Energy
Energy Watch Part IV: Pipelines (DPM, BGH, APL, AHD, EPD, KMP)
Published:
Last Updated:
Just looking at the drop in price for common units of pipeline master limited partnerships could lead one to believe the midstream business is going to hell in a handbasket. DPC Midstream Partners (NYSE:DPM) is down 48% from its 52-week high, Buckeye GP Holdings (NYSE:BGH) is down 44%, Atlas Pipeline Partners (NYSE:APL) is down 32%, and Atlas Pipeline Holdings (NYSE:AHD) is down 30%. Even the two largest companies are lower — Enterprise Products Partners is down 12% and Kinder Morgan (NYSE:KMP) is off 6%.
This simple calculation, though, hides the financial power of theseoutfits. Let’s look at the Atlas companies as an example. AtlasPipeline reported a net loss of $279 million for the second quarter of2008. But, adjust the company’s revenues to eliminate an unrealizedloss on derivatives, and Atlas Pipeline earned a profit of nearly $30million on revenues of $457 million. The company distributed$0.96/common unit, an increase of more than 10% from the same period in2007.
That’s what investors look for in these limited partnerships–cashflow. As long as the pipeline companies throw off nice gobs of cash,everybody’s happy. However, in order to generate ever-increasingamounts of cash, the pipeline companies need to get bigger.Transportation rates are set by federal and state governments, and acompany’s profit is fixed by regulation. Pipeline companies use thisnice, steady, guaranteed income to grow.
In the last few years, low interest rates and easy credit have spurredinvestment in new and expansion pipeline systems. Now, however, tightercredit and higher interest rates could threaten some of the more highlyleveraged companies. Atlas Pipelines, for example, holds total debt ofnearly $1.3 billion, nearly equal to it’s market cap of $1.56 billion.The company’s current ratio is 0.76, not a confidence-building number.
There will come a point when financing becomes too costly, for pipelinecompanies like Atlas and others, and that will lead inevitably toconsolidation. The stronger companies, like Enterprise and KinderMorgan, could go on a shopping trip. Given the expected increasingstress on financial institutions in the next 12-18 months, pipelinecompanies with weak balance sheets could become an endangered species.
Paul Ausick
August 19, 2008
Credit card companies are at war, handing out free rewards and benefits to win the best customers. A good cash back card can be worth thousands of dollars a year in free money, not to mention other perks like travel, insurance, and access to fancy lounges. See our top picks for the best credit cards today. You won’t want to miss some of these offers.
Flywheel Publishing has partnered with CardRatings for our coverage of credit card products. Flywheel Publishing and CardRatings may receive a commission from card issuers.
Thank you for reading! Have some feedback for us?
Contact the 24/7 Wall St. editorial team.