Is Liquidity Returning to the Beleaguered Energy Sector?

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.

For Further Review:

MWE Press Release

Disclosure: No position.

Comments

[PeteK:]

Those who think oil and gas will remain this low for long are kidding
themselves.
It takes oil at $50 to break even with higher cost of labor and equipments.
Just watch, gasoline is cripping back to $3.00 per gallon soon in Calif.
It's been moving up almost every other day now.

Feb 14 10:18 PM