Don’t Be Spooked by Midstream Capex Creep

• Some midstream companies have increased their projections for growth capital spending, including large players Kinder Morgan (KMI) and Enterprise Products Partners (EPD).
• While investors may have some trepidations about increased growth capital spending, projects underpinned by long-term contracts providing visibility to years of cash flow should not be scary to investors.

Halloween may be over, but there is still some creeping in the midstream space. Specifically, capex creep has been common in recent quarters, and justifiably so. Companies are seeing compelling projects with strong returns that can generate years and years of cash flow. Today’s note looks at two examples of large midstream players that have bumped up their spending guidance over the course of this year; though to be clear, capex creep is not unique to these two names. Importantly, midstream capex creep should not spook investors.

U.S. natural gas demand is poised for significant growth in the coming years due to rising exports, new power demand (including from data centers), and other tailwinds like industrial reshoring (read more). Kinder Morgan (KMI) expects the US natural gas market to grow by 25 billion cubic feet per day (Bcf/d) over the next five years. For context, U.S. marketed natural gas production was ~113 Bcf/d last year. Against this backdrop, it makes sense that companies, like KMI, with natural gas infrastructure are seeing more opportunities to invest in their businesses.

At KMI’s January 2024 investor day, the company was expecting annual growth capital of $1-2 billion, with the high end of the range anticipated in the near term. On the 2Q24 earnings call in July, management updated its growth capital run rate to around $2 billion, noting that lumpy spending could result in levels moderately above $2 billion. At the same time, KMI announced a 1.2-Bcf/d expansion to the Southern Natural Gas (SNG) pipeline system to help meet growing power demand in the Southeast. The project is backed by 20-year take-or-pay contracts. KMI’s share of the project cost is $1.7 billion, with spending concentrated in 2027 and 2028 ahead of an expected late 2028 startup.

Management noted that projects like the SNG expansion add confidence to their expectation for ~$2 billion in annual growth capital spending for years to come. Keep in mind, KMI discussed power demand opportunities well north of 5 Bcf/d on its latest earnings call in October, which excludes the SNG expansion.

For additional context, KMI can fund ~$2.5 billion in annual capex from its cash flow and has some balance sheet capacity if needed. More broadly, management does not anticipate any problems in funding strong projects with good returns, either on its own or with strategic or financial partners.

Bellwether MLP Enterprise Products Partners (EPD) has also stepped up its expected growth capital spending range for 2024 and 2025 over the course of this year. At the end of April, EPD was expecting $3.25–3.75 billion in growth capital for each year. EPD raised the bottom of its 2024 range to $3.5 billion in late July, with the announcement of an expansion project at its Houston Ship Channel butane and propane export facility.

On its 3Q24 call last week, EPD raised its 2025 growth capital range to $3.5–4 billion. Management cited strong interest from Permian producer customers following the acquisition of Piñon Midstream and a potential carbon dioxide pipeline project for Occidental OXY serving the Houston area.

Management compared 2024–25 to 2018–19 when growth capital spending was also around $4 billion and then moderated. For 2026, EPD is currently anticipating much lower growth capital spending of $2–2.5 billion. Projects that have reached final investment decision (FID) represent $1–1.2 billion of committed spending in 2026, implying headroom for additional growth projects. Note that current spending forecasts do not include EPD’s Sea Port Oil Terminal — an offshore oil export terminal that has not yet reached FID (read more).

Energy investors may have some trepidations about increased growth capital spending given a welcomed emphasis on capital discipline and free cash flow generation in recent years. However, increased spending seems justified, whether more temporary for EPD or more sustainable for KMI, given the robust multi-year outlook for U.S. natural gas. Growth projects underpinned by long-term contracts providing visibility to years of cash flow should not be scary to investors.

From a capital allocation standpoint, growth projects are competing with other uses of capital. Many midstream companies have buyback authorizations, including both KMI and EPD. Projects with strong return profiles are arguably a better use of capital than simply doing buybacks. To be fair, repurchases tend to be more opportunistic and also depend on equity values. In the current market environment, growth projects likely provide more “bang for the buck,” and repurchases remain a tool that companies can leverage if and when it is attractive.

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