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  • Roger S. Conrad

Gas-Weighted Midstream MLPs: Duds and Studs

By Roger S. Conrad on Feb. 4, 2016

Although natural-gas production has declined steadily in the Gulf of Mexico and most onshore regions, surging output from the prolific Marcellus Shale and Utica Shale has offset this weakness in other basins.

A period of ultra-depressed natural-gas prices will help to accelerate this process, with cash-strapped producers cutting their investment in out-of-favor basins, such as the Barnett Shale in North Texas, the Fayetteville Shale in Arkansas, the Haynesville Shale in Louisiana and the Piceance Basin in the Rockies. Expect decline rates to pick up in these regions.

Names with significant exposure to these basins must contend with volumetric and counterparty risk.

These headwinds recently prompted Azure Midstream Partners LP (NYSE: AZUR) to suspend its distribution. The partnership owns gathering and processing assets in the Haynesville Shale serving marginal producers that involve significant counterparty risk. Expiring contracts meant that the distribution was unsustainable.

Crestwood Equity Partners LP (NYSE: CEQP), for example, has already dealt with bankruptcies from two counterparties: Quicksilver Resources, which operated in the Barnett Shale, and Sabine Oil & Gas, which operated in the Granite Wash and Haynesville Shale.

The partnership renegotiated its gathering contract with Quicksilver Resources prior to the producer’s bankruptcy, agreeing to reduce the associated fees in exchange for the upstream operator running another rig in the play.

During Crestwood Equity Partners’ third-quarter earnings call, management indicated that the MLP would negotiate a new agreement with the new owner of Quicksilver Resources’ assets in the Barnett Shale, ideally one that “will make sense for everyone.”

Nevertheless, the fact remains that Crestwood Equity Partners’ fee-based contracts in the Barnett Shale and the Fayetteville Shale leave the partnership exposed to volumetric risk in these basins. Key counterparties BHP Billiton (ASX: BHP, NYSE: BHP) and Devon Energy Corp (NYSE: DVN) have also slashed their capital expenditures in these basins to the bone. Crestwood Equity Partners LP continues to rate a Sell.

EnLink Midstream Partners LP (NYSE: ENLK) has followed its sponsor, Devon Energy Corp (NYSE: DVN), into the STACK (Sooner Trend, Anadarko Basin, Canadian and Kingfisher Counties) and Permian Basin.

But based on estimates from EnLink Energy Partners’ 2015 Analyst & Investor Day, management expects the Barnett Shale to generate about 44 percent of the MLP’s cash flow this year. Devon Energy continues to experiment with re-fracturing its legacy wells in the play, but has acknowledged that this activity only makes sense at higher gas prices and has indicated that the company would like to divest this asset eventually.

EnLink Midstream Partners’ minimum volume commitments in the Barnett Shale expire in 2018; these headwinds, coupled with concerns that Devon Energy could look to monetize some of its interest in the MLP, prompted us to sell the stock from the Portfolio last June.

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