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Why Kinder Morgan Is So Bullish on Its Future

Matthew DiLallo, The Motley Fool

Kinder Morgan (NYSE: KMI) recently reported mixed second-quarter results. While cash flow edged up by 1%, earnings slipped around 2% because of weakness in most of the company's business units. Those underperformers overshadowed another strong showing by its natural gas pipeline operations where earnings surged 7% thanks to healthy volume growth.

The company expects even more upside out of its natural gas pipeline business in the coming years. That was clear from the comments of Rich Kinder, the company's co-founder and executive chairman, on the recent second-quarter conference call. Here's a look at why his company is so optimistic about the future of natural gas.

Pipelines heading into an industrial complex with the sun shining in the background.

Image source: Getty Images.

A bright forecast for natural gas

Rich Kinder led off the call discussing why the company focuses on operating natural gas-related infrastructure. Kinder Morgan's 70,000-mile pipeline system currently transports 40% of all the gas consumed in the U.S. each year. This business supplies the company with more than half of its earnings, while natural gas-related growth projects make up most of its expansion backlog.

The reason the company is so focused on natural gas is that "we are very bullish on the future of natural gas from both a supply and demand perspective," according to Kinder. He further noted that: "Natural gas is critical to our American economy. We satisfy the growing energy needs around the world and, very importantly, to reducing our greenhouse gas emissions in a cost-effective manner."

Kinder continued his commentary by running through some projections that suggest natural gas has a bright future. He noted that natural gas demand -- which rose 12% in 2018 and by 44% in the last decade -- "is projected to grow by over 30% between now and 2030." Fueling that growth will be power and industrial demand in the U.S. and pipeline exports to Mexico and global shipments via liquified natural gas (LNG) terminals.

Meanwhile, on the supply side, Kinder noted:

The U.S. is projected by 2025 to be producing one-quarter of all the natural gas in the world, accounting for over 50% of the growth in global supply by that year. Now look, I'm aware of Mark Twain saying that making predictions is very difficult, particularly when they concern the future. But I believe that under almost any scenario, natural gas is a winner for years to come.

He then pointed out that Kinder Morgan is very well positioned to connect America's vast supplies to growing demand markets. Not only will the company see higher utilization of its legacy assets, but it will also be able to build new infrastructure, especially in placessuch as Texas and Louisiana. That's because it has an extensive network of pipelines in those two states. This strategic footprint puts it in an excellent position since 70% of natural gas demand will come from these states through 2030 as companies build more LNG export and petrochemical facilities. "That's a big reason why we feel good about the long-term future of this company," Kinder said.

A person in a hardhat standing near a stack of pipelines.

Image source: Getty Images.

Opportunities for growth abound

Kinder Morgan already has several natural gas infrastructure projects under construction. For example, it's currently building two long-haul pipelines in Texas that will move gas from the fast-growing Permian Basin to the Gulf Coast. The first project, Gulf Coast Express, should be in service by late September. Meanwhile, the second pipeline, Permian Highway, should follow next fall. Overall, nearly 80% of the company's $5.7 billion growth project backlog is natural gas-related infrastructure.

Meanwhile, it has several other gas-related opportunities under development. One of them is Permian Pass, which would be its third large-scale gas pipeline out of the Permian. CEO Steve Kean talked about it on the call:

We are working with customers on a third 2 [billion cubic foot]-a-day pipeline in the Permian Pass pipeline. This is a work in progress. It's not [in the] backlog at this point, certainly, but it is moving along.

Kinder Morgan also sees opportunities in Louisiana's Haynesville Shale, where gas volumes have surged 27% in the past year. Kean noted on the call that the company is "still seeing very strong volumes there." As such, "we're probably going to have to invest some capital to debottleneck that system further to accommodate what we see as continued growth in that area."

With these pipelines pushing more gas toward the coast, it also "bring[s] opportunities for downstream expansion and optimization as we find homes for all that incremental gas through our connectivity with LNG facilities, Texas Gulf Coast power, industrial and petchem demand," according to Kean. The company already plans to invest $250 million to increase capacity and improve the connectivity of its Texas Intrastate pipeline network. This initial investment will help it distribute the gas flowing toward the coast through projects such as the Gulf Coast Express. However, Kean noted on the conference call that "there are probably more of those [types of projects] to come."

A gas-powered future

Kinder Morgan operates the largest gas pipeline network in North America. That strategic footprint has the company perfectly positioned for the expected growth in the natural gas market over the next decade. The company should be able to continue securing new expansion projects that would enable it to grow cash flow and the dividend for many years to come. That upside is why the company's management team is so optimistic about what lies ahead.

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Matthew DiLallo owns shares of Kinder Morgan. The Motley Fool owns shares of and recommends Kinder Morgan. The Motley Fool has a disclosure policy.