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Why Watch Kinder Morgan’s Commodity Price Exposure in 2Q15?

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Commodity exposure

In the previous part of this series, we talked about Kinder Morgan’s (KMI) segmentwise 2Q15 expected performance. In this part, we’ll look at KMI’s commodity price exposure in 2Q15 and the rest of 2015.

Kinder Morgan (KMI) operates like a toll road or fee-based business with limited commodity price exposure. About 85% of KMI’s 2015 budgeted EBDA (earnings before depreciation and amortization) is fee-based, and ~94% is fee-based or hedged. KMI’s businesses exposed to crude oil (USO) and natural gas prices (UNG) include the following:

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  • CO2-based enhanced oil recovery (or EOR) accounts for 67% of the CO2 segment’s earnings and 11% of KMI’s 2015 budgeted EBDA. KMI has hedged 81% of 2015 crude oil production volumes at $79 per barrel and 57% of its 2016 earnings at $76 per barrel. KMI estimates every $1 per barrel change in WTI crude oil will impact its distributable cash flow by ~$10 million.
  • Natural gas midstream accounts for 21% of the Natural Gas Pipelines segment’s earnings. Activities include natural gas gathering, processing, and treating. KMI estimates every $0.10 per MMBtu (million British Thermal Units) change in the price of natural gas will impact its distributable cash flow by ~$3 million.

For more details on the type of contracts under natural gas processing, you can read Market Realist’s series MLPs: An Overview of the Best-Performing Energy Sector.

Energy Transfer Partners (ETP), Targa Resources Partners (NGLS), DCP Midstream Partners (DPM), MarkWest Energy Partners (MWE), and Crestwood Midstream Partners (CMLP) are among the midstream companies that have exposure to natural gas prices through their natural gas midstream assets. ETP, NGLS, DPM, MWE, and CMLP together make up ~24.0% of the Alerian MLP ETF (AMLP).

Dividend coverage

Kinder Morgan projects a potential inadequacy in dividend coverage in 2Q15. KMI’s businesses make the most money in 1Q and 4Q because of strong natural gas and NGL (natural gas liquids) demands during the winter. But for the full year, KMI is still expected to have excess coverage.

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