Kinder Morgan, Inc. ($KMI)

Good morning, everyone. My name is Theresa Chen, and I am the North American midstream and refining analyst here at Barclays. It is my pleasure to host a fireside chat with Kinder Morgan, 1 of the premier U.S. midstream combinatory coverage with assets spanning across the country, covering multiple commodity value chains across natural gas, crude oil and prime products. And with us is President of Kinder Morgan, Dax Sanders. Welcome back.

Thank you, Theresa, really happy to be here. And I've also got with me Peter Staples and Sean Po, our 3-person mass of European Antorcha. So great to be here, and thanks for hosting. .

Love it. So diving right in, maybe we look at the macro side of things, first Dex. Over the past 2 months and change into the U.S. Israel war with Iran, How do you think the energy landscape has fundamentally changed with respect to the U.S.'s role in liquids energy supply, in particular, right now, what is the tone like in your conversations with producer customers and the emergent call on U.S. onshore production. And maybe bridging that to your near-term expectations as well, what is your view on the time you'll likely to see a step-up in activity across your...

Yes. Great question. I think all of us, certainly within the energy scope are reacting the news that changes seemingly by the hour. I think it -- with respect to long-term changes, it's pretty early to tell exactly what's going to change. I think, certainly, our conversations with -- our direct conversations with producers haven't suggested yet that they're going to be a massive change. I think producers generally are looking for, and this is part and parcel with the substantial cash flow discipline that's been imparted on U.S. producers over the past 10 to 15 years are looking for really long-term price signals before making substantial changes. In fact, I saw an interview with Michael Worth yesterday saying Chevron wasn't really making any changes at this point. Now I did see and I haven't digested all the news in the last couple of days, but I did see, I believe, Diamondback, who is a large Permian producer as part of the reporting yesterday suggested that they were going to increase production -- crude production in the Permian. So I think if you see sustained price signals. I think you will see incremental production by U.S. producers. Now that's really with respect to overall price response. If you look at the overall structural underpinnings of world energy production, world energy supply, I think there are probably going to be a lot of thoughts and conversations on where people are sourcing molecules of gas and barrels of oil vis-a-vis sovereign risk. And if people are looking at places and deciding that a particular place with the Stratiform moves being front and center, has a lot more risk than it maybe did 3 or 4 months ago then -- and they're looking for places that have less perceived sovereign risk. I think the United States is probably 1 of the first places they look. And I think -- I mean, my personal view is over the long term, this is going to be a substantial catalyst for incremental development, both with respect to production and associated infrastructure in the United States. And the first place probably from an oil perspective is the Permian Basin. I mean, the Permian produces roughly. It's the most prolific U.S. basin of about U.S. producers were around 13 million, 13.5 million barrels a day of oil. I want to say about $6.5 million of that comes from the Permian Basin. It also is a substantial provider of gas, roughly 23 Bcf a day of gas coming out of the Permian. And that really is all driven by lower production. It's -- we call it associated gas because oil is what drives the production decision, but gas comes out and a couple of things. First of all, you can't flare it, you can't burn it. and it also has value. So that's led to a pretty substantial build-out of gas egress out of the Permian over the past, call it, 10 to 15 years. And so that's probably the first place you look from a crude perspective. With respect to gas, the -- I think of the world gas -- the world LNG ecosystem as being roughly 60 billion cubic feet a day, something like that. I think nameplate is greater than that, but if you factor in utilization rates, it's probably somewhere in 60, maybe 65. Right now, it looks like the best numbers, at least, I think, that we have are that roughly a couple -- 2 to 3 Bcf a day of liquefaction capacity in the Middle East coming from Roslafan/North field is out and going to be out for roughly 3 to 5 years. Now that could change. I mean the amount that's out could change tomorrow, but that seems to be what the number is right now. U.S. liquefaction capacity is expanding. It's about 21 Bcf a day right now, up from a blending of about 15 Bcf a day in 2025, but it's effectively maxed out right now. There's incremental capacity coming online and if you look at the basins that could provide that, the Permian is certainly 1 of those, the Marcellus which is the biggest in the U.S. at about 36 Bcf, but it's reasonably constrained with guest capacity. And then you've got the Haynesville, which is right next to LNG corridor in about 15 or 16. So that looks -- that's the landscape as we see it right now.

