After a couple of down years, Kinder Morgan (NYSE: KMI) started growing again in 2018 thanks to the completion of some expansion projects. That trend should continue for at least the next two years because the company has another $5.7 billion of high-return expansions underway.
However, while the company has been working hard to secure additional projects to enhance its future growth visibility, it recently walked away from one opportunity. In doing so, Kinder Morgan showed that it remains committed to pursuing only investments that line up with its strategic priorities.
A less-than-ideal fit
Late last year, Canadian energy infrastructure giant Enbridge (NYSE: ENB) said that it was working with Kinder Morgan and Oiltanking on a new offshore oil export facility dubbed Texas COLT. The companies would have invested $800 million into building the terminal and related infrastructure capable of fully loading Very Large Crude Carriers (VLCC) that can hold 2 million barrels of oil.
The project aligned perfectly with Enbridge's strategic priorities of connecting oil produced in the Permian Basin to the U.S. Gulf Coast for export. It's a natural extension of the company's investment in the Gray Oak pipeline, which will transport oil from the Permian to the Gulf Coast. That's why Enbridge plans to buy out Kinder Morgan's stake in the venture and continue moving forward.
The project, however, didn't fully align with Kinder Morgan's strategic priorities. While the company does have some oil pipeline investment opportunities in development, it's mainly focused on natural-gas-related infrastructure. Another drawback was the lengthy time commitment to move this project through the regulatory process. The companies, for example, applied to build the deepwater port in late January but didn't expect it to be in service until 2022. That timeline might have been optimistic given that there are eight similar projects on the docket. Those factors increased the risk that this project might not deliver the anticipated reward.
Lots of other growth opportunities in the works
While Kinder Morgan has nearly $6 billion of expansions underway, most of those projects should come online by the end of next year. That leaves it with less longer-term growth visibility than some rivals -- though the company currently believes that it can secure between $2 billion and $3 billion of new organic growth investments per year, which at the low end would support 4% annual earnings growth. Last year, for example, it locked up $2.5 billion of new projects.
It hasn't officially sanctioned any this year. However, the company recently teamed up with Tallgrass Energy (NYSE: TGE) to jointly develop a solution to increase oil transportation capacity in the Rockies. Kinder Morgan would convert two underutilized natural gas pipelines for oil service while Tallgrass Energy would further expand its Pony Express Pipeline. This development could fuel additional growth as Kinder Morgan could then expand its Double H Pipeline in North Dakota. Meanwhile, it could enable Tallgrass Energy to move forward with two other oil-related infrastructure projects, including an oil export facility in Louisiana.
Kinder Morgan is also working with Phillips 66 Partners on a project relating to the Gray Oak pipeline. The companies are currently seeking interest from Gray Oak's shippers to move oil on Kinder Morgan's crude and condensate system for delivery along the Houston Ship Channel. If there's enough interest, Kinder Morgan could expand that system.
In addition to these oil-related projects, Kinder Morgan has several gas-focused opportunities in development. For example, the company is looking into LNG export projects, including pipelines and liquefaction terminals. It's also considering pipelines to transport natural gas out of the Marcellus and Utica shale region, as well as those that would support additional natural gas power plants and industrial customers.
The company's success in securing these and other projects would give investors a better idea of how fast it could increase cash flow in the future. Enbridge, for example, is currently in year two of a three-year plan to grow cash flow per share at a 10% annual rate, supported by 16 billion Canadian dollars (about $12 billion) of expansion projects.
Waiting for more clarification
Kinder Morgan's decision to walk away from an offshore oil export development will dim its growth prospects somewhat since the company now has one less project in the pipeline. However, it wasn't a perfect strategic fit and was a higher-risk opportunity given the development time frame and competition. Because of that, this could end up being a wise move in the end -- especially if the company green-lights several other projects with better risk/reward profiles in the coming months that give investors a clear picture of how fast it can grow earnings over the next few years.
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