Just six months ago, the big question for master limited partnerships (MLP) exposed to riskier and more commodity sensitive business lines was if they’d be able to maintain their existing distributions. To reflect those risks, many such MLPs offered yields in the 15 to 20 percent range.

This presented myriad opportunities for investors willing to sort through the rubble and identify those MLPs with the necessary financial backing and assets to hold on through the bad times.

Investors who bought our Aggressive recommendations such as Linn Energy (NSDQ: LINE), Navios Maritime Partners LP (NYSE: NMM) and Regency Energy Partners LP (NSDQ: RGNC) not only locked in yields of 15 percent or more but have subsequently realized significant capital gains as the market discounts their superior fundamental positioning.

But there’s a new catalyst for upside in our Aggressive favorites: the potential for renewed growth in distributions in coming quarters. In other words, for many of these higher-risk MLPs, the question is no longer whether they’ll be able to maintain their current payout but how long investors will need to wait before these firms start boosting distributions again.

One of the most important developments for the MLP space this year has been the normalization of credit and equity market conditions. The importance of this can’t be overstated; a year ago, in the wake of the Lehman Brothers collapse, even the largest, most creditworthy and best-capitalized companies could not raise capital by issuing bonds or taking on bank lines of credit.

In an environment where the big MLPs were struggling to get access to capital, the smaller, riskier partnerships were completely in the proverbial wilderness. Even if these companies could borrow money, the interest rates demanded were so high that it made almost any conceivable project, no matter how fundamentally worthwhile, totally uneconomic.

But the shift over the past year has been dramatic. Check out the chart below of the price of Regency Energy Partners LP 8.375 Percent Bond of 12/15/13.

Source: Bloomberg

This particular bond was a $357.5 million issue made in September 2007 and rated B by Standard & Poor’s. In other words, this was a high yield, or “junk,” issue. On its first day of trading the bond closed at a price of $104.50, equivalent to a yield of around 7.15 percent. Regency’s cost of debt capital was just over 7 percent.

But note what happened late last year. On Dec. 5, 2008, the bond touched an intra-day low of roughly 67 percent of par, equivalent to a yield-to-maturity of around 20 percent and a current yield of 12.5 percent.

With that sky-high cost of capital investors quite rightly fretted over whether Regency would be in a position to fund its planned pipeline expansion in the Haynesville Shale region of Louisiana.

But the chart also shows that this bond has once again rallied back over par. With a current yield-to-maturity of about 8.2 percent, Regency’s cost of capital is still higher than was the case during the 2007 credit boom. But 8 percent is low enough to make Regency’s projects worthwhile.

And we received conclusive evidence of Regency’s intention to grow distributions when the company released earnings and hosted its conference call last month.

Regency operates in three basic business lines: gas gathering, gas processing and contract compression. As detailed in the July 16, 2009 MLP Profits article “Gathering Yields,” the gathering and processing (G&P) business has significant exposure to commodity prices and gas drilling activity.

The decline in gas prices and the resulting 60 percent decline in the US gas-directed rig count–a measure of how many rigs are actively drilling for gas–spells lower volumes of gas traveling through Regency’s gathering pipelines and falling demand to process gas.

Total volumes of gas traveling through Regency’s G&P system have fallen from a high of 1,122 million British thermal units (MMBtu) per day in the fourth quarter of 2008 to about 985 million in the second quarter of 2009.

Regency has taken steps to hedge its exposure to drilling activity and commodity exposure. The company estimates that just 42 percent of its business was fee-based contracts in 2007; producers paid a simple fee for Regency to transport and process their gas. Two years ago some 22 percent of Regency’s business was completely exposed to commodity prices.

This year management projects that nearly 70 percent of Regency’s business is based on fees, and only 3 percent represents commodity sensitive revenues not covered by hedges. Thus, Regency’s risk profile has been moving toward greater safety in recent years.

But the real transformational deal for Regency is its pipeline joint venture in an area known as the Haynesville Shale.

Source: Oil & Gas Financial Journal

The Haynesville Shale is an unconventional natural gas field located in northwest Louisiana and parts of East Texas. The sweet spot of the play, where wells have been most prolific, appears to be on the Louisiana side of the border but producers are operating throughout the play.

Unconventional gas plays like the Haynesville are a relatively new trend in US gas production. Although some of these plays have been known to contain gas for years, most pundits felt recovering that gas was uneconomic.

But the development and expansion of two key techniques–horizontal drilling and fracturing–have rendered these fields among the most prolific ever drilled in the US.

The importance of unconventional natural gas plays can’t be overstated. Just four years ago most industry pundits would have told you the US and Canada were both likely to see declining production in coming years; both nations were assumed to become increasingly dependant on gas imports in the form of  liquefied natural gas (LNG).

Now, most would agree that if gas prices were to rise back over $6 to $7 per MMBtu, the US could easily overtake Russia as the world’s largest gas producer. There’s even talk of the US and Canada becoming important players exporting LNG to gas-hungry Europe and Asia.

The Haynesville is among the largest and cheapest to produce gas fields in the US. Here’s a table showing some of the major US conventional and unconventional fields in the US and the gas prices needed for producers to earn a 10 percent return on their investment.

