Kinder Morgan: STX Midstream Purchase Satisfies Its Long-Standing Mexican Exports Ambitions

Kinder Morgan KMI has been discussing the growth opportunities available in Mexico for gas exports for over a decade now, so it’s not much of a surprise to see it jump on a deal to expand its portfolio in the area. The $1.8 billion purchase of NextEra Energy’s STX Midstream serves that need. The pipeline system has about 4.9 billion cubic feet per day of capacity, primarily connecting the Eagle Ford basin to the Mexican and Gulf Coast (or liquefied natural gas demand) markets. Over 75% of contracts are take-or-pay, which we consider strong, and contract lengths average over eight years. The assets connect with multiple Kinder assets, including Texas intrastate assets, Tennessee Gas Pipeline, and Natural Gas Pipeline of America. This is a solid deal in all respects, and we consider the purchase price fair at about 7-7.5 times EBITDA after synergies. This purchase is not material enough to move our $17.50 fair value estimate or change our narrow moat rating.

We think the timing of the deal is good. Gas assets serving Mexico have been struggling over the past few years, primarily due to a combination of regulatory, tax, and infrastructure issues, which are mainly lack of connections to end-use demand by our observation. As a result, pipelines serving the region typically were vastly underutilized (about 20% utilization was not uncommon). However, after needed reforms, and addressing key infrastructure issues, peers such as Oneok and TC Energy have become much more optimistic regarding returns on their investments. TC Energy expects its Mexican earnings contributions to more than double over the next few years. Oneok is working toward a new final investment decision on the Saguaro Connector, which is another pipeline designed to serve Mexican gas demand potentially by the end of 2023. Given Kinder’s long experience in the region as well, it makes sense to make this investment now to take advantage of the stronger outlook.