There are signs that credit is flowing once again in the beleaguered energy sector and in particular within the Master Limited Partnerships (MLPs). MarkWest Energy Partners’ (MWE) announcement that it has successfully entered into a new joint venture with NGP Midstream & Resources and expanded its credit facility are tell tale signs that this illiquid corner of the energy sector is seeing a return of financing and investment. The new joint venture, when coupled with the increase in borrowing capacity, allows MarkWest to realign its capital expenditures to account for projects that it was required to undertake in the second half of the year. In achieving this, a significant overhang has been removed from the stock, as the company will likely not be forced to raise dilutive equity to undertake its obligatory contracts with Newfield Exploration (NFX) and Range Resources (RRC). These contracts, which were entered into prior to the credit crunch, mandated that MarkWest Energy Partners construct gathering pipelines according to what Newfield Exploration and Range Resources needed, regardless of whether or not MarkWest Energy Partners could effectively fund such projects.
While MarkWest Energy Partners will only own 60% of the combined venture with NGP Midstream & Resources, it will nevertheless no longer have to deal with an uncertain level of capital expenditures going forward into 2009 and 2010. The assets that were transferred into the joint venture were primarily in the Marcellus Shale, showing once again that western Pennsylvania remains one of the most attractive shale development plays in North America. NGP Midstream & Resources is at its core a private equity firm. Despite its relatively small size, its participation will likely serve as a harbinger of things to come, as cash strapped energy companies will be forced to turn to private equity firms and the plethora of cash that they are currently carrying to fulfill pre credit crunch commitments. However, even if private equity firms become increasingly involved in the energy sector through corporate/private equity joint ventures it is unlikely that any will ever rival Atlas Energy Resources' (ATN) universal cost advantage as derived from its partnership program.
Despite the resolving of its capital expenditure issues, MarkWest Energy Partners is still not a buy at these levels as the firm will be significantly impacted by sub $40 oil and an abnormally low NGL to crude ratio. As a result, unless there is a significant expansion in oil and gas prices, it is likely that MarkWest Energy Partners will not be able to cover its current distributions going forward.
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4 comments:
I hope you are right. Yesterday QELP suspended its distribution and I lost almost 50% overnight. If they can't find money to refinance their upcoming loan obligation in Sept 09, the whole MLP structure of QRCP is gone.
Thanks
Anonymous, i saw the news out of QELP & frankly it was to be expected given the gas pricing situation in Oklahoma. The pricing issue should be corrected in the second half of 2009. While QELP is a significant part of the QRCP story the company also has a significant acreage position in the Ohio Valley and in a privately held midstream partnership in which it has an ownership stake and management responsibility. For more information you should check out my previous writings on QRCP.
Thank you,
What is you reference for the gas prices in Oklahoma. Do you follow Southern Star as a primary index?
Southern Star is quoted at $3.36 or dollar less than Henry Hub.
What about the hedge schedule of QRCP and QELP? I think they are will hedged in 09.
If my memory serves me right the company is, on a consolidated basis, 60% hedged in 2009 and 50% hedged in 2010 at nearly $7.50. The rest will likely be sold at below market rates (maybe $3.50) due to infrastructure issues that should be corrected in the second half of 2009.
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