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Marcellus and Utica Squeeze Harder on Boardwalk

The abundance of market-area gas that has crushed basis differentials and flattened seasonal spreads has bedeviled Boardwalk Pipeline Partners LP for several quarters now. But on Monday investors got pinched hard when the partnership cut its distribution by 81% and the price of its units plunged 46%.

Boardwalk cut its distribution to free up cash for debt reduction and to fund a slate of projects that are hoped to have the ability to turn the Houston-based partnership’s revenue outlook around. During the fourth quarter, net income fell 78% from a year ago. Net income for 2013 was down 17% from the prior year.

The distribution cut had analysts at Tudor, Pickering, Holt & Co. writing that "even bears will be shocked by the draconian" reduction, and speculate that general partner Loews Corp. could be considering a sale. Credit Suisse Monday downgraded Boardwalk to "underperform" from "neutral."

Investors clamored, driving partnership units down 46% to close at $13.03 Monday after touching a new 52-week low of $12.82 earlier in the day. Volume was more than 62 times the norm.

The shale gale has been a cruel wind for Boardwalk. Pipeline capacity recontracting remains a challenge (see Daily GPI, Oct. 28, 2013); minimal price volatility has eroded the value of storage, and hopes are dimming for its big shale-focused project -- Bluegrass Pipeline -- which has yet to nail down customers.

Compared with the fourth quarter of 2012, the partnership's results were impacted by lower transportation revenues of $13.3 million primarily due to contract expirations and contract renewals, the company said. Parking and lending and storage revenues were lower by $3.6 million due to decreased parking opportunities from a reduction in the level of, and volatility in, natural gas price spreads between time periods. Operating expenses were negatively impacted by a goodwill impairment charge of $51.5 million.

Growth in gas production from the Marcellus and Utica shales is seen by nearly everyone as a good thing. However, the shifting matrix of U.S. gas supply basins has devalued Boardwalk's existing pipes greatly. During an earnings conference call Monday. CEO Stan Horton talked of growing Northeast production -- which he said could exceed 25 Bcf/d by 2020 -- as something of a curse rather than a blessing.

"Unfortunately, these pipes were put in the ground a long time ago, and you can't dig them up and just repurpose them," Horton said.

During its previous earnings report, the company said recontracting headwinds would result in a $40 million annualized hit to revenues this year. Distributable cash flow (DCF) is forecast to be about $400 million this year, down from about $560 million last year. This year, about $75 million worth of transportation contracts are coming up for renewal.

“Some of those contracts, where we’re seeing the [new] rates, we’re just not going to enter into long-term contracts at those rates,” said CFO Jamie Buskill. “We’re going to be selling a good portion of that capacity in the short-term or interruptible markets for now, and that’s what’s driving the $40 million [annualized revenue reduction].”

Bluegrass, a project Boardwalk has cooked up with Williams to move Northeast natural gas liquids (NGL) down to the Gulf Coast, in part using repurposed pipeline already in the ground (see Shale Daily,March 7, 2013), has struggled to secure customers. On Monday analysts were curious about its prospects. Horton's response was that talks are continuing with interested prospective customers.

On the bright side, the partnership's Southeast Market Expansion project is proceeding as planned, Horton said, and projects to connect new gas-fired power generation load to the Boardwalk network are under way. Boardwalk recently concluded an open season for its Ohio to Louisiana Access project on Texas Interstate Gas, which would entail the reversal of flow on some existing pipeline.

The decrease in the value of storage spreads has accelerated of late. Fewer gas marketers are contracting for storage capacity as an arbitrage play. The future of the value of storage depends greatly on the weather, of course, and Horton said the company isn't parking gas right now but rather lending it out of storage. "So that's been kind of a complete reversal of what we've seen in the last couple years," he said.

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