Source: The Energy Strategist, Ultra Petroleum

Producers can earn a solid return on Haynesville wells even when gas prices are hovering around $3.50 per MMBtu. While near-month gas futures have broken below $3 per MMBtu at times over the past month, futures expiring three to six months hence have largely remained above that key breakeven level.

The implication is simple: Gas producers have cut down on drilling activity because of falling gas prices, but the Haynesville continues to see growth. Larger producers such as Chesapeake Energy (NYSE: CHK) have simply transferred rigs and spending budgets from other regions to the Haynesville, where it’s still possible to earn a positive return.

Even if gas prices remain depressed, continued strong growth in Haynesville drilling activity spells continued volumes traveling through gathering lines, pipelines and processing facilities in the region.

In fact, the expected ramp-up in natural gas production from the region over the next few years absolutely necessitates new pipeline construction. Without new pipelines, there will be no way to move all of the new natural gas production to market.

Regency’s pipeline in the Haynesville is a $650 million pipe with the capacity to transport about 1.1 billion cubic feet of natural gas per day. It’s the second-largest pipeline currently under construction in the area, and it’s the first due to come into service; during Regency’s second quarter conference call in early August, management reassured investors that the pipeline would be completed on time in the fourth quarter of 2009 and on or under budget.

The best part of this deal is that revenue from the pipeline is fee-based and extremely stable. That’s because as of its early August call Regency had already signed deals with producers covering about 92 percent of the pipeline’s capacity.

These deals provide for what’s known as a demand charge, a fee paid by producers for the right to access a certain portion of the pipe’s capacity. This fee is paid whether the producers actually use the pipe or not; more than three-quarters of the cash flow from the pipeline is guaranteed by demand charges.

The completion of the Haynesville expansion will further dilute Regency’s exposure to volatile G&P businesses and boost fee-based and commodity insensitive revenues.

The $650 million project would be a huge undertaking for Regency, a company with a market capitalization of just $1.4 billion. Raising sufficient debt or equity capital even in the strongest markets would be tough and expensive. That’s why Regency created a joint venture (JV) in March to handle the financing of the project.

The JV has three partners: Regency, with a 38 percent stake; a unit of General Electric (NYSE: GE), with a 12 percent stake; and Alinda Capital, with a 50 percent share. Regency contributed about $400 million worth of its existing assets in the area and the JV partners chipped in $653 million, the estimated cost of the deal.

In a sign that Regency’s access to capital is rapidly improving, the company announced in early September that it was buying a further 5 percent stake in the deal from GE for $63 million, boosting its stake to 43 percent.

To finance this deal, Regency undertook a private offering of $80 million in convertible preferred shares to two private firms, MTP Energy Management and Harvest Partners.

The terms of the preferred deal are favorable to Regency. The preferreds were issued at a price roughly 19 percent above the current trading price of the common units–preferred buyers paid a premium for the shares.

Meanwhile, the preferreds offer a fixed $0.445 quarterly distribution per unit without participating in any future distribution increases to common unitholders. These quarterly distributions are to be paid in the form of additional Regency units, not in cash.

The preferred offering is a private deal not open to the public. However, the offering allows Regency to buy additional interest in the Haynesville pipe and further boost its exposure to this attractive fee-based asset.

Management also highlighted the potential for further expansions of the deal. The JV could have the opportunity for as much as another $300 million to $400 million in small expansion projects along the Haynesville pipeline route in coming years; many of these small bolt-on deals could be financed directly at the JV level, minimizing Regency’s need to take on new debt capital. In addition, Regency sees opportunities for it to expand assets outside the JV that benefit from the pipeline.

The fact that management is talking about these expansions shows that it’s confident it could raise additional debt and equity capital as needed to finance organic expansion. Regency won’t quite cover its distributions with cash flow in 2009 as a slump in commodity and drilling-sensitive businesses impacts results. The addition of revenues from the Haynesville pipeline will mean that Regency’s 2010 coverage will be healthy.

And by the end of next year Regency will be in an excellent position to consider further distribution hikes. Aggressive Holding Regency Energy Partners LP rates a buy under 18.

Another Aggressive Holding poised for distribution growth thanks to normalizing credit conditions is Linn Energy (NSDQ: LINE). In early September CEO Michael Linn noted the firm plans to spend $500 million on acquisitions over the next 18 months.

Linn noted that it made a $118 million acquisition of oil-producing properties in early August; we analyzed that deal in an August 6 Flash Alert.

Linn is seeing a number of producers looking to sell their conventional oil and gas-producing properties to reinvest that cash in drilling hot unconventional plays. Linn can pick up these properties and invest capital to stabilize or boost production.

Linn is also hearing from distressed sellers that have been crushed by commodity volatility over the past year and are looking to raise cash to remain in business. Linn believes the company could finance many of these $100 million to $200 million deals with existing credit lines and then sell additional equity and debt to pay down those lines as needed.

Most of the deals Linn is targeting are for oil-producing properties. The economics of such deals are tremendous; with oil prices currently around $75 a barrel, Linn can hedge its exposure to commodity prices for four to five years in the future, locking in an attractive return on its investments.