Kinder Morgan sharply cuts expansion budget to weather virus downturn

Houston — Kinder Morgan cut its budget for growth projects and joint ventures by 29% Wednesday as it reported a loss for its latest financial quarter versus a year-ago profit as the coronavirus pandemic takes a significant bite out of energy markets.

The Houston-based pipeline operator, which moves more than a third of the natural gas consumed in the US, won't pursue some expansion plans as it looks to preserve cash to weather the downturn.

While most of its business relies on fixed fees from gas transportation, processing and storage, the plunge in crude has resulted in a 40-45% drop in refined products pipeline volumes. Many of its pipelines are common carrier pipelines, and Kinder Morgan gets paid a fee based on throughput.

"Refined products volumes are coming down in a way we have never seen before," CEO Steve Kean said during a conference call with analysts to discuss the results and outlook.

Kinder Morgan's kickoff of first-quarter earnings reporting season for the midstream sector highlights the storm the industry is facing amid widespread demand destruction due to stay-at-home orders across the US and much of the world. Other operators of pipelines, processing facilities, gathering systems and liquefaction facilities will be releasing results for the January-March quarter in the coming weeks.

Particularly impactful for Kinder Morgan moving forward will be the expected slowing of associated gas production due to the slide in US oil prices, which turned negative for the first time ever earlier this week as the WTI May contract expired. S&P Global Platts Analytics has lowered its full-year forecast for Permian Basin gas production by nearly 0.2 Bcf/d from the level expected in March. The 2021 forecast was reduced by 1.4 Bcf/d to an average of 13.9 Bcf/d.

Production cuts can affect pipeline volumes and the timing of expansion projects. That, in turn, can affect the amount of gas available to feed LNG export terminals. Those dynamics can be complicated if liquefaction facilities cut output as end-users defer or scrap cargoes.

Kinder Morgan operates the Gulf Coast Express gas pipeline in the Permian and will continue to move forward with construction of its Permian Highway Pipeline project, which it maintained Wednesday would start up in early 2021.

However, it is reducing its $2.4 billion budget for expansion projects and contributions to joint ventures for 2020 by approximately $700 million as market conditions have resulted in a number of planned projects no longer meeting its internal return thresholds.

Nearly $250 million of gathering and processing projects have been removed from its plans or deferred. It said there also would be several project deferrals across its interstate pipelines segment. Further, Kinder Morgan is removing or deferring several projects across its products, terminals and CO2 segments. A press release and investor presentation accompanying its earnings did not mention a third Permian gas pipeline that the company had previously been considering.

Weakened outlook

For the three months ending March 31, Kinder Morgan reported a loss of $306 million, or 16 cents a share, compared with a profit of $556 million, or 24 cents a share, in the same period a year ago. Revenue declined 9% to $3.11 billion from $3.43 billion in the first quarter of 2019.

The company's natural gas pipelines segment benefited from contributions from the Elba Liquefaction facility in Georgia and the Gulf Coast Express project in Texas, but was hurt by lost revenue from the sale of the US portion of the Cochin pipeline, as well as reduced contributions from Tennessee Gas Pipeline due to historically mild weather in the US Northeast and the impact of a FERC rate settlement.

For the balance of the year, due to the coronavirus impact, Kinder Morgan expects reduced upstream customer activity impacting contributions from gathering and processing assets, particularly in the Bakken. The company is also expecting further impact from refined products volume declines.

"These are just unprecedented times," executive Chairman Richard Kinder said on the conference call. "We are just trying to be as protective as we can."