Kinder Morgan (NYSE: KMI) received some good news this week after it obtained approval to build a major pipeline from the Northeast to the Gulf Coast. That green light will enable the company to start working on another new project at a time when it faces considerable uncertainty on its ability to build the largest expansion in its backlog, the Trans Mountain Pipeline expansion in Canada. With this latest project approval, the pipeline company's growth prospects continue to come into better focus.
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An important new purpose
This week, the U.S. Federal Energy Regulatory Commission (FERC) approved Kinder Morgan's Utica Marcellus Texas project, which is a 964-mile pipeline that will transport 400,000 barrels per day of natural gas liquids (NGLs) from major shale plays in the Northeast to market centers in Texas. The $412 million project should enter service by the end of next year if everything goes according to plan. For the most part, the project will use existing infrastructure on Kinder Morgan's Tennessee Gas pipeline system by converting portions of that system from northward flowing gas service to southbound NGL transportation. The company, though, will build 200 miles of new pipeline to connect it to a major NGL storage hub in Texas.
One of the themes this particular project underscores is the changing flows of hydrocarbons in the country due to the shale revolution. To build this project, Kinder Morgan will take an underutilized segment of pipeline that had been transporting gas from the Gulf of Mexico to market centers in the Northeast and convert it to move a different product southward because the Marcellus and Utica shales are providing the Northeast with plenty of gas and an overabundance of NGLs.
It's one of several such conversions the industry has undertaken in recent years. One of the largest is Enterprise Products Partners' (NYSE: EPD) 1,192-mile ATEX pipeline, which entered service in 2014. The company repurposed much of an existing pipeline so it could move ethane from the Marcellus and Utica shale plays to Enterprise's NGL hub in Texas. In addition to that pipeline, which continues to expand, Enterprise Products Partners and its 50% partner, Marathon Petroleum (NYSE: MPC), are developing another project that would repurpose and reverse the flow of the currently unused Centennial Pipeline. That project would use a combination of that legacy pipeline along with new lines to move additional volumes of NGLs to Texas. One of the benefits of repurposing an existing line is that the developer doesn't need to obtain as many permits and right-of-ways, which makes these projects cheaper and quicker to build. That's why Kinder Morgan believes it can finish construction on the Utica Marcellus Texas project in about a year.
Increasing clarity that growth is just over the horizon
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That rather quick in-service date is worth noting because one of the issues weighing on Kinder Morgan's stock this year is the uncertainty on the future of Trans Mountain, which is a significant growth driver for the company. That said, because of the attention paid to that project, investors are missing the fact that Kinder Morgan has several others coming down the pipeline that should quickly reverse the slide in its earnings. Next year, for example, the company should bring its nearly $2 billion liquefied natural gas export project on line as well as the more than $500 million Utopia Pipeline project, which is an NGL pipeline in the Northeast. These projects, as well as several smaller natural gas pipeline expansions, should provide the company with nearly $400 million of incremental annual earnings before interest, taxes, depreciation, and amortization (EBITDA) in 2018.
Meanwhile, the recently approved Utica Marcellus Texas project, when combined with the ramp-up of 2018's expansions and additional gas pipeline growth initiatives underway, should add several hundred million dollars of incremental EBITDA in 2019, putting the company on pace to deliver more than 10% earnings growth over the next two years.
In addition, the company has several more expansions in development, including a proposed pipeline project with DCP Midstream (NYSE: DCP) that would move natural gas from the Permian Basin to the Gulf Coast. With a rumored price tag of more than $1 billion, the project would provide needle-moving growth for Kinder Morgan and DCP Midstream if they move forward with the project. One other noteworthy aspect of this project is that it could enter service as soon as late 2019, which coincides with the currently expected in-service date of Trans Mountain, suggesting that it could help to partially offset a delay in that project's completion. In the meantime, with energy prices starting to stabilize, and demand for hydrocarbons accelerating, Kinder Morgan could have more project announcements in the coming months that would help reduce the perceived reliance on Trans Mountain to drive future growth.
Plenty is coming down the pipeline
While all eyes are on Trans Mountain, investors need to realize that Kinder Morgan's future is more than that one project. It has several other expansions that should enter service over the next two years, which should reverse the decline in its cash flow. That's just one of the many reasons why now looks like a great time to be a buyer of this stock.
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Matthew DiLallo owns shares of Enterprise Products Partners and Kinder Morgan and has the following options: short January 2018 $30 puts on Kinder Morgan, long January 2018 $30 calls on Kinder Morgan, and short December 2017 $19 puts on Kinder Morgan. The Motley Fool owns shares of and recommends Kinder Morgan. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.