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

The Norwegians Are Coming!

Earlier this week Chesapeake Energy (CHK) announced that the company was proceeding with the sale of a 32.5% interest in its Marcellus Shale development to StatoilHydro, the Norwegian oil giant.  In return for its new interest in one of North America’s more interesting shale plays, StatoilHydro is paying $1.25B plus the guarantee that it will foot 75% of the expected drilling costs through 2012 for an additional $2.13B.  Another Norwegian company, Norse Energy (NEC) has already built up a sizeable acreage position in the Marcellus Shale totaling somewhere around 175,000 acres.  Given the interconnectedness of Norway it would not surprise me at all if the executives at Norse Energy and StatoilHydro had at the very least talked over the opportunities that the Marcellus Shale offers to natural gas prospectors.  Nevertheless, the emergence of StatoilHydro as a passive foreign partner should serve as a reassurance to domestic gas produces in search of cash as the Norwegian giant is more likely then not only the beginning of wave of large foreign multinationals looking to diversify their production base via the acquisition of U.S. oil and natural gas producers in relatively low cost venues. 

The purchase price Chesapeake received from the sale of this portion of its interests in the region amounted to a purchase price of nearly $5,800 an acre.  This figure approaches the $6,000 an acre that some analysts had valued land in the Marcellus Shale, prior to the collapse of the credit markets.  The deal is also significant in that it is the first large sale since July when Dominion Resources sold 205,000 acres to Antero Resources for $552 million or $2,600 an acre with Dominion reserving a future royalty rate of 7.5%.    

Such a sale is good news for those companies looking to reduce their own leverage through asset sales.  While still financially sound on a cash flow basis, countless U.S. natural gas companies have announced their intention to reduce their debt loads through asset sales as the country heads into an uncertain economic environment.  Companies such as Quest Resources (QRCP), National Fuel Gas (NFG), Atlas Energy Resources (ATN) and EXCO Resources (XCO) appear to be especially well positioned to benefit from per acre prices that are above what should be expected given the freeze in the credit markets.  In partnering with foreign investors in joint ventures, these companies will be able to use the proceeds from the sale of a portion of their interests in the Marcellus Shale to not only pay down debt but to also buy back their own stock which in nearly every case is trading at levels that would have been ridiculous only months ago.       

For Further Review:

List of Marcellus Drillers

Chesapeake/StatoilHydro Article

Disclosure: Long QRCP, ATN, XCO

Mixing the Pickens Plan and a Auto Bailout

With the automakers in such dire straits and in search of government funding for the second time this year it is only natural to assume that the federal government will be able to dictate terms to America’s once proud industrial titans.  With the changing political climate, these new terms will be driven by Barack Obama and the congressional democrats.  While the Big 3 are currently asking for over $50 billion, they have already received $25 billion to retool plants for more fuel-efficient vehicles.  Such a large intervention should be used by the Obama administration to expand their own agenda while at the same time saving countless American jobs in the process.

Sponsored by oilman Boone Pickens, the “Pickens Plan” made its day view during the summer as an attempt to put the idea of energy independence back at the forefront of the political discussion in America.  While displaced by the collapse of the financial markets in September, the Pickens Plan can be used by the Obama administration to bring about the achievements of some of its key objectives.  While the details of the Pickens Plan are not entirely clear, the plan is centered around the construction of vast wind farms in the central United States that will be used to displace Natural Gas production which will then be switched over for automobile consumption.  Such a plan would be beneficial to the United States because of its vast stores of natural gas, the relative cheapness of natural gas (it costs less then a $1 per gallon to fill up a car) and the significant environmental benefits of natural gas when compared to oil. 

When preparing the various legalities of the bailout, Congress should put such stipulations in the agreement so that it forces the Big 3 to significantly ramp up their efforts to produce natural gas friendly vehicles as an intermediate solution to our country’s dependence on foreign oil.  Such a stipulation would help provide cover for the unpopular bailout of the Big 3 while stimulating the economy, pleasing the environmentalist lobby of the Democratic Party and by helping to wean Americans off foreign oil.  Given the surplus of natural gas production coming on in the next several years, excess natural gas supply should be enough to cover the initial consumption boost that would occur with the first generation of Big 3 natural gas based cars.  In addition, the initial infrastructure spending that would be needed on the part of the federal government for a nationwide roll out of a natural gas system would provide an additional direct stimulus to the economy.  

