Quicksilver Gas Services Isn't Your Typical Gathering & Processing MLP

In recent months many MLPs have declined in price as commodity prices have fallen. If you read my earlier article on midstream MLPs you know that some types of MLP assets do have commodity exposure while other types do not.

Quicksilver Gas Services (NYSE:KGS) is unique in that it is in the gathering and processing space but it does not have the commodity exposure of a typical gathering and processing MLP. This is because Quicksilver Gas Services charges Quicksilver Resources (NYSE:KWK) volume based fees. Typical gathering and processing MLPs make their money off of keep-whole or percent of proceeds contracts. However, Quicksilver Gas Services' volume based fee contracts more closely resemble those of a interstate gas pipeline contracts such as those used by Boardwalk Pipeline Partners (NYSE:BWP).

Quicksilver Gas Services is in an enviable position where its fee-based cashflows are increasing despite the poor margin environment that the rest of the gathering and processing MLPs are dealing with. The Barnett shale acreage that Quicksilver Gas Services services continues to be profitable to drill in the current gas price environment and the company said on their conference call that they expect the only draw $5 million on their credit facility to fund growth capex next year as Quicksilver Gas Services' quickly rising coverage ratio will almost entirely fund expected capex growth for next year.

Quicksilver Gas Services' volume based fee contracts mean that it deserves to be priced more like a company such as Boardwalk Pipeline Partners (NYSE:BWP). However, Quicksilver Gas Services should be able to grow much faster than Boardwalk Pipeline Partners with or without the return of access to capital markets. Quicksilver Gas Services' stable fee based contracts and sufficient access to liquidity should make its distribution safe even if processing margins and commodity prices remain low for a long time.

Disclosure: Long KGS