The pace of acquisitions among master limited partnerships (MLP) is beginning to accelerate, a sure sign that improved credit market conditions are making it easier for MLPs to fund deals.

As always, quality counts: The best-positioned, best-capitalized MLPs can raise money at favorable rates and grab assets from weaker, undercapitalized partnerships at attractive prices.

Conservative Portfolio bellwether Kinder Morgan Energy Partners LP (NYSE: KMP) recently announced a deal to acquire gas treating assets from Crosstex Energy LP (NSDQ: XTEX), in a USD266 million deal. We have long rated Crosstex Energy a sell in How They Rate because of its heavy commodity exposure and high debt.

Crosstex’ main business is gathering and processing natural gas. As detailed in the July 16, 2009 update on the Aggressive Portfolio, gas gathering lines are small-diameter pipelines used to transport natural gas from individual wells.

The gathering and processing (G&P) business is heavily dependent on gas drilling activity because more drilling activity spells more wells that need to be hooked up to gathering systems and more fees for the partnership.

Business boomed in early 2008 as gas prices soared well above USD10 per million British thermal units (MMBtu) but collapsed in 2009 as gas prices languished and the number of rigs actively drilling for gas plummeted by 60 percent. 

Meanwhile, the gas processing business involves separating natural gas liquids–propane, butane and other hydrocarbons–from the natural gas stream. Some MLPs, like Crosstex Energy, also assume commodity price risk as part of their processing business.

To make matters worse, Crosstex Energy has nearly USD1.2 billion in debt as part of a credit facility due to mature in 2011. That’s a truly monumental debt pile when you consider that Crosstex’ current market capitalization is just over USD300 million.

By late 2008 it was clear that Crosstex would never be able to meet its debt obligations and withstand the sudden downturn in the G&P business without slashing its USD0.63 per unit distribution. In 2009 the MLP did just that, cutting its distribution to USD0.50 in the first quarter, USD0.25 in the second and then announcing it had discontinued its payout a month later.

Although this is all bad news for Crosstex, it’s great for Kinder Morgan Energy Partners. The gas treating assets Kinder purchased are used to remove impurities such as carbon dioxide and water vapor from the gas stream before it’s injected into the national pipeline network. Because there are strict standards about the quality of gas injected into the interstate network, treating facilities are a key component of the nation’s energy infrastructure.

Even better, these assets are primarily fee-based, unlike most of Crosstex’s G&P business; that means that Kinder’s new treating assets will generate fees regardless of the current price of natural gas or US drilling activity.

In many cases producers actually pay a fee even if they don’t utilize the treatment facilities. The treating business fits hand-in-glove with Kinder’s existing energy pipeline and related infrastructure assets. And because the entire market knows that Crosstex Energy needs to generate cash to pay down debt, Kinder was able to buy these assets for an estimated 6 to 7 times their annual cash flows.

Another example of a weak partnership burning the proverbial furniture to heat the house is Atlas Pipeline Partners LP (NYSE: APL), also a sell-rated partnership in the MLP Profits coverage universe.

Atlas, like Crosstex, has an excessive debt burden and has first slashed and then discontinued its distributions this year. Back in April Atlas announced it was selling the NOARK Pipeline System to Conservative Portfolio Holding Spectra Energy Partners LP (NYSE: SEP) for USD300 million in cash in an effort to pay down debt.

The NOARK Pipeline System is a 565-mile long pipe that extends from Oklahoma to Missouri and interconnects with additional pipelines out of the Rockies and Gulf Coast. Not only did Spectra get the pipeline on the cheap but it also owns several of the pipes that interconnect with NOARK; the asset was a perfect fit.

In mid-July Atlas announced another sale of a gas processing facility in Oklahoma to Penn Virginia Resources (NYSE: PVR), a buy in How They Rate, for USD22.6 million. The proceeds of that sale have also been used to pay down debt.

Ultimately, Atlas has some attractive assets in the hot Marcellus Shale play in Appalachia, one of the fastest-growing natural gas producing basins in the US. For this reason, the MLP was among the most widely hyped during the big gas price run-up of early 2008. But Atlas’ excessive debt and the pressing need to sell assets have made it difficult for the company to invest and profit from any upside in its promising Marcellus assets.

In addition, natural gas prices look to be bottoming. As noted earlier, the US gas-directed rig count has fallen between 50 and 60 percent over the past year, and signs are emerging that US production is finally dropping.

Meanwhile, the main cause of falling demand for gas over the past year has been a drop in industrial demand, such as gas used in factories and chemical plants. But industrial demand is highly sensitive to manufacturing activity and industrial production; recent data suggests industrial production is beginning to turn around.

These factors are starting to show up in weekly natural gas storage data; four straight weeks of lower-than-expected builds in natural gas storage have been a key catalyst for gas prices.

In addition, natural gas inventories built by 100 billion cubic feet less in the month of August this year than was the case in August 2008 despite relatively mild summer weather. An up-tick in gas prices and the economy would revive the G&P business and produce some excellent opportunities in the MLP sector, including MLP Profits  Aggressive holdings Williams Partners LP (NYSE: WPZ) and Regency Energy Partners LP (NSDQ: RGNC).