InvestingDaily.com

Account Information

  • My Account

    Manage all your subscriptions, update your address, email preferences and change your password.

  • Help Center

    Get answers to common service questions, ask the analyst or contact our customer service department.

  • My Stock Talk Profile

    Update your stock talk name and/or picture.



Close
FEATURED STRATEGY

This Two-Minute Market Move Could Make You Rich

This Two-Minute Market Move Could Make You Rich[Revealed] How to generate instant income from the stock market. Over and over again. At will. This technique is so powerful – and safe – we’re guaranteeing you can use it to generate $1 million (or more) in retirement cash. And we’ll even send you a $1,000 check to kickstart your journey. Go here for details.

 

More Broken Contracts in the Pipeline?

By Robert Rapier on March 15, 2016

In theory, one advantage of midstream MLPs is that they are shielded from volatility in the commodity markets. The idea goes something like this: Because midstream providers simply charge a toll for moving oil, natural gas, and natural gas liquids (NGLs) from Point A to Point B, and because they sign up producers to long-term contracts, then they should continue to get paid regardless of what’s going on in the commodity markets. The contracts are often of the take-or-pay variety, where the shipper either uses the services of the pipeline company or pays a penalty.

The downturn in energy prices has of course depressed the market worth of midstream MLPs. The Alerian MLP Infrastructure Index (AMZI), whose constituents are primarily involved in pipeline transportation, gathering, processing and the storage of energy commodities, is down about 40% since the downturn began in mid-2014. But that’s largely a function of diminished expectations of future growth in oil and gas production in response to the lower prices.

The past five years had seen a huge infrastructure build-out, and until the downturn it looked like the next five years would deliver more of the same to the benefit of the midstream MLPs. Valuations reflected these expectations. The commodity price crash put that notion on hold for now, and MLPs corrected to reflect more modest growth expectations.

Nevertheless, the majority of the midstream MLPs have managed to grow distributions throughout the decline. That’s because they have enjoyed a measure of protection from direct commodity exposure. However, another way they could be hurt — which I have mentioned in the past — is that bankruptcies in the upstream sector could cause some of their long-term contracts to be voided.

Until now that’s been more of a hypothetical concern, but the situation changed last week with a U.S. bankruptcy court ruling. Judge Shelley Chapman ruled that Sabine Oil & Gas, which filed for bankruptcy in July, can reject contracts with two natural gas processors, one of them a unit of Cheniere Energy (NYSE: LNG). The pipeline owners had argued that the long-term commitments they secured from Sabine in exchange for providing it with gathering and processing facilities were “covenants running with the land” not breakable even in bankruptcy under governing Texas law.

The judge disagreed, ruling that the pipeline owners can’t use land as a conduit for preserving uneconomic pipeline contracts and covenants at the expense of secured creditors. The preliminary ruling was the first in the current energy downturn authorizing a bankrupt driller to reject its midstream contracts over a service provider’s objections.

The Alerian MLP Index dropped 2.5% following the ruling, but it had largely erased those losses by the end of the week as oil prices strengthened. Energy prices will ultimately determine how many insolvent drillers follow Sabine’s lead in breaking onerous gathering and processing contracts, so the recent resurgence in oil prices is encouraging.

Some broader perspective is in order. Although 51 North American drillers have filed for bankruptcy protection since the end of 2014, only seven of them had debts topping $1 billion (with Sabine the second-largest at $2.9 billion.) In total the cases involved debt of $17 billion, which is dwarfed by $237 billion in outstanding obligations as of the third quarter of last year for just the 61 largest drillers tracked by Bloomberg.

Thus, while the precedent is noteworthy for investors in midstream companies, the recent rally in oil and gas stocks has made widespread defaults less likely. It is another risk factor that needs to be weighed, but barring a much longer bear market in energy prices it is unlikely to be an extremely influential one.  

(Follow Robert Rapier on Twitter, LinkedIn, or Facebook.)

 

 


You might also enjoy…

 

Obscure Tax Law Forces This Company to Pay Out 90% of its Profits

A 50-year-old loophole is forcing one company to pay out $9 of every $10 it makes from ironclad contracts with the U.S. Government.

In fact, over the past seven years, it’s made payments ranging from a few dollars… to tens of thousands of dollars… 30 times. Without a single cut! 

Most folks don’t even know this company exists, but the ones that do are making a mint.

Like Ted B., who’s set to receive a check for $1,096 just a few days from now.

Merrill H., a 58-year-old from New York, has collected over $3,385 so far. 

And retirees Beth and Terry P. have raked in $16,555.

I’ve put together a special report that will give you all the details, including simple instructions on how to get your name on the payout list before the next cutoff date.

You can get your copy here.

Stock Talk — Post a comment Comment Guidelines

Our Stock Talk section is reserved for productive dialogue pertaining to the content and portfolio recommendations of this service. We reserve the right to remove any comments we feel do not benefit other readers. If you have a general investment comment not related to this article, please post to our Stock Talk page. If you have a personal question about your subscription or need technical help, please contact our customer service team. And if you have any success stories to share with our analysts, they’re always happy to hear them. Note that we may use your kind words in our promotional materials. Thank you.

You must be logged in to post to Stock Talk OR create an account.

Create a new Investing Daily account

  • - OR -

* Investing Daily will use any information you provide in a manner consistent with our Privacy Policy. Your email address is used for account verification and will remain private.