Kinder Morgan Energy Partners Primed for Robust Growth

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Recently it was reported by the Energy Information Administration, or EIA, that the US' recoverable amount of oil and gas reserves is 35% greater than in 2011. The shale revolution has unlocked the tremendous potential of the natural gas and oil industry, bringing about a huge increase in the oil and gas pipeline distribution around the U.S. and Canada.

In the AEO2013 Reference case and EVA projections, natural gas production is expected to reach 31.4 trillion cubic feet by 2035, which is a mammoth increase of 8.4 trillion cubic feet from its 2011 levels.

Kinder Morgan Energy Partners (NYSE: KMP) is one of the largest midstream and the third-largest energy company in the United States with approximately 80,000 miles of pipelines and 180 terminals. The company operates in a defensive industry, as its revenue model is completely dependent on the utilization of its pipelines and terminals.

The company has exhibited robust results of late, as it witnessed 44% year-over-year growth in its revenues, the largest contributor being the product pipelines segment.

Acquisitions to spur growth

Kinder Morgan Energy Partners has made several acquisitions in order to spur growth through inorganic means. The recent acquisition of Copano Energy is expected to be accretive by the end 2013. Going forward, the strategic acquisition is expected to drive growth for the company and turn accretive over the next five years beginning in 2014.

The acquisition facilitated Kinder Morgan Energy Partners in expanding its pipelines across 70,000 miles. Furthermore, with the acquisition of El Paso Natural Gas Company and its projects worth $900 million, the company is well positioned to provide a robust and reliable infrastructure in North America.

Future investments and expansions plans

The supply of shale and oil-sands crude in North America is expected to exceed the demand from 2020 to 2030. To capitalize on this new exciting opportunity, the company plans to triple the size of its Trans Mountain pipeline from Edmonton, Alberta to Vancouver by 2017.

Other expansion plans such as Crude and Condensate pipeline system in Karnes County, Texas, BOSTCO Oil Terminal on Houston Ship Channel, the $450 million expansion of coal terminals and the $58 million Geismar chemical storage capacity expansion (GLT) allow me to keep a highly bullish view on this company. 

Further, in order to diversify its business the company is exploring new business opportunities in leasing and acquiring natural resource reserves within its Terminals business segment.

Growth in CO2 division

Kinder Morgan Energy Partners is the largest supplier of CO2 in the Permian basin for enhanced oil recovery from mature oil wells; therefore, the company is expected to benefit from rising oil prices in the future.

The ongoing expansion projects in Colorado is expected to release some its capacity constraints and prop up the overall output to 1.4 Bcf a day by 2014. In addition, the new gas field along the Arizona-New Mexico border is expected to add another 200 million cubic feet per day to its supply. The additional output will be sold under long-term contracts, thus, mitigating any price fluctuations.

Competitive landscape

With a market capitalizations of $30.53 billion and $34.54 billion respectively, TransCanada (NYSE: TRP) and Enbridge (NYSE: ENB) are the two major players operating in the oil and gas pipeline segment in North America.

With a reported net income of $446 million, TransCanada has surpassed the comparable earnings ($370 million) for the first quarter. With its Bruce Power Units one and two on again, in addition to Bruce Power unit four and Sundance, which are back in service, TransCanada seems well positioned to report strong growth with its yearly earnings growth estimated at around 16.7% and 13.31% for the fiscal 2013 and 2014, respectively.

However, at present its Keystone project is under doubt due to various environmental issues. Nonetheless, ongoing projects such as Coastal GasLink from the Dawson Creek area to the West Coast of British Colombia and extension of NOVA Gas Transmission Systems, TransCanada certainly proposes a reliable long-term investment opportunity.

Enbridge exhibited robust performance during the first quarter of 2013 with adjusted earnings at around $488 million. Earlier this year, the company announced its plans for a $200 million pipeline for new oil sands project.

The new pipeline is expected to connect Athabasca Oil's planned Hangingstone oil sands project in northern Alberta to its regional pipeline network. The massive 50-Kilometer pipeline will carry approximately 16,000 barrels per day of crude oil by 2015.

It must be noted that, earlier this year, Enbridge also entered into a joint venture with Energy Transfer in order to develop a Trunkline gas-to-oil conversion and reversal project that connects the East Coast Gulf refinery market to the Patoka, Illinois, hub. Such efforts are expected to bolster its revenues and earnings in the future.

Bottom line

The cancellation of its Freedom Pipeline project enabled Kinder Morgan Energy Partners in delivering a dividend-pay-out ratio of 508%. In addition to this, shareholders of the company should be pleased with estimated year-over-year earnings pegged at around 12.77% and 8.54%, respectively, for the next two fiscal years.

I believe Kinder Morgan Energy Partners is primed to attain a strong upside in its share price, as its the largest midstream company with huge investments in the pipeline infrastructure coupled with new found shale deposits in North America. I believe Kinder Morgan Energy Partners will witness robust growth through the utilization of its assets in the long run.

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Ashit Gulati and Equity Dimensions have no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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