Goodman Point. Source: Kinder Morgan.
Many companies likely regret their bullish bets on oil right now.Kinder Morgan, however, isn't one of them. The energy company, which produces oil in Texas through enhanced recovery projects using carbon dioxide, has held on to the business even thoughsome investors did not think it was a strategic fit. Kinder Morgan disagrees,and COO Steve Kean had a lot of good things to say about the company's oil business at a recent energy conference.
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Risk and rewardWhen asked about the company's oil business, and more specifically about the higher returns it had been known to generaterelative to its pipeline and terminals business, Kean had this to say:
The company's oil unit tends to be its highest-returning business. It needs to be, because unlike most of the company's fee-based assets, this business exposes Kinder Morgan to commodity prices. That is an issue when oil prices fall, as seen this year. However, the company's view is that its hedging program mitigates some of the risk from falling oil prices, at least in the short term. However, that only goes so far, as Kean acknowledged.
Sand Canyon Facility. Source: Kinder Morgan.
So far, the company's risk-taking has worked, as Kinder Morgan has earned the higher returns it sought. But that's not the only reason it continues to like its oil business.
Kinder Morgan's carbon advantageThe other reason is because Kinder Morgan controls its supply of carbon dioxide, which is a key strategic asset.Kean noted this when he said:
The following slide shows that the company owns and operates the best source for carbon dioxide used in enhanced oil recovery. That gives it a distinct competitive advantage to inexpensively produce oil using that carbon dioxide.The company also sells this material to third parties, so it's an important integrated system both internally and externally.
Source: Kinder Morgan Investor Presentation.
Investor takeawayWhile oil has quickly fallen out of favor with investors, Kinder Morgan still loves its oil business. Not only does the business earn higher returns than its other assets, but the company controls a strategic supply of carbon dioxide that is critical in keeping its production costs low. That's why we'll likely see the company keep pumping oil for years to come.
The article Why Kinder Morgan Inc. Still Loves its Oil Business originally appeared on Fool.com.
Matt DiLallo has the following options: short January 2016 $32.5 puts on Kinder Morgan and long January 2016 $32.5 calls on Kinder Morgan. The Motley Fool recommends Kinder Morgan. The Motley Fool owns shares of Kinder Morgan. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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