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Market News

 June 06, 2013
Is North America's pipeline king beating the odds?

 Kinder Morgan Inc., the largest pipeline operator in North America, is juggling a massive portfolio of oil, gas and coal transportation assets as energy needs shift across the continent.

It remains a Wall Street darling even as oil and gas producers stumble into another period of declining oil and natural gas prices.

Yesterday, the subsidiary that holds most of the company's pipeline assets, Kinder Morgan Energy Partners LP, announced it would spend $107 million to expand a crude oil and condensate pipeline in the Eagle Ford Shale Basin in south Texas. The expansion underscores how production growth in the Eagle Ford is triggering more investment in transportation. Kinder Morgan is locking in customers and pumping money into the region, including the Houston Ship Channel.

Kinder Morgan's latest expansion project is supported by a long-term contract with ConocoPhillips. The project extends an existing 178-mile pipeline 31 miles to a Conoco facility in Karnes County and is slated for completion in the third quarter of 2014.

The company's announcement comes a couple of days after it pulled the plug on a proposed pipeline to deliver oil from west Texas to California. Kinder Morgan wasn't able to get enough refinery support for its proposed $2 billion Freedom pipeline project during an "open season" to sign up for transportation capacity that ended on May 30.

California's biggest refineries -- operated by Valero Energy Corp., Tesoro Corp. and Phillips 66 -- signaled late last week that they wouldn't sign up for the pipeline under its current design. That has increased speculation that refineries in Southern and Northern California are willing to pay more to get crude oil by rail from North Dakota's Bakken Shale oil fields.

Shifting tides in the U.S. market and the public's awareness of pipeline expansions tied to Canada's oil sands have garnered Kinder Morgan an unusual amount of attention lately, injecting some risk into its beefed-up project portfolio.

Across the border in Canada, Kinder Morgan has proposed expanding its Trans Mountain pipeline to ship more Alberta oil sands crude to the west coast of British Columbia. From there, the oil is expected to be shipped to Asian markets, where demand for energy in developing countries is eclipsing demand in the United States and Europe.

Increasingly, however, westbound pipelines to Canada's coast are facing opposition. On Friday, British Columbia's provincial government weighed in with critical comments to a joint review panel evaluating Calgary, Alberta-based Enbridge Inc.'s Northern Gateway pipeline project designed to haul oil from Alberta to the Pacific Coast.

British Columbia's environment minister listed an assortment of concerns that lay bare how much of a battle it could be for Gateway -- and potentially Kinder Morgan's Trans Mountain expansion -- to get regulatory sign-offs without significant changes or delays. That $6 billion, 730-mile Gateway project faces critics in aboriginal communities but also faces tough questions by the provincial government on the basics: spill response plans and its route, among them.

For its part, Kinder Morgan is pulling together its project application for Trans Mountain for submission to the National Energy Board, Canada's federal regulator. What it faces is similar to First Nation concerns about the potential impact on the land through which the pipeline will travel.

Owning or operating energy infrastructure seemingly everywhere has put Kinder Morgan in an enviable and, according to analysts, potentially risky position. Oil prices have to remain around $91 a barrel for its 2013 budget to work. The U.S. West Texas Intermediate price benchmark closed at just above $92 a barrel in trading yesterday.

Other risks are structural, analysts say. Equity analysts at Raymond James in a recent report pointed to investor risks associated with owning units in Kinder Morgan Energy Partners, the master limited partnership controlled by a top tier of investors and Kinder Morgan's top manager, who act as "general partners."

"Given this level of control, removing the general partner or the individuals in management is not likely," said the analysts. As a result, they said, minority investors would be hard pressed to remove top executives, as activist investors have succeeded at doing at a number of other major energy companies, including Chesapeake Energy Corp.

Kinder Morgan's $13 billion, five-year capital expansion plan hasn't shaken Wall Street. The company has gotten positive marks from credit ratings agencies for its handling of its merger with El Paso Corp. Last week, Standard & Poor's maintained its 'BB' corporate credit rating for Kinder Morgan and its subsidiary El Paso but upgraded its outlook to positive.

"We revised the business risk profile to 'strong' from 'satisfactory' based on largely on the company's improved scale and the high percentage of fee-based cash flows," S&P said in a May 31 report.

Kinder Morgan's stock has dipped some in the past month, closing yesterday at $83.82 on the New York Stock Exchange. Yet compared to upstream companies with significant exposure to oil and gas prices, Kinder Morgan and its founder, Chairman and CEO Richard Kinder, aren't facing the same heat as midsized resource and exploration companies like Oklahoma City-based Devon Energy Corp.

A host of deals have amped up Kinder Morgan's profits, including a $3.2 billion buyout of Copano Energy. Nearly 7,000 miles of pipeline and nine processing plants came with that deal.