ETF Securities Research Blog

MLPs: Keep, Reject or Renegotiate

Midstream master limited partnerships (MLPs) have come under intense scrutiny after bankruptcy courts permitted Sabine Oil and Gas, an upstream producer to renege on two of their midstream contracts. Many such contracts were framed when the oil production outlook was more promising and it’s evident that producers will now decide to keep, reject or renegotiate contracts to survive. While Sabine Oil and Gas has rejected contracts with Nordheim Eagle Ford Gathering LLC and HPIP Gonzales Holdings LLC (both midstream MLPs) on the pretext of savings worth $115mn. Other midstream MLPs have been more accommodative to preserve liquidity and avoid the risk of losing relationships. For example, Williams’s Partners (another midstream MLP) renegotiated contracts in advance with Chesapeake Energy (producer) with the caveat of higher volumes and longer maturities and Quicksilver Resources have kept the gathering and processing contracts with Crestwood Midstream Partners intact despite filing for bankruptcy in March 2015.

Nonetheless, it’s evident from the CDS spreads that producers have been struggling with high debt loads given the ensuing low oil price environment, driving midstream MLPs to trade more like upstream MLPs.

MLP CDS chart

Source: ETF Securities, Bloomberg

Midstream MLPs that currently have contract rates above the market and/or minimum volume commitments (MVC) are at highest risk of having contracts renegotiated . However, this is by no means reflective of midstream MLPs ability to stay afloat, as evidenced by Q4 results highlighting a 24% rise in distributions and 30% rise in revenue over the prior year. Midstream MLPs with gathering contracts closer to the well head and contracts rates in line with the market without stringent MVC are best positioned to take advantage of the current dislocations in the market.