Super helpful, lay of the land as far as the key drivers and where everything is coming from. And Doc, I want to double-click on the commentary related to the call on U.S. LNG, supporting incrementally positive long-term growth outlook for feed gas operators like Kinder Morgan, so we're still somewhat early days in the next wave of announcements and proliferation beyond what's been already under development. But what are you hearing from your liquefaction customers at the end of your pipelines in terms of additional expansions from here as a result of this call in the war, Do you anticipate further upward revisions to your already bullish outlook for feed gas demand growth as a result of all of these developments?

Yes. I think so. I think it goes -- it's part and parcel with, first of all, the capacity that's actually been taken off right now. And I think as well as kind of the thing I touched on with respect to the people's perception of sovereign risk. So I think that -- we think that right now, the U.S. gas market is about 115 Bcf a day, roughly 115, 116. We think that's going to grow -- or rather the latest Wood Mac number suggests that's going to grow by roughly, I don't want to say 19 over the next 4 ,5 years. Our numbers are actually a little bit more bullish. LNG growth is about 13 of that. So a pretty substantial piece of it. And we think that is -- that's going to continue. And you take -- 1 specific, and I don't have any information from this group, but you take Golden Pass LNG, which is 1 of the largest facilities coming on here pretty soon. That's 30% owned by Exxon and 70% owned by the government of Qatar. The government of Qatar clearly owns and runs Roslafan and is the developer of the North Sea, the largest -- presumably the largest field in the world. I think that it's probably reasonable to assume that their calculus over the last 3 to 4 months about what's the most practical to further develop has probably changed a little bit. So we feel good about that. And we've got -- 1 of the ways we're playing it, and we think that our angle in this as an infrastructure company is to build the infrastructure around the assets like LNG that are going to be key assets. We have the largest natural gas network in the United States, and we transport about 40% of all the gas around the United States, about 40% of the liquefaction capacity or gas going into liquefaction. And we've got -- right now, we've got a backlog of projects, and these are projects that are Board approved that have signed binding agreements with creditworthy counterparties that we are deploying capital, actively deploying capital against and that capital is -- about 60% of that backlog is actually related to power in the United States but about 20% of it is related to LNG. And 1 key pipeline we have on the LNG front is, we call it the Trident pipeline is a pipeline that originates in Katy, Texas and goes -- north of Houston goes to the Texas, Louisiana border, ties in to our network and some other pipes in the Texas, Louisiana corridor, it will transport about 2 billion cubic feet a day of gas. And this is gas that's coming out of the Permian. I talked about it earlier, that's moving into the Houston area. But there's only so much that Houston can absorb, it needs to move into the market's East. And so we're building this pipe. It will be -- it will start to come online towards the end of next year, and it will be -- it's under active construction right now. And it will come in over the next year sort of following that get to a full run rate after that. It -- and so it will really take -- it will be a connector for Permian egress gas and moving it into the LNG and even to a lesser extent, power consumption corridors. And on that pipe, we've got -- we will have the ability to expand that by an additional Bcf a day with just compression should the need -- should the basin continue to expand and the need arise.

And on that brownfield expansion, would that be rather quick in terms of turnaround and commercialization in your opinion?

Yes. We haven't fully scoped out what it would be. But generally speaking, compression expansions, as you noted, a brownfield compression expansion can be done a lot more quickly than a greenfield expansion where you're putting new pipe in the ground. So it definitely would be a lot -- we would be able to get it done a lot more quickly than the time line for this pipe, which is all greenfield new pipe in the ground. .

Understood. So in addition to your sanctioned backlog, of which consists Trident and other things, I'd like to touch on your $10 billion of shadow backlog -- natural gas projects and other projects. Can you share more details on these proposed opportunities which are closer to reaching FID even from a value chain perspective without naming individual ones. How much more of this shadow backlog could you realistically sanction in the year ahead?

