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Kinder Morgan results hurt by lower expectations for some gas contract renewals

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Kinder Morgan results hurt by lower expectations for some gas contract renewals

Highlights

Q2 net loss wider than a year earlier

Overall fundamentals strong on LNG strength

Kinder Morgan posted a wider second-quarter loss July 21 due to it having to account for its expectation of lower volumes and rates on contract renewals on its South Texas natural gas processing and gathering assets.

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The company, which moves through its pipelines more than a third of the natural gas consumed in the US and operates an East Coast liquefaction facility, also substantially lowered its outlook for full-year earnings, to $1.7 billion from a range of $2.7 billion to $2.9 billion forecast in April.

Kinder Morgan is focused on leveraging its extensive network of pipelines and affiliated midstream infrastructure to take advantage of strong US LNG exports that are being spurred by robust international prices. The company, however, is also mindful that markets are still recovering from impacts from the coronavirus pandemic, and it is seeking to mitigate, and possibly generate new revenue opportunities from, the global energy transition to greater use of clean-burning fuels.

"Our existing business will be needed for decades to come," CEO Steve Kean said during a conference call with investors that was webcast.

Natural gas transport volumes were up 4% in the April-June quarter compared with the second quarter of 2020.

Kinder Morgan cited benefits from the Permian Highway Pipeline going into service; increased volumes on Tennessee Gas Pipeline due primarily to increased deliveries to LNG, power plant and Mexico customers; increased volumes on the Texas intrastate systems due to increased Gulf Coast demand from industrial and LNG customers; and higher volumes on Elba Express due to increased deliveries to its Elba Liquefaction facility in Georgia.

The company boasts a 48% share of the market for pipeline feedgas deliveries to US LNG export terminals.

Those positives were partially offset during the second quarter for Kinder Morgan by declines on Colorado Interstate Gas Pipeline due to continued declining production in the Rockies basin and on FEP due to contract expirations. Natural gas gathering volumes were down 12% from the second quarter of 2020 across many of Kinder Morgan's systems, most notably on its KinderHawk and Eagle Ford assets, the company said.

For the three months ended June 30, Kinder Morgan reported a net loss of $757 million, or 34 cents a share, versus a net loss of $637 million, or 28 cents a share, for the same period in 2020. Second-quarter revenue rose 23% to $3.15 billion from $2.56 billion recorded in the April-June quarter a year earlier.

The results for the latest quarter included a loss of $1.6 billion on impairments, divestitures and other write-downs, stemming from the expectations about renewals tied to the South Texas gathering and processing assets.

Kean referenced a number of pipelines that Kinder Morgan built a decade ago that were contracted in a high-basis price environment, and those contracts are now coming up for renewal.

"They are rolling off into a more challenged basis environment," Kean said, adding that the resulting impact on earnings is effectively "masking" strong underlying performance in Kinder Morgan's pipelines segment.

Adjusted to exclude such one-time items, Kinder Morgan earned $516 million in the latest quarter, versus an adjusted profit of $381 million for the second quarter of 2020.

Energy transition

As an operator of pipelines and LNG infrastructure in North America, Kinder Morgan is among a wave of energy companies that have launched initiatives over the last year to reduce their carbon footprints.

The company recently announced that it was buying Kinetrex Energy for $310 million to leverage the clean energy platform the small-scale provider of LNG and renewable natural gas in the US Midwest has built.

With Kinetrex, whose customers span the transportation, industrial, agricultural, utility, and power sectors, Kinder Morgan will be able to boost its energy transition ventures business. Kinder Morgan has long viewed natural gas as a bridge to enable increased renewables market penetration.

"We believe there is a bright future for this business and other energy transition businesses that we are exploring," Executive Chairman Richard Kinder said during the earnings investor call.