Quicksilver Gas Services: Not Your Typical Gathering and Processing MLP

In recent months many Master Limited Partnerships [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 an 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. The company said on its conference call that it expects to only draw $5 million on its 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. 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

Comments

[You're Kidding:]

A couple of things to keep in mind here, if you care what analyst's might think, is that Standard and Poor's Stock Report is saying the following:

"... we think that KGS's revenues will be hindered, as its parent, Quicksilver Resources (KWK) plans to reduce its capital expenditures for the remainder of 2008 and 2009."

They go on to say that they believe KGS's dividends will drop slightly next year, as will its price, and rate the company only two stars (a sell) out of a possible five stars.

Well, maybe S&P will be right, and maybe it won't.

On the other hand, Reuters Research rates the stock an "Outperform."

The stock's current dividend yield is about 16%, which is very tempting under the circumstances.

2008 Dec 01 08:18 AM

[granger:]

Good article, thank you.

I am working on building a basket of the best MLP's
(smallest funding needs and commodity exposure), maybe 4-5 issues, preferably with a monthly dividend stream, and going long.

Then finding an ETF of MLP's or build a basket of poor ones and hedge my long basket by maybe 25/50% and collect the income stream.

Thoughts, ideas? Maybe we can get some ideas together here and share them.

2008 Dec 06 04:03 AM

[You're Kidding:]

Hey granger:

I am also working on mlps. We should talk. Send me your personal email. Here's mine: DRrmudd AT inboxDOTcom


On Dec 06 04:03 AM granger wrote:

> Good article, thank you.
>
> I am working on building a basket of the best MLP's
> (smallest funding needs and commodity exposure), maybe 4-5 issues,
> preferably with a monthly dividend stream, and going long.
>
> Then finding an ETF of MLP's or build a basket of poor ones and hedge
> my long basket by maybe 25/50% and collect the income stream.
>
> Thoughts, ideas? Maybe we can get some ideas together here and share
> them.

2008 Dec 11 06:37 AM