Yes. So just again, a little bit of a recap on -- because these are measures we use to communicate with investors on sort of what the future looks like and what we think we can develop. So again, starting with what we call our project backlog which reiterate what I mentioned a minute ago, those are projects that have been Board sanctioned that have binding proceeding agreements and long-term agreements that we are actually actively developing spending money on. That stands right now at $10.1 billion. We just updated it recently, that consists of projects as I said earlier, about 60% related to power. And again, the -- Yes, sure. Excellent. Yes, about 60% of our projects are power-related. And within that, I mean, data centers get a lot of conversation and airtime but the power demand that, first of all, these contracts are generally with utilities. They're not directly with data center providers, they are with utilities that have generally solid investment-grade ratings, generally sort of an A in of level. And therefore power related to everything from demographic changes, migration into the U.S. Southeast, coal to gas switching and power recoring of industrial demand in the United States as well as data centers as well. But I think the point is, is that there are a lot of drivers that we're seeing in our markets for incremental power that are beyond data centers. So -- and then about roughly 20% is LNG, and the balance is other stuff, industrial, miscellaneous other things. So that's our backlog. Our shadow backlog that Teresa mentioned is another measure. I mean investors have constantly asked us, well, what's next behind that. And so we've developed what we call our shadow backlog, which are projects that are under active development by our business development teams, what they are not are an idea that's hoping a prayer that somebody just kind of came up with over lunch and sketched out on the napkin what they are opportunities that we are in active conversations with customers on know that there is a demand. We know that there's a possibility of a project, but they haven't been approved by the Board. They haven't been -- we don't actually have signed agreements yet. It may be a situation where we've got competition, and there's a lot of competition out there. We have competition with other potential providers or a customer may just decide to go in a different direction. So -- but these are projects that, that we believe have a really good chance of being developed. And generally, what will happen is over kind of a year's period of time, the projects on that list will work themselves out. And we will either get some of them we will get, a lot of them we will get, some of them we won't. There will be new added, some of them will go away. As we sit here right now, our shadow backlog looks a lot like our existing backlog. There's a lot of potential power. There's a lot of potential tower demand out there. Largest area demand is probably the United States, as I mentioned, Southeast which is where we have our Southern Natural Gas pipeline, which is a joint venture with Southern Company, the big Southeastern utility, which has a lot of power demand. There's also the desert Southwest, where we have our EPG pipeline out West. Again, there's a lot of competition out there at the Transwestern pipeline. And in the Mid-Continent as well, where we have our NGL, natural gas pipeline company of America that we own 30% -- 37.5% of. So those are really the drivers behind kind of what we're seeing in entacklog. But there's a lot of opportunity in the U.S. infrastructure market.

Got it. So between shadow and sanction, $20 billion of potential opportunities out there, $10 billion and change of which has been officially sanctioned.

Yes, that's right.

Looking at the data center side specifically, Can you talk about Kinder Morgan's role in SoftBank Consortium organized to develop a 9.2 gigawatt data center project in Ohio. Will KMI need to expand your existing footprint in the region? What will you need to do to serve this project?

Yes. Great question. And what she's talking about is there was an MOU that was released by a game member if it was actually released by Softbank or the U.S. federal government. But it effectively is a consortium of people led by SoftBank and led by a big source of capital from the government of Japan as well as a host of other people looking to invest a substantial amount of capital in the United States for data center development in different places. We were named in that as part of that consortium. We are thrilled to be part of it. We're thrilled to be working with SoftBank and the other members of the consortium. There hasn't been -- and the potential opportunity associated with that is not part of any backlog anywhere. We don't have any signed binding definitive agreements. But we do continue to work with the consortium, and we hope that, that's going to lead to something at some point because the development is real, and we think there's a good opportunity. But we haven't announced anything. We haven't put any direct releases out ourself. And again, just to reiterate, there's nothing associated with that in any 1 of our backlogs.

Understood. But it is interesting that you're the only midstream company named within that consortium period?

Yes, that's right. And we were very happy to be the only 1 named in there. So...

