These Pipelines Are Worth Looking Into

Callum is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Kinder Morgan Energy Partners (NYSE: KMP) could make you rich. How, you ask? Because there are enormous trends that are heavily in favor of pipeline operators like this company. Pipelines are America's veins, transporting vital fluids around the country in order to keep everything going. KMP operates 75,000 miles of pipelines for oil and gas, has 180 storage terminals which can handle 2.5 million bpd (barrels a day) of oil and 55 billion cubic feet of gas a day. It also makes a lot of money from selling CO2, and its oil and natural gas production. KMP is poised to ride the US energy boom upwards.

USA Energy BOOM

The IEA predicts that by 2020 the US will overtake Saudi Arabia and Russia in oil production and produce 11 million bpd. That is up sharply from the 6.7 million bpd the US currently produces and is much more than the 5.1 million bpd we produced back in 2006. The IEA isn't alone in its bullish prediction. Citigroup also sees the US out-pacing Saudi Arabia in oil production by 2020-2022. "As a result, they say, the U.S. looks to become the largest producer and seems certain to overtake Russia and Saudi Arabia before the decade is out." If these estimates turn out to be true, and there is a lot pointing towards it happening, KMP will benefit immensely.

For instance, in North Dakota oil production has gone from 122,000 bpd in 2005 to over 720,000 bpd today. "In March, North Dakota surpassed Alaska to become the No. 2 oil producing state. North Dakota produced a record 728,494 barrels of oil per day in September, according to preliminary numbers from the North Dakota Department of Mineral Resources." All of that oil has to be transported somehow, and Kinder Morgan is more than happy to ship it. Last year in March KMP announced that it was going to team up with Watco Cos LLC to build out the infrastructure needed to transport oil. They are going to build several rail facilities in key areas so they can transport oil and gas out of the Bakken and across America. KMP is about more than just the Bakken and North Dakota though, their extensive pipeline operations and storage facilities make them very well positioned to ride the energy boom upwards. As more oil and gas passes through their veins (pipelines), they make a lot more money.

Natural Gas

Don't think I forgot natural gas. Natural gas is another large part of Kinder Morgan's future. While the two largest US natural gas producers, ExxonMobil (NYSE: XOM) and Chesapeake Energy (NYSE: CHK), have curtailed natural gas production due to record low natural gas prices, the future of natural gas is bright. Natural gas prices have gone from $14 MMBtu (million British thermal units) in 2008 to $3.55 MMBtu today. This has caused most, if not all, natural gas wells to become unprofitable for right now. But, this is due to the over supply of natural gas in the US. Which is why the US is going to start exporting LNG by 2015.

A US government backed study found that in 63 different scenarios where the US exports LNG, each one had positive effects on the US economy. As the US shifts to natural gas from coal, starts to export excess natural gas to Europe and Asia, and starts to use natural gas as fuel (using compressed natural gas engines in trucks), more natural gas will have to be produced to keep up with demand. That will benefit KMP's bottom line as more gas is moved through their pipelines. Natural gas production has sharply rebounded off its financial crisis low of 50 billion cubic feet a day, up to 65 billion cubic feet a day currently. This graph clearly demonstrates the rebound.

<img height="344" src="/media/images/user_13409/us-natural-gas-production-tthough-july-2012_large.png" width="546" />

Final Thoughts

There is an energy boom going on in the US right now, there is no denying it. Kinder Morgan is well positioned to ride this boom, and pays out a fatty 6.3% dividend yield right now. I'm very bullish on the future of domestic American energy and I'm bullish on KMP.


callumturcan has no positions in the stocks mentioned above. The Motley Fool owns shares of ExxonMobil and has the following options: long JAN 2013 $16.00 calls on Chesapeake Energy, long JAN 2014 $20.00 calls on Chesapeake Energy, long JAN 2014 $30.00 calls on Chesapeake Energy, and short JAN 2014 $15.00 puts on Chesapeake Energy. 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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