Kinder Morgan (NYSE: KMI) announced a notable leap forward on one of the projects it has in development by signing a letter of intent with two partners to jointly develop its Gulf Coast Express Pipeline project (GCX Project). The company, which previous secured DCP Midstream (NYSE: DCP) as a partner, added Targa Resources (NYSE: TRGP) to its team this week, while also broadening the scope of the project. As a result, it's increasingly likely that the company will move forward with this project, which should help alleviate fears on its ability to grow its dividend.
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A bigger and better project
Kinder Morgan initially pitched its GCX Project this past March by holding an open season on a proposed pipeline that would move natural gas from the prolific Permian Basin to the Gulf Coast. The scope included building a 430-mile pipeline that would transport up to 1.7 billion cubic feet per day (Bcf/d) from the resource-rich Permian to expanding gas markets along the coast, including export opportunities through LNG facilities and pipelines to Mexico. The project quickly generated a tremendous level of interest, including from leading Permian gas marketer DCP Midstream, which swiftly agreed to become a partner on the proposed pipeline.
Now, with Targa Resources coming aboard as a 25% partner, Kinder Morgan and DCP Midstream, which will hold 50% and 25% stakes, respectively, plan to expand the scope of the project. They now anticipate building a pipeline that would have 1.92 Bcf/d of capacity while also constructing a 50-mile extension to reach into the Midland Basin to serve gas processing plants operated by Targa Resources and its producing partner Pioneer Natural Resources (NYSE: PXD). Despite the larger scale, the partners still expect it to enter service in the second half of 2019 if everything goes according to plan.
Needed now more than ever
The addition of Targa to the team is noteworthy because of its relationship with Pioneer Natural Resources, which is the largest producer in the Midland Basin side of the Permian. While Pioneer's primary drilling target is oil, the company recently noted that its wells are producing more gas than expected. While investors initially sold the stock off on that news, the company pointed out that its oil volumes hadn't fallen, only that its gas volumes were higher than anticipated. Because of that, it will likely continue generating incremental gas production as it keeps expanding output that will need access to end-markets.
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Pioneer isn't the only driller that recently noted that wells in the Midland were producing higher volumes of gas. Parsley Energy (NYSE: PE) also pointed out that gas volumes were coming in higher than expected while oil was tracking its projection. In Parsley Energy's case, it's on pace to produce an additional 2,000 barrels of oil equivalent per day (BOE/d), or roughly 12 million cubic feet of natural gas and NGLs this year than initially expected. These higher incremental gas volumes from Parsley, Pioneer, and others, when combined with their already rapidly increasing output, suggest that the GCX Project will provide the industry with a much-needed solution.
Rapidly improving visibility
With this partnership announcement, it's increasingly likely that Kinder Morgan will move forward with what appears to be a vital project for producers. That helps improve the visibility of the company's future growth potential, especially since the anticipated in-service date coincides with that of its controversial Trans Mountain Expansion project, which investors worry won't get built on time. The overlap could help mute the impact of a delay so the company can keep growing cash flow, which should give investors more confidence in its dividend growth forecast.
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Matthew DiLallo owns shares of 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 has a disclosure policy.