So we talked a lot about your organic growth opportunity, stack. I'd like to touch on the inorganic side. Looking at your recently announced acquisition of Momentum Pipeline, can you shed more light on the strategic benefit that this asset will bring to your system as well as the rationale behind purchasing an asset that is comparatively more expensive than what you typically build on your own.

Yes, great question. And just to be clear, it's the monument pipeline that we it's all good. There's a lot of them out there. We -- yes, so the Monument pipeline we announced with our earnings a couple of weeks ago, and we actually just clicked on that last week. The -- it's an acquisition just north of $500 million. This is a short-haul piece of pipe just outside of Houston that ties really nicely into our existing network. It's got a set of customers, a small set of customers with the largest customer being a customer that is 1 of our largest existing customers on the same asset. And so we look at a lot of M&A -- potential M&A transactions. Anything that's close to what we do we look at. We're always looking at something. Most things we're not going to get. Most things we're just -- there's some buyer that's probably willing to take more risk or underwrite more less concrete assumptions than we are. But if you look back over the last 5 years, I would say about every somewhere between, call it, every year, but call it 6 months to 18 months, something will come along that is just an absolute fat pitch right down the middle of the plate. And this was 1 of those type that again ties right into our existing network. There's an existing storage contract associated with this. that the is that the seller had been using to supply storage service to existing customers. We've got our own storage assets over time. We will transfer the storage, the providing of the storage service. from the third party to our existing assets, and we've got some incremental capacity there that we're not using. So it's a really nice tuck-in acquisition. And exactly to your point, we are -- we're I think, as you noted, when we build new pipe, we generally are able to construct it at a multiple -- at a very attractive multiple. Our existing backlog, as we talked about, is about 5.6x build multiple and our history suggests that we can do that or better with new projects. Now even in the M&A market, even when we find an asset that we think is a really good fit. There's a lot of competition out there. And so generally, the price and the valuation for M&A assets is not as attractive as we would see a new build multiples, but still very attractive. So as we said, in the medium term, there will be sort of an 8x asset, and it's something we're very excited about and I think it will be a really good tuck-in over time. It will be a really good tuck-in day 1, but it will be really good.

Understood. And we talked a lot about your Gulf Coast assets as it relates to natural gas. In terms of the Permian needing additional residue gas egress, clearly have a strong footprint there as well. Can we talk about your ability to execute on incremental expansions of GCX or any other flavor of Permian egress as you see fit? As this demand grows over time?

Yes. Yes. Great, great macro question and as it relates to us. So the interesting thing about Permian, we talked about the Permian at the beginning of the conversation, but the interesting dynamic about Permian gas is Permian gas egress is that -- it has -- egress was needed. There was almost no egress, call it, 10 years ago. And gas production started to grow, and egress was needed. and egress -- a decent bit of egress built. And there was a lot of speculation and worry that the egress was getting overbuilt. And guess what, gas production just continued to grow as the Permian grew, and egress grew as well. And so we've kind of had this sort of 1 step, 1 foot in front of the other incremental egress, incremental production growing. As we sit here today, the Permian is short gas egress. You -- and really, what you do is you look at the difference between the Waha price in the Houston Ship Channel price and Waha is pretty consistently negative and which is, again, is the price in West Texas. We've got an expansion of our GCX pipeline we own our -- we've got several 2 main and then a couple of ancillary pockets for egress out of the Permian heading Eastward. We also have our El Paso natural gas pipe, which moves gas westward out of the Permian but we've got a 570 a day expansion of our GCX pipeline, which is coming online sort of like -- it's in the process of coming online right now. It will be in later this quarter. With that, our pipe moving east are generally at capacity based on the amount of steel in the ground. There's also an additional 11 Bcf. I want to say it's about 11 Bcf of capacity egress -- capacity coming online with some other pipes, Hugh Brinson and energy transfers building, Iger, a couple of other pipes. So as those come online, it feels like you're going to be -- you're going to have enough egress capacity out of the Permian. Now again, if you go back to what we started talking about at the very beginning, if there is a call on additional Permian crude capacity or Permian crude production in Permian gas grows, you could be short again. And I think if there is a new greenfield pipe that needs to be built out of the Permian, I think we certainly would be there and be ready to participate in that. you could potentially even see another pipe, not compression, but looping of 1 of our systems coming out of there. But again, just to reiterate, I think we are very well positioned to be able to take the gas. As it comes out of the Permian and moves Eastward, it moves right into our network, into our Texas intrastate system potentially our Trident pipeline that we talked about. So we're very well positioned to move it even -- move it further in Easter.

