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Midstream MLPs: The Next Generation

By Elliott H. Gue on Dec. 11, 2013

Independent oil and gas producer QEP Resources (NYSE: QEP) created QEP Midstream Partners LP to monetize its midstream assets and to help fund the development of its acreage in the Rocky Mountains, the Bakken Shale and the Texas-Oklahoma Panhandle.

The MLP owns four oil- and gas-gathering systems and two regulated pipelines that handle some volumes from North Dakota, but primarily serve Utah’s Uinta Basin and the Green River Basin in Colorado and Wyoming

These 1,500 miles of pipelines generate a steady stream of fee-based income and involve little direct exposure to commodity prices. The customers that have reserved capacity on these systems include QEP Resources, Anadarko Petroleum Corp (NYSE: APC), EOG Resources Corp (NYSE: EOG) and Ultra Petroleum Corp (NYSE: UPL).

Even better, 71 percent of the contracts covering this capacity have at least seven years remaining, insulating the MLP’s cash flow against reduced drilling activity in basins that produce primarily natural gas. And most of the partnership’s pipelines and gathering systems are backed by acreage dedications from major customers and allow for inflation-indexed adjustment.

Drop-down transaction from QEP Resources will drive much of QEP Midstream Partners’ cash flow and distribution growth. Between 2007 and 2012, the MLP’s sponsor invested $1.1 billion in new midstream assets to support its growing production. These projects include another 900 miles of gathering systems and five gas-processing and fractionators that separate NGLs from the natural gas stream and into discrete components.

QEP Resources holds more than 60 percent of the MLP’s outstanding units and the general-partner interest in QEP Midstream Partners, incentivizing the parent to drop down assets to the partnership.

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