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>>> The Kinder Morgan Growth Driver No One Talks About



http://www.investopedia.com/stock-analysis/040815/kinder-morgan-growth-driver-no-one-talks-about-kmi-enb-key.aspx?partner=YahooSA



By Investopedia

April 08, 2015



Kinder Morgan's (NYSE: KMI) business is founded upon natural gas. More than half of the company's earnings come from its natural gas pipeline business while over 25% of its project backlog consists of new natural gas pipeline projects with upside well beyond that number. That said, natural gas isn't the only story at Kinder Morgan. One growth story that few investors pay attention to is the growth of the company's terminals segment. Not only is that segment's earnings expected to grow by 20% this year, as opposed to just 1% income growth from natural gas pipelines, but the company continues to add new projects to extend this segment's strong growth well into the future.

Building a bigger backlog

Recently, Kinder Morgan announced that it had formed a new 50-50 joint venture with Keyera Corp (TSK: KEY) to build upward of 6.6 million barrels of new crude oil storage capacity in Edmonton. The initial capacity of the project will be 4.8 million barrels of crude oil storage capacity that Kinder Morgan and Keyera have already contracted to customers under long-term, take-or-pay contracts. Kinder Morgan's investment in the project will be CAD$342 million for the initial 12 tank buildout that is expected to be complete in the second half of 2017 and Kinder Morgan will also invest CAD$69 million outside of the joint venture for connecting pipelines and other infrastructure related to the project.

Kinder Morgan is already the largest independent terminal operator in North America, however, that hasn't stopped the company from continuing to extend its lead. Prior to this deal the company spent $158 million to buy three terminals and one undeveloped site in February. That deal boosted the company's terminal business storage capacity to over 138 million barrels in North America, which the company plans to grow in the years ahead as it works through its robust project backlog of $2.1 billion. It is a backlog that will grow thanks to the addition of the Keyera joint venture and future projects that the company develops.


The importance of storage

Oil storage has been in the headlines in recent weeks due to the fact that North America is running short of storage capacity thanks to the glut of oil on the market. That said, for the most part oil isn't typically parked in storage facilities for a long time as oil storage is more about market flexibility than a long-term home.

That's really what's behind Kinder Morgan's latest joint venture. It's not looking to capitalize on the current market craze for oil storage capacity, which is obvious by the fact these storage terminals won't be operational until 2017. Instead, Kinder Morgan is building these terminals to offer its customers maximum future flexibility.

This is largely due to the fact that Edmonton is growing as an important oil hub for the Canadian oil sands. So, by building more storage space Kinder Morgan will be able to offer customers more flexibility as they move oil to a number of delivery destinations. The increase in storage capacity will also help Kinder Morgan better compete with other shippers in the region like Enbridge (NYSE: ENB), which is also investing to grow its storage capacity in Edmonton. For example, Kinder Morgan's ability to offer Edmonton shippers storage provides customers with more time to find an end market for that oil. Then, shippers have the flexibility to ship oil west on Kinder Morgan's Trans Mountain Pipeline, or pretty much every other direction by rail at one of the company's two rail terminals in Edmonton or on another export pipeline. By providing this service Kinder Morgan can make more revenue per barrel, and allow it to better compete with a rival like Enbridge on future expansion projects in the region.

Investor takeaway

Market flexibility is proving to be a valuable asset to oil companies. That's due to the fact that oil prices vary by region, with Canadian oil prices tending to sell at a steep discount to oil priced in the U.S., which sells at a discount to global oil prices. This is why oil shippers want to move their oil to where it fetches the highest price and one of the best ways to do that is to pay a fee to have the option to store oil until it can hitch a ride to a more lucrative location. Kinder Morgan is more than happy to provide this service as it simply loves this type of fee-based revenue.

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