For Further Review:

The Pickens Plan

Auto Industry Bailout

$1 Per Gallon Natural Gas

Increased Government Support for Banks?

The Wall Street Journal was out with an article on Monday stating that over 1,800 publicly traded banks would likely seek access to the Treasury Department’s rescue plan.  While the total dollar figure being attached to the rescue plan is in excess of $700 billion, only $250 billion has been earmarked for bank recapitalizations.  While this is a large sum, it is increasingly looking as if more money will be needed given the sheer number of banks that have not yet received government investments. 

As we can see from the table below (via thestreet.com), nearly $170 billion has already been committed to supporting the institutions that control the majority of our banking system’s deposit base.  However, this leaves only $80 billion in Treasury funds for the support of our country’s remaining 8,000 banks, most of which are private and state chartered.  In other words, it’s going to get messy from here on out as the Bush administration will be forced to go back to Congress for more money, seriously reexamine the United States’ hybrid bank structure and be forced to develop an innovative method for delivering much needed capital to community banks.  These community banks will prove difficult to deliver capital to because they are either too small or unwilling to become public, yet they nonetheless serve a vital part in the American economy and will need government capital in order to ensure the success of the Bush Administration's bank bailout.  A simple division of the $80 billion dollars remaining among the 5,000 private and public banks likely to be working towards a government injection shows that they would on average receive a mere $16 million dollars, which is a surprisingly low figure and a cause for concern. 

Banks Receiving Government Investments
Bank	Ticker	Amount (in billions)
JPMorgan Chase	JPM	25.000
Bank of America*	BAC	25.000
Citigroup	C	25.000
Wells Fargo	WFC	25.000
Goldman Sachs	GS	10.000
Morgan Stanley	MS	10.000
PNC Financial Group	PNC	7.700
US Bancorp	USB	6.600
Capital One	COF	3.550
Regions Financial	RF	3.500
SunTrust	STI	3.500
Fifth Third	FITB	3.400
BB&T	BBT	3.100
Bank of New York Mellon	BK	3.000
KeyCorp	KEY	2.500
Comerica	CMA	2.250
State Street	STT	2.000
Marshall & Illsley	MI	1.700
Northern Trust	NTRS	1.500
Huntington Bancshares	HBAN	1.400
Zions	ZION	1.400
First Horizon	FHN	0.866
City National	CYN	0.395
Valley National	VLY	0.330
United Commercial	UCBH	0.298
Umpqua Holdings	UMPQ	0.214
Washington Federal	WFSL	0.200
First Niagra	FNFG	0.186
Old National	ONB	0.150
First Community	FCBC	0.043
HF Financial	HFFC	0.025
Redding Bank	BOCH	0.017
FFW Corp.	FFWC	0.007
Saigon National	SAGN	0.001
Provident**	PBKS	0.000
TOTAL		169.832
Source: The Financial Services Roundtable, KBW   *Includes Merrill Lynch   **Hasn't decided to participate

 

The government capital injections makes investing in banks difficult as it allows for an added variable that investors must take into account. Nevertheless, as the video below from Bloomberg discusses there are several metrics that can still be used by investors to gauge the risk of their bank investments.  According to the commentator, tangible book value, normalized earnings and “excess” regulatory capital are all important characteristics that investors should be knowledgeable of when investing in banks.  Even if his conclusions are poorly timed, the commentator does a nice job of laying out the framework needed for conducting bank investments. 

As we saw in the forced National City sale, banks that have taken government capital should be viewed as having received a seal of approval from the government and can be considered by investors as safe havens in the financial sector and are more likely  then not trading at once in a generation prices, regardless of the weakness in the economy going forward.   

For Further Review:

Thestreet.com Bank List

WSJ Article