(NYSE: KMI) Kinder Morgan CEO says renewable energy is overstated—why he’s wrong

(NYSE: KMI) Kinder Morgan CEO says renewable energy is overstated—why he’s wrong

On Tuesday, July 12, Steve Kean, chief executive officer of oil pipeline giant Kinder Morgan (NYSE: KMI), spoke at a conference in Washington hosted by the Energy Information Administration (EIA). At the conference, Kean urged policymakers to better communicate the value of natural gas, and what he believes is the overstated potential of renewable energy. The goal of this public campaign would be to raise the level of awareness among the general public of the relative benefits of natural gas.

Comments like this should be taken with a grain of salt, given that they were made by the CEO of a huge oil and natural gas pipeline company. And, that Kean further commented about renewable energy, and that the potential for renewables is not what most think it is.

While no one should be surprised by these comments, investors should know that an argument could be made contrary to what Kean believes. There has been a great deal of research conducted on the potential for renewable energy, and all indications are that the potential has a high probability of living up to the expectations.

Houston, we have a problem

One of Kean’s statements that stood out was his frustration over the declining enthusiasm for natural gas as a source of energy among environmentally-conscious Americans. “Maybe it’s just my perception, but earlier in my career I remember how supportive environmental groups were for natural gas … That seems to have waned.”

On this point, one can hardly argue with the conclusion. After receiving national momentum for many years, due rising concerns over America’s dependency on foreign oil, natural gas was seen as a saving grace, due to massive domestic supply. Kean is right—sentiment has definitely changed, but it’s not without a good reason. The reason why much of America, including environmentalists, have soured on natural gas is because of the clear link between new drilling technologies and earthquakes.

In order to unlock the vast amounts of natural gas sitting underneath the U.S., which the EIA states is enough to last the U.S. more than 80 years at its current rate of consumption, the energy industry had to come up with new drilling techniques. This is why natural gas was not developed more intensely in previous decades. A large amount of domestic supply was trapped in areas previously inaccessible.

The oil and gas industry found a solution, which became known as hydraulic fracturing. This process involves injecting huge amounts of water and chemicals into the ground in order to break up rocks, which releases the gas that can then be obtained and produced.

Unfortunately, we soon learned that hydraulic fracturing isn’t all it’s cracked up to be. The downside of hydraulic fracturing is that, not only does it involve the injection of potentially harmful chemicals into the ground, and also require huge amounts of water, but the process of breaking up the rock has led to a steep increase in earthquakes, particularly areas close to some of the premier producing fields in Texas and Oklahoma. In Oklahoma specifically, the results are shocking.

According to the U.S. Geological Survey, in 2009, there were 20 earthquakes of 3.0 magnitude or higher in Oklahoma. Five years later, that number soared to 890. There is mounting evidence that the extreme growth of significant earthquakes can be directly attributed to the growth of natural gas drilling that utilizes hydraulic fracturing, which scientists widely believe causes natural faults by the billions of gallons of water injected deep into the ground.

Giving credit where it’s due

One point Kean made that many could agree with is that, in the fight against climate change, natural gas should be viewed as friend and not foe, for now. In his remarks, he stated “When it comes to fighting global warming, we need more natural gas, not less. In the power sector we are back to 1993 levels [on greenhouse gas emissions]. We’ve increased our generation by 25 percent while keeping that emissions level flat.”

There is little doubt that the massive switch from coal to natural gas, particularly among large industrial end users like utilities, has made a profound step forward in the fight against climate change and global warming. There is an abundance of evidence that shows natural gas is cleaner, with far less adverse environmental effects, than coal. But this does not mean that natural gas is the end of the journey. Natural gas has often been referred to as a bridge fuel, and this is exactly why.

Kean is also underestimating the potential of renewables. His comments against the potential for renewables are based on the fact that wind and solar require supportive weather conditions, and are prone to outages in unfavorable weather. While this is certainly true, it does not mean the potential is not significant. According to the International Energy Agency, renewable energy will represent the single largest source of growth in the energy sector over the next five years.

As a major transporter of natural gas, Kinder Morgan is threatened by the rise of renewables, and analysts are increasingly scrutinizing the company. The latest analyst action on the stock was a downgrade by Credit Suisse, from outperform to neutral. And, the average price target for Kinder Morgan is $21.76 per share, which represents just 4 percent upside from the current share price.

Final thoughts

Natural gas is indeed an improvement, but the long-term goal should still be centered firmly around renewables. When Kean states that America needs to increase its production and consumption of natural gas, he is right as it pertains to a relative choice versus coal. But in absolute terms, we need more renewables, not less.

Companies to Watch

Chesapeake Energy (NYSE: CHK): Chesapeake is one of the nation’s largest producers of natural gas. The company has estimated proved reserves of more than 1.5 billion barrels of oil equivalent. Oklahoma-based Chesapeake Energy would be one of the hardest-hit by any reduction in hydraulic fracturing, as the company has significant operations in the premier fields in the U.S.

Vanguard Natural Resources (NYSE: VNR): Vanguard, like Chesapeake, is a major natural gas producer. These companies are engaged in exploration and production, and these are the types of firms that supply the liquids transported by pipeline operators.

Exxon Mobil (NYSE: XOM): Exxon Mobil is the biggest of Big Oil—it is the largest publicly-traded energy company in the world, and has made a huge push into U.S. natural gas production. In 2009, Exxon Mobil acquired Houston-based XTO Energy in a landmark $41 billion deal. The acquisition provided Exxon Mobil with XTO's resource base of 45 trillion cubic feet of gas. As a result, Exxon Mobil stands as one of the super-majors most heavily exposed to a drawdown in natural gas drilling.

Bob Ciura is an independent equity analyst. Since 2012, his work has focused on fundamental investment analysis of publicly-traded companies in the energy, technology, and consumer goods industries. Bob has a Bachelor's degree in Finance and an MBA in Finance.  

Originally published on July 19, 2016