I think tax imperially speaking, the supply and demand balance for Permian egress has only surprised 1 side. we'll see.

Well said. .

So turning to the liquid side of your portfolio. I want to give some attention to this, too, because you have some major development projects here. So maybe first on what's recently been in effect. Your conversion of your Bakken system from crude oil to NGLs. Looking at that recent pipeline conversion, how do you think about the incrementally positive macro backdrop, the potential uptick in production at large for the U.S., what that means for the Bakken and how that alters for subsequent phases of your NGL system as it stands?

Yes. So just to put a little finer point on what Teresa is talking about. We've historically had a crude pipe, a crude egress pipe out of the Bakken that originates in the Bakken and goes down to Guernsey, Wyoming. We announced a couple of years ago the intention to convert that into a natural gas liquids line to bring natural gas liquids out of the basin. And that's in the process of coming online right now. We've talked about potential future phases of that. And we don't have anything that we've announced on that. And I think -- as we've said before, given how competitive it is up there, that's not something that we've elaborated on a lot although I would say we put -- we are putting a lot of energy in sorting out the next opportunities there. With respect to the overall macro, we don't see the Bakken is having a tremendous amount of growth associated with it. But that's okay from a gas. And we also have a crude oil as well as gas gathering operation in the Bakken but we don't necessarily see that as absolutely necessary to potentially drive growth. I think the wells up there are getting a little bit gassier. So we are seeing incremental gas and we are seeing incremental NGLs. So we think that there's opportunity to further develop our Phase I and we continue to work on that, but we haven't announced anything beyond that.

Fair enough. Elsewhere on the liquid side, touching on your refined products project. So Western Gateway following the conclusion of a successful second open season. Can you provide color on the early learnings from both open seasons and whether your expectations for the project have changed at all relative to initial expectations?

Yes. Great question. I would say, first of all, expectations right now are reasonably consistent with what we thought about from the beginning. The interesting thing is the desert -- the plumbing for refined products in the Desert Southwest and California have been in a relative state of equilibrium for the past 70 years. And what we're attempting to do with our partner, P-66 is completely change that plumbing via this Western Gateway project that we're talking about. And the real change, the dramatic change that's happened over the past handful of years is you're seeing refineries in California shutting down. You've seen several -- seen a couple of convert to renewal diesel, you've seen a couple of shutdown. And so refining capacity in California that is traditionally provided refined products to California and even moved products eastward into Nevada and Arizona is changing pretty dramatically. The other thing that you're seeing is the relative economics of PADD II refiners and even PAT II refiners has increased. And so what this project will do is reverse the flow of 1 of our pipes. It's moving refined products from Southern California into Arizona to take products that will be brought from PADD 2 and the Texas Gulf Coast. East word -- I'm sorry, Westward into the Phoenix area in tag product in Phoenix to supply California. And what this does, what it would do is provide really the next phase of refined product security for consumers in the Desert Southwest, in Arizona and in California. And so -- it's a big undertaking, but it's something we're excited about. The open season, as we said, was successful. The next phase, as we said, as I said on the earnings call a couple of weeks ago, is to negotiate a successful joint venture with our partner P66, which we're working on. And we're optimistic that we'll get there and that we'll get it done. I mean there's enough -- a big enough size of the pie to make this project work. But I mean, again, I think it's likely that we do, but if we weren't able to work something out, then we would go back to -- I mean these are great assets that we have. and we would go back to the state of equilibrium that exists for the past 70 years. But we think this is a project that the market needs, and we're excited about it.

