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Kinder Morgan (KMI) Continues to Bank on Take-or-Pay Contracts

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Kinder Morgan, Inc. KMI has low exposure to oil and gas price volatility and is well poised to gain as compared to many energy companies, especially upstream firms with significant exposure to fluctuations in commodity prices.

Factors Aiding the Stock

It is to be noted that major proportion of earnings that the company generates is dependent on take-or-pay contracts, depicting a stable business model. It means that irrespective of the volumes flowing through its pipeline, the company receives its payments.

Moreover, being a leading North American energy infrastructure player, the company generates stable fee-based revenues from its gigantic base of midstream assets that comprise pipeline networks spanning across 83,000 miles. Through its network of pipelines, Kinder Morgan transports volumes of natural gas, crude oil, gasoline and carbon dioxide (CO2). The company also has operating interests in 144 terminals that generate additional earnings. The terminal assets are involved in storing renewable fuels, petroleum products, chemicals and vegetable oils.

Investors should also know that Kinder Morgan, with its gas pipelines, is well positioned to capitalize on the growing demand for natural gas in the United States. This is because coal-fired power plants are being replaced with natural gas fired plants and export volumes of liquefied natural gas (LNG) are likely to grow.

Risks

After periods of low returns, energy investors are pressing oil exploration and production companies to focus more on returns than to production of commodities at a massive scale. This is going to hurt oil production volumes. With lower volumes being transported, fee-based revenues from midstream businesses might get affected. This is because a significant portion of earnings Kinder Morgan generates is dependent on volume risks.

Notably, it is quite evident that the coronavirus pandemic has impacted demand for midstream assets. Hence, like other midstream players like Enbridge Inc ENB, MPLX LP MPLX and The Williams Companies, Inc. WMB, Kinder Morgan is exposed to soft demand for pipeline networks, at least in the short term.

Moreover, the company’s project backlogs have dropped drastically to only $1.4 billion – as of Mar 31, 2021 – from the high of $22 billion in mid-2015.

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Enbridge Inc (ENB) : Free Stock Analysis Report
 
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