XOM - Kinder Morgan: Carbon Dioxide Business Could Revalue

2023-09-22 11:22:14 ET

Summary

• Kinder Morgan, Inc.'s large carbon dioxide system, like Denbury's, could be worth more given the takeover of Denbury by Exxon Mobil Corporation.
• The industry's practice of putting carbon dioxide into the ground for oil recovery makes systems like Kinder Morgan's a potential growth area.
• The need for more energy due to population growth suggests a bright future for Kinder Morgan's carbon dioxide transportation system and the traditional business lines.
• Energy transitions take a lot of time and often more money than countries are willing to spend.
• Even though market share declines, energy sources continue to grow (historically).

Like Denbury (DEN), which is being acquired by Exxon Mobil Corporation (XOM), Kinder Morgan, Inc. (KMI) has a very large carbon dioxide system that probably is worth a lot more given the takeover of Denbury. One could reasonably assume that Exxon Mobil really will not keep the secondary recovery operation of Denbury unless it can significantly reduce the costs of that operation. But with "carbon capture" being a new hot topic, the fact that the industry regularly puts carbon dioxide into the ground to recover more oil makes systems like the one Kinder Morgan has a potential growth area in the future.

Energy Transitions

Ironically, an underlying part of the assumption is that the original reason for the carbon dioxide system in place will not go away. As long as the population of earth continues to grow, we will need more energy. What has happened in the past is that as new energy sources came into existence, the old energy sources still grew even though their percentage an energy source declined as those other sources grew.

Therefore, this company, based upon history, has a bright future not only for oil and gas but also due to the possession of a carbon dioxide transportation system.

John Hess, CEO, Hess Corporation (HES) has a presentation he does from time to time that shows the investment needed to bring about an energy source change followed by the actual investment. Most times, the actual investment is a small fraction of the investment needed for the desired energy source change. That backs up what Kinder Morgan management is telling you happens with the energy sources above. When the money is not available to bring about the desired change, you instead get a result like the slide above.

Much of the opinions generated has been that we need to get carbon dioxide out of the atmosphere and into the ground where it will not harm the environment so much.

The oil and gas industry already does put a significant amount of carbon dioxide into the ground.

All that needs to change is the ability to take carbon dioxide generated from carbon capture projects and more that carbon dioxide to fields that happen to use it to generate more oil and potentially natural gas as well.

Low Investment In Renewables

One of the things that John Hess, CEO Hess Corporation, has stated repeatedly at conferences he speaks at, is that the necessary renewable investment to bring about the energy changes needed is about one-third or less of what it should be. The industry watches this very closely for obvious reasons before they invest in more large projects. So long as the investments remain low (or lower than they should be), then things like oil and natural gas are likely to be around for a long time with a potentially robust future.

This is one of the reasons that the first slide in this article shows energy growth as more energy sources have been historically added for the world to choose from. Energy sources can grow even as their market share declines.

Furthermore, as industry sources and industry suppliers point out, many times the supporting infrastructure cannot handle a rapid change combined with things like switching from coal to natural gas does reduce pollution significantly. In short, the whole process is not as clear cut as some would have you believe.

Secondary Recovery

As Vicki Hollub, CEO Occidental Petroleum (OXY), pointed out in a presentation, a lot of carbon dioxide in the future will be needed for secondary recovery of unconventional oil.

One of the more interestin g things about oil production is that a lot of feared "air pollution" goes away with modern production techniques that involve natural gas and carbon dioxide into the reservoir to keep the pressure up. Therefore, pollution issues go away.

It is already commonly known that Exxon Mobil reinjects any gas of any kind produced in Guyana and therefore has one of the lowest project pollution rates in the industry.

Kinder Morgan Significance

The carbon dioxide business combined with secondary recovery has long been a steady cash flow producer for this company. But with the industry (and energy sources) changes underway, this part of the company can make the switch from a cash flow producer (a mature phase) back to a growth business.

The sizable amount of carbon dioxide transportation shown above can easily be expanded to accommodate more carbon dioxide transportation in the future.

There is a lot of talk about story carbon dioxide permanently in the ground. The oil and gas industry does that already to improve oil recovery rates. What is left out of the discussion is that oil and natural gas needs will likely grow for some time to come, just as the use of coal has grown as shown before.

Since Kinder Morgan already has an extensive system in place, an expansion and (or) modification of the current system is usually far less costly than would be the case of beginning a new system from scratch.

Ironically, the unconventional reserves are far larger than the conventional reserves. So, we may still need carbon dioxide from the ground as Kinder Morgan currently does to supplement any carbon dioxide from carbon capture or other environmental projects.

Key Takeaways

Kinder Morgan is an investment grade company with one of the more comprehensive systems in place for oil and natural gas. Much discussion has been about the future of oil and natural gas. But while that discussion is going on, the industry has been figuring out ways to profit from natural gas and oil.

The "green revolution" for example uses plastics which are made from ethane and propane that is part of the natural gas stream. Many supplies like Chart Industries (GTLS) also supply the industry customers and the green revolution with products designed to handle this process.

Furthermore, energy companies have chemical divisions that surprisingly sell a variety of products to the green revolution. Far from being a renewable idea at the current time, it is simply another use for fossil fuels. Naturally, the idea (at least for energy) is for that to change.

But if you take everything out of your house, there is not much left that does not involve an oil or natural gas product. Similarly, a lot of environmentally friendly products, like cell phones, computers, and even windmills, have more oil and gas products in them (or as a part of them) than many of their backers would want to admit.

Therefore, the industry stance that this is going to take a while has merit. So does the graph showing that even as energy sources decline as a percentage of use, the absolute numbers continue to grow. The fact is that we have not ever found a way to reverse that trend. Of course, the future could change that. But as John Hess, CEO Hess Corporation, repeatedly points out, it would take a far higher level of investment than many countries are willing to make at the current time.

Therefore, Kinder Morgan is likely a buy or strong buy consideration for any portfolio. The company is likely to get its share of growth projects due to the considerable size of the company (and hence convenience as a one-stop shop). The huge diversification and the investment grade rating are assets that few in the industry can match.

Kinder Morgan is a large company. So, any growth is likely to average over the long-term in single digits. But when combined with the dividend, the total future return is likely to be in the low teens. At the current price, the downside is very limited.

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