Some of America's independent shale oil and gas drillers might benefit from lower transportation rates on large interstate pipelines after the Federal Energy Regulatory Commission stripped away one of the tax mechanisms that had boosted the pretax income pipeline master limited partnerships can pass through to unit holders, some analysts said.
The ruling could benefit exploration and production companies along with other pipeline customers if it results in lower costs to move their gas to market, analysts at energy investment bank Tudor Pickering Holt & Co. said. "Because the decision applies only to cost-of-service contracts, operators such as [Antero Resources Corp.], who has 1.5 Bcf/d of upcoming cost-of-service capacity, are set to benefit on the margin while operators with negotiated rate contracts will see no change."
Otherwise, drillers and their affiliated midstream MLPs will not be much affected by the FERC decision to eliminate a pipeline MLP's inclusion of income taxes in cost-of-service calculations, the analysts said March 16.
"Most transmission assets owned by our coverage universe have negotiated rate contracts, insulating them from negative headwinds," Tudor Pickering said. "Specially, we point to [Anadarko Petroleum Corp.], [Antero], [CNX Resources Corp.], [Devon Energy Corp.], [Noble Energy Inc.], and [Oasis Petroleum Inc.] as entities with interests in publicly traded MLPs that have zero/minimal exposure to FERC regulated assets. All-in, no change to our view of the space."
Nonetheless, investors dumped their MLP units in the wake of the March 15 decision, sending the benchmark Alerian MLP Index down 4.6% that day. Much of that antipathy was misplaced, analysts said.
"The selloff impacted the whole midstream sector, though C-corps and MLPs that own fewer interstate pipelines should be less impacted," CreditSights analyst Charles Johnston said. "FERC regulates interstate pipelines, so assets like gathering, processing, fractionation and export terminals shouldn't be impacted the by FERC ruling."
"Names without interstate pipeline exposure and limited FERC regulated tariffs should not be materially impacted," B. Riley FBR Inc. analyst Benjamin Salisbury said.
The gathering and processing operations of most shale midstream MLPs with producer sponsors — EQT Midstream Partners LP, CNX Midstream Partners LP, Antero Midstream Partners LP and Anadarko's Western Gas Partners LP, for example — are not under FERC jurisdiction because they do not transport gas interstate. Commonly, they gather gas from producers' wells, process it to remove gas liquids if required, and deliver it to giant interstate pipelines such as Transcontinental Gas Pipe Line Co. LLC.
EQT Midstream said March 16 that it did not expect a material impact from the ruling. More than half of its revenue comes from gathering, and 89% of its service is provided under negotiated rates. The partnership's Mountain Valley Pipeline LLC pipeline project, which will ship shale gas from West Virginia to Virginia, has all of its 2 Bcf/d capacity booked under negotiated rates. These pipeline service rates are hammered out in agreements between a pipeline and a shipper under FERC supervision.
Williams Cos. Inc.'s Williams Partners LP, which operates the Transco system and which will be subject to the new FERC tax ruling, was not worried about the change. "Given the relatively small percentage of our revenues that are affected by this ruling, we don't expect this ruling to impact our previous guidance for [Williams] and [Williams Partners] cash dividends and distributions and related growth rates," CEO Alan Armstrong said in a March 16 statement. "Additionally, as we've often discussed, we are well-positioned to execute on corporate structure changes, which would restore the income tax allowance to the pipeline's cost of service rates."
