Source: Kinder Morgan.
Kinder Morgan's founderRichard Kinder wanted to make one thing abundantly clear on its third-quarter conference call: Kinder Morgan is a natural gas story -- and that story is really good. Here are four things he wanted investors to know about that tale.
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Kinder Morgan and natural gasKinder led off his comments by saying:
While Kinder Morgan is a diversified midstream company, its core business is natural gas pipelines, which Kinder noted produces half its cash flow. Because of this, natural gas is important to the company's current operations as well as its future.
Kinder then laid out the bull case for natural gas, using projections from respected industry research firm Wood Mackenzie. He said:
This demand growth isn't a pipe dream because there are four major drivers fueling that growth, which are detailed on the slide below.
Source: Kinder Morgan.
1. It's electricKinder continued by saying:
Kinder first points out the fundamental shift away from coal and toward cleaner-burning natural gas. It's a shift that has significantly affected the coal industry with a number of producers in, or on the brink of, bankruptcy. Coal producer Peabody Energy is one of those in the brink. One reason for this is because demand for coal by utilities continues to sink. Peabody Energy noted in its third-quarter report that it "now projects utility coal demand to decline approximately 100 million tons in 2015, primarily due to lower natural gas prices" with gas pushing down coal's share of electric generation. Worse yet, Peabody Energy "expects 2016 utility coal consumption to be below 2015 levels based on current natural gas prices and expected plant closures." That said, Peabody's loss is Kinder Morgan's gain because it is building a number of pipelines to support additional gas demand by utilities.
2. Viva la MexicoThe natural gas story, however, extends far beyond its market share battle with coal in the U.S. Kinder noted:
Kinder points out that an increasing amount of U.S. natural gas is making its way into Mexico for two reasons. First, like the U.S., Mexico is building more natural gas power plants, which is increasing its demand for gas. However, it's increasing its demand at a time when production in the country is declining, which has opened up a number of opportunities for Kinder Morgan to expand its pipelines to export gas to Mexico, including a $38 million expansion to its Mier-Monterrey pipeline.
Source: Kinder Morgan.
3. The chemical reactionNext, Kinder noted:
Cheap natural gas is fueling an unprecedented amount of industrial and petrochemical expansion projects in the U.S. because these facilities are large consumers of natural gas. That's great news for Kinder Morgan because these facilities will need to be connected to the natural gas supply network, with Kinder Morgan benefiting from the potential to build pipelines to directly supply these new plants.
4. LNG is comingKinder concluded with:
Kinder notes that the first of many LNG export facilities are expected to come online later this year when Cheniere Energy's Sabine Pass offloads its first natural gas cargos. These projects directly benefit Kinder Morgan, which earlier this year signed a 20-year deal with Cheniere Energy to supply gas for its Corpus Christi facility. Kinder Morgan is investing $212 million to expand its facilities to support this agreement with Cheniere Energy.
Investor takeawayIf there's one thing Richard Kinder wanted to make abundantly clear on the company's third quarter conference call it is the fact that the natural gas story is real. Further, there are four drivers of that story, all of which have huge growth potential for the company both in the near and long term. This is why Kinder Morgan believes its best days appear to be ahead of it.
The article 4 Things Kinder Morgan Inc. Wants You to Know About the Natural Gas Story originally appeared on Fool.com.
Matt DiLallo owns shares of Kinder Morgan andhas 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 owns shares of and recommends 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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