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Kinder Morgan third-quarter profit declines on pandemic-fueled gas volumes drop

Highlights

US midstream operator watching growth spending

LNG demand pickup could provide near-term boost

Houston — Kinder Morgan reported a 10% drop in third-quarter profit on lower revenue as the North American natural gas pipeline operator and LNG exporter continued to experience lower volumes on parts of its network, due in part to weakened demand driven by the coronavirus pandemic.

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The results for the July-September quarter reported Oct. 21 come as market observers are closely watching for signs that growth spending could pick up in 2021 as virus conditions ease and economic activity rebounds.

With a network of midstream infrastructure that moves more than one-third of the gas consumed in the US, Kinder Morgan is often seen as a bellwether for the health of the sector. In the weeks ahead, other major operators will be reporting their results, including Enterprise Products Partners, Energy Transfer, Williams and Canada's TC Energy. Kinder Morgan's shares have fallen more than 30%, on a dividend-adjusted basis, over the last 12 months amid the challenges the sector has faced.

"To paraphrase Mark Twain, the rumors of our death are greatly exaggerated," executive Chairman Richard Kinder said during an investor conference call to discuss the latest financial results.

Kinder Morgan did not disclose capital spending plans for 2021, but it did say it remains vigilant with respect to expenses and operational efficiency. Spending on capital expansion projects this year is estimated to be reduced by $680 million from the $2.4 billion that was originally budgeted for 2020.

For the three months ended Sept. 30, Kinder Morgan reported net income of $455 million, or 20 cents a share, compared with a profit of $506 million, or 22 cents a share, in the same period a year earlier. Revenue slid 9% to $2.92 billion from $3.21 billion in the third-quarter of 2019.

The company blamed continued low crude oil and natural gas production and reduced demand for refined products. As a common carrier pipeline operator, Kinder Morgan generates fees from resources, such as refined products, that pass through its network.

Financial contributions from Kinder Morgan's products pipelines and terminals business segments were down compared with the third-quarter of 2019, primarily due to lower refined products volumes as a result of the pandemic and the December 2019 sale of Kinder Morgan Canada Limited, the company said.

Natural gas transport volumes were down 2% compared with the third-quarter of 2019, with notable volume declines on Kinder Morgan Louisiana Pipeline and Natural Gas Pipeline of America due to lower LNG demand; Ruby Pipeline, due to competition from deliveries from Canada; and Wyoming Interstate Company, due to Rockies basin production declines, Kinder Morgan said. Those declines were partially offset by volumes on the company's Gulf Coast Express pipeline, which serves the Permian Basin. Natural gas gathering volumes were down 13% from the third-quarter of 2019 across nearly all its systems, most notably on the KinderHawk system.

Kinder Morgan's Permian Highway Pipeline is more than 97% complete and remains on schedule to be placed in service in the first quarter of 2021, the company said.

As for LNG, Kinder Morgan's Elba Liquefaction facility in Georgia placed the last of its 10 trains in service in August. Utilization at US LNG export terminals has surged in recent weeks as global prices in end-user markets have strengthened, a trend that Kinder Morgan expects to be favorable for gas pipeline volumes in the fourth-quarter.

M&A opportunities

Given the continued headwinds facing the sector, the company believes its "disciplined approach" to sanctioning any new expansion projects is the best way to go, Kinder said on the investor call. He said the company can't predict with any degree of accuracy when volumes will fully return to pre-pandemic levels.

Long term, Kinder Morgan sees its vast pipeline and storage network being an asset in facilitating the energy transition toward the use of more renewable fuels to reduce global impacts from climate change, CEO Steve Kean said on the call. Natural gas, he said, will play a significant role in ensuring power reliability as more intermittent resources, such as wind and solar, are used for generation.

Amid notable consolidation activity in the upstream sector, Kean said Kinder Morgan was monitoring opportunities in the midstream sector, though he stressed that, like with expansion spending, the company would be "disciplined" with respect to any participation in M&A.

"We intend to keep our eye on relative valuations," he said.