Here's Where Kinder Morgan Sees Some Green Shoots in the Energy Market

By Matthew DiLallo Markets Fool.com

As one of the largest energy infrastructure companies in North America, Kinder Morgan (NYSE: KMI) has unique insight into what's going on in the oil and gas market. In fact, by taking a closer look at the change in the volumes flowing through its system, the company can take the pulse of the industry. Because those volumes have been increasing recently, it can be interpreted to mean that the energy market is getting better. Here's where Kinder Morgan is seeing positive signs and what that portends for its future.

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Natural gas demand was strong

On the company's fourth-quarter conference call, CEO Steve Kean detailed several "green shoots" that suggest a recovery is underway in the energy market. First, Kean said that the company saw "record-setting days" of demand on two of its larger gas pipeline systems during the fourth quarter. Next, Kean noted that price volatility increased, enabling the company's natural gas storage business to capture opportunities in the marketplace both in late 2016 and earlier this year.

Furthermore, Kean pointed out that "we had about 0.5 BCF of new, natural gas capacity sign-ups." He added, "A little less than 100 of that, it was about 60 of that, was existing capacity, bringing the total over the last three-year period up to 8.7 BCF." In other words, customer demand for gas capacity was so strong that the company not only filled out some existing capacity on its system, but it will need to invest capital in adding capacity to meet this demand. In fact, Kean noted that it added $167 million of new capital investments during the quarter, bringing its full-year total to $740 million.

Image source: Kinder Morgan Inc.

As Kean pointed out:

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While gathered volumes were down on our system, the return of rigs to the Eagle Ford and Haynesville, the resilience of our assets in the Bakken, where we actually kept oil gathered, roughly flat and increased our gas gathering volumes were good leading indicators for us.

Here, Kean notes that rising rig counts in the Eagle Ford and Haynesville suggest that higher volumes should follow in the future. For example, Chesapeake Energy (NYSE: CHK) plans to run three to four rigs in the Eagle Ford this year and another two to three rigs in the Haynesville, which are part of its plan to boost totalproduction by 7% over the course of the year. Also, Chesapeake said that it expects output to increase another 15% in 2018. Meanwhile, in the Bakken,Continental Resources (NYSE: CLR) plans to increase oil production by 29% and gas production by 12% over the course of this year. One of the drivers of Continental Resources' growth is its decision to finish 131 drilled uncompleted wells during 2017 as well as drilling and completing 17 more. As producers drill more wells to grow output, it could open the door for Kinder Morgan to invest additional capital in expanding its natural gas pipeline capacity.

Image source: Anadarko Petroleum.

Oil production is starting to pick back up

Turning his attention to the oil market, Kean said:

In North American crude, green shoots were apparent as rig count rose significantly over the last half of the year and US production actually grew during the fourth quarter. Producers have continued to lower their breakeven prices with respect to the Eagle Ford specifically, which was hit especially hard by the downturn. Acreage has now started to change hands from capital constrained players to new owners who we expect will do more with that position. We expect to see volumes in the Eagle Ford, both gas and oil, to continue to decline in the first part of 2017 before flattening and then starting to grow as 2017 progresses.

Another thing Kean emphasizes is the noticeable shift in ownership of Eagle Ford shale acreage recently, which should lead to more drilling. One prime example was Sanchez Energy's (NYSE: SN) decision to team up with private equity juggernaut Blackstone Group (NYSE: BX) to acquire Anadarko Petroleum's (NYSE: APC) position in the Eagle Ford. Due to lower oil prices, Anadarko had been using that position to generate free cash flow. However, Sanchez plans to use it to fuel production growth. In fact, Sanchez now expects its pro forma production to grow at a 10% compound annual rate over the next three years while living within cash flow at current prices. As more producers join Sanchez and start ramping up production, it should drive additional oil volumes through Kinder Morgan's Eagle Ford assets.

Investor takeaway

Kinder Morgan is starting to see more volumes flow through its natural pipelines, suggesting that conditions are getting better. It also sees more oil rigs going back to work now that cash-strapped producers have offloaded acreage to others, which should drive oil volume growth in the future. These green shoots suggest better days lie ahead for Kinder Morgan.

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Matt DiLallo owns shares of Kinder Morgan and has the following options: short January 2018 $30 puts on Kinder Morgan and long January 2018 $30 calls on Kinder Morgan. The Motley Fool owns shares of and recommends Kinder Morgan. The Motley Fool has a disclosure policy.