Why Kinder Morgan Should Benefit the Most from Crude Oil Recovery



WTI crude oil prices

WTI (West Texas Intermediate) crude oil recovered slightly after plunging to multiyear lows of $29 per barrel in the first week of January and mid-February. WTI crude oil for the front month delivery closed at $39.9 per barrel by the end of trading on March 21, 2016. Midstream companies will benefit if the crude oil prices continue to recover for the rest of 2016. In this series, we’ll look at the midstream companies that are expected to see the maximum impact based on their correlation with crude oil.

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Kinder Morgan

Kinder Morgan, the midstream energy giant, has the highest correlation with crude oil for the one-year period among the selected midstream companies. KMI’s high correlation is due to its direct exposure to crude oil through ownership interest in oil-producing fields. However, KMI’s correlation has come down significantly for the one-month period.

KMI expects its 2016 segment EBDA (earnings before depreciation and amortization) and distributable cash flows to be $7.7 billion and $4.7 billion, respectively, based on commodity prices of $38 per barrel for WTI crude oil and $2.50 per MMBtu (million British thermal units) for natural gas. Plus, KMI estimates every $1 per barrel change in WTI crude oil will impact its distributable cash flow by ~$6.5 million. KMI forms 0.34% of the iShares Russell 1000 Value ETF (IWD).

NuStar Energy

Next on our list of midstream companies is NuStar Energy (NS). The partnership has a correlation of 0.54 with crude oil for the one-year period. NS’s relatively high correlation with crude oil could be attributed to its fuel marketing business and declining throughput volumes at the partnership’s Eagle Ford system.

Other midstream companies

Western Gas Partners (WES), Buckeye Partners (BPL), and EnLink Midstream Partners (ENLK) are among the top five midstream companies that have a relatively high correlation with crude oil. WES, BPL, and ENLK’s one-year correlation with crude oil is 0.54, 0.52, and 0.50, respectively. Buckeye Partners, which mainly provides crude oil and refined products transportation and terminalling, has the highest one-month correlation of 0.7. The asymmetrical change in the correlation coefficient is due to the different percentages of crude oil, natural gas, and NGLs (natural gas liquids) exposure.


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