Last month, Kinder Morgan (NYSE: KMI) announced the news that it was selling its largest growth project to the Canadian government. While the company received fair companion for the Trans Mountain Pipeline and its controversial expansion project, the deal slashed its expansion project backlog in half, leaving some disappointed investors wondering where the company might get its next growth boost. One source they seem to have overlooked is the Permian Basin, which will require billions of dollars worth of new infrastructure in the coming years to meet the extraction industry’s needs.
A gusher of gas in the forecast
Last year, oil and gas companies in the Permian Basin produced roughly 7 billion cubic feet of natural gas per day (BCF/D). In 2018, that’s expected to rise to an estimated 8.7 BCF/D, according to analysis from Woods Mackenzie, and another 1 BCF/D of gas output is expected to be tacked on in 2019. With a decade, the Permian could produce as much as 14 BCF/D, or twice last year’s output. That forecast suggests the industry will need to significantly increase its capacity to process and transport all that natural gas. It’s a mammoth opportunity that’s right in Kinder Morgan’s wheelhouse, since it is already the largest natural gas pipeline company in the country, transporting 40% of the nation’s average daily volume.
Kinder Morgan has already started to capture some of this growth. It’s working with two of the largest natural gas gathering and processing companies in the region — DCP Midstream (NYSE: DCP) and Targa Resources (NYSE: TRGP) — on the Gulf Coast Express pipeline. That $1.7 billion pipeline will have the capacity to move 1.92 BCF/D of natural gas to market centers along the Gulf when it comes online next October. It’s the first of what could be many expansion projects for the company in the region over the next several years.
More opportunities up ahead
Kinder Morgan quickly secured customers for 100% of the Gulf Coast Express’ capacity. Because of that, the company stated on its first-quarter conference call that it’s already in early-stage discussions with shippers about constructing a second pipeline. While the company cautioned that this project is still in the very early stages, it believes that there’s enough industry support to build another line sooner rather than later.
In addition to that larger-scale project, the company noted that it is working on several smaller debottlenecking projects in the region, especially on its El Paso Natural Gas system, which moves gas to California, the Southwest, and Mexico. Meanwhile, it’s also exploring options to expand its Natural Gas Pipeline of America system to move Permian gas to market centers.
On top of pipeline expansion projects, Kinder Morgan could also develop other infrastructure assets that would support the development of the Permian Basin. One example is the company’s proposed Gulf LNG Liquefaction Project, which would liquefy natural gas for export. While the Mississippi location isn’t as close to the Permian as some other LNG export facilities under development, it’s still near enough to be a potential outlet for Permian gas.
Another possible opportunity for Kinder Morgan is partnering with other companies that need funding for projects they’re developing in the region. One example is Summit Midstream Partners’ (NYSE: SMLP) proposed Double E Pipeline project. Summit envisions it moving upwards of 1.0 BCF/D of gas from the Permian to a hub in Texas. The $400 million to $450 million project is too large for Summit to finance on its own, which is why it’s evaluating alternatives, including looking for financial partners. Meanwhile, Targa Resources recently secured another $500 million of Permian expansion projects, and now expects to invest more than $2.4 billion into the Basin over the next few years. While the company has secured funding for a large portion of that, it still needs more, and it could choose to bring on a partner like Kinder Morgan to provide it.
The possibilities above represent just a sampling of the opportunities that could develop for Kinder Morgan in the coming years.
A massive opportunity up ahead
Energy companies will need to pour billions of dollars into expanding the midstream infrastructure in and around the Permian Basin over the next decade, because natural gas production in the region is on pace to double. That growth potential is already providing Kinder Morgan with opportunities, and should continue to do so. But too many investors are overlooking it because they’re focused on the project the company is giving up on in Canada instead.
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