Upstream master limited partnerships (MLP) have suffered from the credit crisis along with all high-yield securities, but the distributions from companies in this sector are backed by “solid” oil and natural gas production and cash flows, which will only increase over time, said energy analysts in a note to clients.

MLPs emerged as a dominant deal structure for oil and gas assets in 2006 and 2007, with several exploration and production (E&P) companies entering the market to hold their mature leaseholds. However, access to capital has become more difficult to obtain than it was a year ago, and some planned MLPs on both the E&P side and within the more traditional gas storage and pipeline sectors have been canceled in recent months (see Daily GPI, Feb. 12). Spectra Energy Corp. CEO Fred Fowler said in February he expected to see more MLP consolidation this year (see Daily GPI, Feb. 7).

Friedman, Billings, Ramsey & Co. Inc. (FBR) analysts Amir Arif and Hui (Parker) Wang said they “continue to like the upstream MLP space…and would add to the space on any pullbacks created from dollar stabilization/commodity weakens.” MLPs under coverage by FBR include Atlas Pipeline Partners LP, Legacy Reserves LP and Quest Energy Partners LP.

“If the U.S. dollar is close to stabilizing as we expect, this would cause commodities to come down, which would put some pressure on the upstream MLPs (less so than E&Ps), which we would view as a buying opportunity for investors with a 12-plus month horizon,” wrote the analysts. Upstream MLPs “are trading not too far from what the underlying assets are worth in a C-Corp structure, limiting the downside to 10-15%, while still providing the upside from accretive growth.”

Atlas and its subsidiaries, which are based in Moon Township, PA, primarily provides natural gas gathering services in the Anadarko, Arkoma, Golden Trend and Permian basins in the southwestern and Midcontinent, as well as the Appalachian Basin in the eastern United States. Midland, TX-based Legacy focuses its exploration efforts in the Permian Basin and Midcontinent regions. Oklahoma City-based Quest engages in coalbed methane development in southeastern Kansas and northeastern Oklahoma.

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