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Temporary business interruptions, project delays and damage from weather-related events failed to deter U.S. energy master limited partnerships from having a strong year, according to a report issued Thursday by Standard & Poor's Ratings Services (S&P).
The S&P "Industry Report Card" found energy MLPs, which typically hold assets such as oil and natural gas pipelines and storage terminals, this year continued to benefit from high energy prices, robust drilling activity, tight commodity supplies and refining constraints. There were "erratic basis differentials between producing basins" and tighter supply and demand, but the "commodity-sensitive businesses performed stronger than fee-based operations," the report noted. S&P currently ranks 21 U.S. energy MLPs.
"Prices were so dominant in the second half that MLP yields were correlated more with commodity prices than with interest rates, and the current environment is expected to continue into 2006," said analyst Aneesh Prabhu.
Going forward, a few trends likely will dominate the energy MLP space. S&P predicted there will be more initial public offerings of holding companies, "forays" into new business opportunities as competition for existing assets rises, and more new MLPs.
Those new business opportunities may include moves into the liquefied natural gas (LNG) segment and in Canadian oil sands, the report noted. For example, Kinder Morgan Energy Partners LP recently announced the start of a binding open season for its proposed Louisiana pipeline to provide takeaway capacity from the Cheniere Sabine Pass LNG plant now under construction. "Similarly, S&P believes that the primary strategic rationale for the $6.9 billion acquisition of Terasen Inc. by Kinder Morgan Inc. is Terasen's oil sands-related business."
Even though funding sources have improved, S&P is predicting the competition for funds will rise. Average distributions have grown significantly, especially for MLPs with publicly held holding companies. The report noted the acquisition markets "remain strong yet organic projects have become central to the growth strategy." On the organic growth side, S&P noted earlier this year Duke Energy Field Services LLC formed DCP Midstream Partners LP to house its midstream energy assets. And in the fourth quarter, Boardwalk Pipeline Partners LP transformed its legal structure to an MLP. "S&P also believes that based on the type of assets held by it, Targa Resources Inc. could contemplate an MLP structure in the future."
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