MLP Investors May Not Be Shielded From Low Natural Gas Prices

| About: JPMorgan Alerian (AMJ)

Recent years have seen a major shift in U.S. natural gas production. Only a few years ago vertically drilled wells, primarily in Canada, the Rocky Mountains, the Southwest, and the Gulf Coast areas supplied most U.S. gas. This gas, in addition to supplying local needs, was (and is) pushed through pipelines to the large heating and industrial markets in the Midwest and East.

Most public pipeline companies trade as tax-advantaged Master Limited Partnerships (MLPs). Some well known MLPs are: Kinder Morgan Energy Partners (NYSE:KMP), Plains All American Pipeline (NYSE:PAA), Enterprise Products Partners (NYSE:EPD), and Magellan Midstream Partners (NYSE:MMP).

Income oriented investors have long looked on MLPs for stability and income. Some might even call them "widows and orphans" type investments as MLPs, being utilities, can generally can be purchased and then mostly forgotten. Like almost all other equities, they suffered in the 2008 crash but have steadily risen since. Dividends are generally in the 4-6% range.

Now, however, geographically diverse shale beds across the U.S. are producing profuse amounts of natural gas locally. Often these shale gas sources are close to markets so it is no longer necessary to pipe the gas long distances. For example, Marcellus Shale gas from Pennsylvania and West Virginia is obviously much closer to the large U.S. Eastern markets than Western gas. Historically there has been a price spread between lower Western hub prices and Eastern Hub prices making it profitable to push the gas long distances through pipelines to the East. Here is an excellent article which explains shale gas economics and why hub spreads are often no longer present.

Bentek News (scroll down to January 6) confirms this shift away from eastward gas transmission:

Marcellus Gas Balloon Tilts Market West

Booming gas production in the Marcellus Shale has pushed what would be eastbound Rockies gas on REX back toward the West. "Since the beginning of November, Rockies Express pipeline deliveries have begun to show significant declines year-over-year as spreads to the East have collapsed," Bentek analysts said in a recent Market Alert

REX is the large Rocky Mountain Express Pipeline completed in 2009 which runs from Colorado to Eastern Ohio. At the time of REX's construction Eastern shale gas was not yet on the market in appreciable quantities. Now, with West to East price spreads flattened, REX's toll charges (and profits) may deteriorate.

REX is 50% owned by Kinder Morgan Energy (KMP). Other MLPs with Interstate gas lines include Boardwalk Pipeline Partners (NYSE:BWP), Energy Transfer Partners (NYSE:ETP), and El Paso Pipeline (NYSE:EPB).

MLP investors should be aware of recent changes in natural gas production, transmission, and pricing. Future MLP profits may be hurt for companies with long distance pipelines. MLPs own a complex, interconnected web of both interstate and intrastate pipelines so it's difficult to precisely determine how profits may be affected.

Disclaimer: This article is informative only - not buy or sell advice. Do your own research and due diligence before investing.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.