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Kinder Morgan kicks off potential renewables M&A wave among gas pipeline firms

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Oil and gas pipeline companies are investing in renewable natural gas assets as pressure mounts from investors to reduce carbon emissions.

Source: Align RNG

Kinder Morgan Inc.'s announced acquisition of renewable natural gas developer Kinetrex Energy for $310 million could convince other gas pipeline operators to follow suit as securing supplies becomes a lucrative part of the fuel's value chain, industry experts said.

Renewable natural gas, or RNG, is a pipeline-quality gas generated by capturing and using the methane produced from decomposing organic materials instead of fossil fuels. Kinetrex's footprint includes two small-scale, domestic LNG production and fueling facilities as well as a 50% interest in a landfill RNG facility and three additional RNG facilities with signed commercial arrangements.

For CBRE Clarion Securities portfolio manager Hinds Howard, the deal is likely the first of several that midstream companies will ultimately pursue to participate in the energy transition and "reduce terminal value concerns" investors have about oil and gas assets.

"I would expect ongoing announcements like this related to RNG and carbon capture among large midstream companies because of their competitive advantage in those areas versus just trying to jump into wind farms or solar fields without a linkage to their existing footprints," Howard said.

Kinder Morgan's transaction also indicates management teams are taking a more realistic look at how the RNG business generates profits.

"I think what you heard from midstream originally was, 'RNG's great, it creates additional volumes on the system, we don't really have to invest any capital and they come to us,'" energy investment bank Tudor Pickering Holt & Co.'s Colton Bean said in an interview. "I think the transition you're seeing is people started realizing that the absolute volumes from RNG are pretty de minimus ... and the only way this makes sense is if you also capture the pricing upside."

Once all four facilities begin commercial service, they will generate roughly $50 million of EBITDA combined and produce about 4 Bcf per year of RNG, analysts at CreditSights told clients July 16. They also noted that Kinder Morgan thinks that the RNG market can grow from about 0.1 Bcf/d up to roughly 1.5 Bcf/d as other midstream gas giants such as Enbridge Inc. and Williams Cos. Inc. pour capital into transportation projects, while TC Energy Corp.'s ANR Pipeline Co. already ships about 10 MMcf/d of the fuel.

According to the Coalition for Renewable Natural Gas, 157 operating renewable natural gas production facilities are in North America, with 76 more under construction and another 79 being planned.

The Kinetrex deal is significantly smaller than Kinder Morgan's recent $1.23 billion acquisition of Stagecoach Gas Services LLC, but Credit Suisse's Spiro Dounis said it shows that the company is committed to taking advantage of well-priced renewables assets as pressure grows for the midstream sector to decarbonize.

"We're talking about roughly 1% of [Kinder Morgan's] EBITDA, but it does signal that they are willing to be a little more aggressive in terms of going after energy transition opportunities," Dounis said in an interview. "It illustrates you can get these deals done without sort of overpaying because I think that was a concern for investors … that midstream companies would end up paying premium multiples for these assets."

Sustainability-linked bond frameworks may become a more popular financing tool for pipeline companies looking to expand into RNG, while states such as Minnesota are also introducing incentives for gas utilities to build out their RNG infrastructure further downstream.

Still, Dounis added "it's hard to say ... if [renewables M&A] is going to be a wave going forward" across the pipeline industry.