oil and coal as a source of energy. Kinder Morgan is moving to take advantage of this demand. The company currently has $ 6.1 billion of new growth projects either under construction or being planned, $ 4.3 billion of which are meant to increase its footprint in the natural gas space:

] Source: Kinder Morgan

The most significant of these projects are the $ 1.3 billion that the company is investing in. These include things like the Permian Highway pipeline and the Gulf Coast Express pipeline, which will carry natural gas away from the massive Permian basin in West Texas to the export facilities along the Gulf Coast. Naturally, the point of these projects is to increase the amount of natural gas that Kinder Morgan is able to carry away from the Permian basin, accommodating the growing level of production there. As KMI's business model results in the company with higher revenues and cash flows when its transported volumes increase, these projects will stimulate financial growth for the company. This is what investors like to see.

Perhaps a much more interesting project that is currently working on in the natural gas space is the $ 1.2 billion Elba Liquefaction Plant. This facility is located on Elba Island, an 840-acre private island near Savannah, Georgia. That makes it one of the few liquefied natural gas plants that are constructed outside of the Gulf Coast. The plant will have, when fully operational, a capacity of approximately 350,000 mcf / day of natural gas, which works out to about 2.5 million tonnes per day. Royal Dutch Shell (NYSE: RDS.A) (NYSE: RDS.B) has been very aggressively positioned as a supplier of natural gas to Europe and has already agreed to purchase the entire output of the plant. This is a good sign as it will allow Kinder Morgan and its partners to generate a positive return on the project from the moment it starts operating. This also ensures that the companies are not investing all that money to produce LNG that nobody actually wants. The plant first started operation earlier this quarter and will be slowly ramped up over the next nine to ten months. Thus, we will slowly increase Kinder Morgan's revenues over the remainder of the year.

Earlier this week, I published an article on peer company Magellan Midstream Partners (MMP), in which I described the company's projected return on its growth projects as rather disappointing. Kinder Morgan performs much better in this respect. Over the 2015-2018 period, the projects that Kinder Morgan brought online had an EBITDA multiple of 5.9x. However, most of them were better than 5.2x:

Source: Kinder Morgan

What this means that it takes, on average, just over five years for a natural gas pipeline to pay for itself. This is much better than what the Magellan Midstream has been accomplishing and clearly states that it has a much better job of holding costs down in construction or is able to get more profitable contracts from its customers. Either scenario is a good one for the company and its shareholders.

For quite some time, one of my biggest concerns with Kinder Morgan has been the company's level of debt. Fortunately, this is an area in which the company has improved. We can see this by looking at the net-debt-to-adjusted EBITDA ratio, which tells us how long it will take to pay off its debt if the company devotes its entire pre-tax recurring cash flow to this purpose: [19659017] Source: Kinder Morgan

If we can see, the company currently has this ratio at 4.5x, which is quite a bit lower than the 5.3x it had back at the end of 2016. It seems likely that the company will try to keep its leverage at around this level as management's long-term target is 4.5x. I will admit though that I generally like to see this ratio below 4.0x. This is due to the fact that debt limits are the company's flexibility and some event cause its cash flow to decline. Of course, midstream companies like Kinder Morgan have very stable cash flows, so it is difficult to see what kind of event could cause such a cash flow decline. In addition, Kinder Morgan is less than some other midstream giants like Enbridge (NYSE: ENB). Thus, the company probably has enough financial flexibility to take advantage of opportunities as they present themselves.

In conclusion, the natural gas space is likely to be one of the growth segments in North American energy over the next decade, and Kinder Morgan is well placed to take advantage of this by providing the infrastructure needed to take this natural gas to market. It is also well positioned to prosper off the growing demand from the export space. The company also has several growth projects in the space that have attractive returns and has the financial flexibility to do so. Overall, it is easy to see why children are in the midst of a midstream income investor.

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Disclosure: I / we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.


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