Well, on behalf of all California residents, we greatly welcome incremental refined products flowing into our same I certainly hope this project passes FID. But to your point about the state of SFPP at this point, there is a lot of debate on the value of SFPP as it stands. either into this project or on a stand-alone basis. Can you talk about the EBITDA and earnings outlook if this -- for SFPP if this project was not to come to fruition, having to see that evolving over time?

Yes. Well, first of all, these are really good solid assets. They're good cash flowing assets. They are assets in markets that are that have existed for a very long time with solid demand. There are certain places that they serve that have really favorable demographics. I mean, Maricopa County, both our East wine and West Line served Maricopa County, which is where Phoenix's, which is a very fast growing, metropolitan area. We, in part also serve the Calnev pipeline, which is serving Clark County, Nevada, which is growing as well. So these are really good, solid growing assets. They've got really good traditional fixed cost economics associated with them. Those of you that know the way refined products and oil pipes work in the United States. Every 5 years, the FERC sets an index adder or subtractor that you apply to the producer price index that sets effectively how much you can raise your tariffs each year. And so it's an inflation plus or minus. The past 5 years, it's been PPI plus $0.78 in FERC just reset it for the next 5 years at minus -- roughly minus 0.5%. And -- but again, that's off PPI, which is a substantially positive number. So what that does is it provides an inflation escalation component to your tariff that allows you to raise -- basically grow revenue each year. So these are really strategically important assets. They cannot be replicated. You're not going to build a new gasoline pipeline in California anytime soon. And they are absolutely critical meeting the demand that exists today. So these assets are -- these assets are going to be worth a decent valuation, whether this -- whether they go into part of this JV or continue to operate as they have for the last 7 years.

Fair enough. And we spent the bulk of our time talking a lot about your fee-based assets, the fee-based contracts and the long-duration nature of those cash flows. But we do have a modest amount of torque within your system as it relates to this macro backdrop. But I don't think we can ignore given the current environment. I'd like for you to talk about this potential uptick if either producer actively materializes or the elevated and volatile commodity price environment persists. Can you elaborate on the specific sources of earnings upside across your diversified footprint?

Yes. Well, the first thing I would say, 1 of the most important aspects of our entire network and this goes for the entire United States natural gas grid. But the utilization of our network back in 2016, 10 years ago was about 74%. And today, that number is at our -- or north of 90%. So what that says is the competition for the incremental molecules -- space molecule in our pipelines just continues to increase. And so we are able to benefit from that when situations -- when the right situation presents itself in extreme events like in extreme weather events. So you've got that. That's probably the most fundamental thing associated with our business. But to your point about specific items related to torque, we do have our CO2 business, which is a tertiary oil production business. That business is a small part of our overall company. it generates about $300 million a year of free cash flow. We generally hedge about 90% of our budgeted barrels going into a particular year. But we've got 10% that are generally floating throughout the year. To the extent that we outperform, we have the ability to capture that. We are outperforming in our crude production this year. We have a transmix business. where we are buying downgraded product and then upgrading it back to what it was before it was downgraded, so we get to capture that spread. We've got some blending businesses. And then we've also got businesses that are -- those are kind of specific. We do not have a lot of commodity exposure as an overall company, but that just highlights some of the areas where we have a little bit of commodity exposure. With respect to volumetric exposure, I think to the extent you're seeing a lot of incremental volumes if you're talking about torque. If you have high prices and then you have volumes that are driven by that, we've got gathering new process -- we've got a couple of gathering and processing businesses. I mentioned the crude business in the Bakken. We've also got a gas business there. We've got a gas gathering and processing business in the Haynesville. And then we've also got probably the largest number of export docs that accommodate refined product exports in the United States, and those are running about as full as they can possibly run right now. And we've all got crude pipes that have some exposure to the crude export market. So those are all things that are, again, the fundamental piece of our businesses, we are a fee-based energy infrastructure business. That's our core business. But to your point about where do we have some torque, do have a little bit of torque around the edges that we're able to capitalize on.

Wonderful. Well, we're about at time. Thank you all for participating and coming. Thank you very much, Dax for this lovely discussion.

Thank you. thoroughly enjoyed it.