NEW YORK (TheStreet) -- Everyone knows that the coal business is a disaster. U.S. mines are still being closed. Mine owners are pointing their supporters to social media in a move to maintain employment.
Could such a thing happen in the oil patch? It did happen in the 1980s, when the price of a barrel of oil plunged to a low of $20.
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Could it happen again? A lot depends on whether the industry can effectively store the product when times are good, as they are now.
Right now the U.S. is consuming about 19 million barrels of oil per day and producing about 12 million, according to the Energy Information Administration, which expects production to rise to 14 million barrels per day next year. The U.S. should by then be the world's largest oil producer.
Moving and storing that oil, a business called the "midstream," is becoming an increasingly important business, which is why Kinder Morgan (KMI) decided to fold its limited partnerships into the main company and begin investing in new infrastructure again.
New investment should solve the problems of oil transportation and storage over the course of several years. But current prices are based on short-term estimates for supply and demand, and those are on a knife edge. Crude prices have been falling for a month, and the U.S. benchmark, West Texas Intermediate, opened for trade Tuesday at $96.41 a barrel.
The supply situation sounds great, but each move toward international peace -- whether in Iraq, Ukraine, or North Africa -- sends prices down because there is a limit to storage. (If there were no limit, producers could store oil when prices fall and then bring it to market when prices surge.)
The U.S. Strategic Petroleum Reserve, for instance, which has a capacity of 727 million barrels, mostly in salt domes under Texas and Louisiana, currently holds 691 million barrels, meaning it's 96% full. There's another 609 million barrels of private storage capacity, 55% full at the end of March, according to the EIA.
The next EIA report on storage, due in November, should show more oil in storage. But how secure is that storage? Not as secure as you may think. Oil "banked" as money in storage can leak.
The Environmental Protection Agency regulates the management of underground storage tanks and estimated there were more than 3,000 leaks from such tanks in the first half of this year, with the number of such tanks on a long-term decline.
Salt domes are a much cheaper way to store oil than tank farms on the land, but they aren't foolproof, either. One abandoned dome recently broke in Louisiana, leaving a lake measuring 27 acres and 271 feet deep that's growing and burping up oil and gas, leading to a $48.1 million settlement with property owners who lost their land.
The largest oil import terminal, the Louisiana Offshore Oil Port (LOOP), can hold 60 million barrels in its salt domes. The same system handles storage from U.S. Gulf of Mexico production. The port was closed Monday to check for a pipeline leak.
The point here is that oil storage is not unlimited, that it's not foolproof, and that most of the oil coming into the U.S. market needs to be processed and sold fairly quickly. That is why supply and demand for oil are so carefully balanced, and why good times for producers could become tough times as global supply increases while demand doesn't.
Now let's look at TheStreet Ratings' take on Kinder Morgan.TheStreet Ratings team rates KINDER MORGAN INC as a Buy with a ratings score of B. TheStreet Ratings Team has this to say about their recommendation:
"We rate KINDER MORGAN INC (KMI) a BUY. This is driven by a few notable strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its robust revenue growth, good cash flow from operations, expanding profit margins, increase in net income and increase in stock price during the past year. We feel these strengths outweigh the fact that the company has had generally high debt management risk by most measures that we evaluated."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- The revenue growth came in higher than the industry average of 2.6%. Since the same quarter one year prior, revenues rose by 16.4%. This growth in revenue does not appear to have trickled down to the company's bottom line, displaying stagnant earnings per share.
- Net operating cash flow has increased to $1,085.00 million or 14.21% when compared to the same quarter last year. The firm also exceeded the industry average cash flow growth rate of -6.58%.
- 38.48% is the gross profit margin for KINDER MORGAN INC which we consider to be strong. It has increased from the same quarter the previous year. Regardless of the strong results of the gross profit margin, the net profit margin of 7.21% trails the industry average.
- The net income growth from the same quarter one year ago has exceeded that of the S&P 500, but is less than that of the Oil, Gas & Consumable Fuels industry average. The net income increased by 2.5% when compared to the same quarter one year prior, going from $277.00 million to $284.00 million.
- KINDER MORGAN INC reported flat earnings per share in the most recent quarter. The company has suffered a declining pattern of earnings per share over the past year. However, we anticipate this trend reversing over the coming year. During the past fiscal year, KINDER MORGAN INC reported lower earnings of $1.15 versus $1.22 in the prior year. This year, the market expects an improvement in earnings ($1.23 versus $1.15).
- You can view the full analysis from the report here: KMI Ratings Report