We’ve noted before that pipeline master limited partnerships must grow if they are to attract investors. For nearly all MLPs, that means access to credit at low interest rates. Does that sound like today’s credit market?
Rigzone.com carried a Dow Jones Newswires story that tight credidt is making it difficult to raise money for new pipeline construction or acquisitions. Even though natural gas prices are low, volumes flowing through the pipelines remain high. That means that revenues to the pipeline companies remains high or even increases because MLP revenue is not tied to the commodity price.
Some MLPs, including El Paso Pipeline Partners, L.P. (NYSE:EPB), Energy Products Partners, LP (NYSE:EPD), and Kinder Morgan Energy Partners LP, (NYSE:KMP) could see the current credit crunch as an opportunity to acquire smaller, less well-heeled competitors. Credit is available to these big players, albeit at significantly higher rates than earlier this year. To some degree higher interest rates don’t matter much in the short term because when the whole economy starts to grow again, these MLPs will simply refinance at lower rates. Remember those guaranteed profits.
Projections for gas drilling rigs in the continental US in 2009 predict a drop of more than 200 rigs in order to restore some balance to the natural gas market. That decline is most likely to come from the western US, where gas already sells at a discount. The shales of northern Appalachia, on the other hand, should continue to produce more gas for northeast markets.
While pipeline expansion may be curtailed by expensive credit, now is not a bad time for that to happen. Natural gas in the US is in oversupply, so taking a rest from pipeline building shouldn’t cause too much pain. Unless, like a pipeline MLP, you need to grow in order to survive. The survivors will be the MLPs that can afford to pay for credit and have the cash to make acquisitions.