Apache Corporation (APA), Eagle Rock Energy Partners, L.P. (EROC), BP plc (ADR) (BP): Commodity Prices Drive This Company’s Success

Operating pipelines and processing plants make for a rather boring business. Yet these operations provide substantial income to the MLPs that typically own these assets. However, not all midstream assets are equal, which is why investors interested in Eagle Rock Energy Partners, L.P. (NASDAQ:EROC) need to take a deeper look into the company’s bedrock midstream operations to get a better understanding of these assets.

Midstream overview
Eagle Rock’s midstream operations are concentrated in two core areas, the Panhandle and East Texas. Overall, the company has 8,134 miles of pipeline and 20 process plants:

Eagle Rock Energy Partners Investor Presentation

It’s the Panhandle assets which offer a lot of potential growth. There are currently 68 active drilling rigs in the area and more than 550 wells have been permitted over the past six months. Because of this, Eagle Rock Energy Partners, L.P. (NASDAQ:EROC) has been busy both acquiring and building its assets in the area. The biggest recent acquisition was a $227.5 million deal for BP plc (ADR)(NYSE:BP)‘s Texas Panhandle Midstream System. The system, which won’t be accretive to its distributable cash flow until 2014, added significant scale and important fixed-fee revenue. The deal was also important to BP plc (ADR)(NYSE:BP), which was able to monetize a non-core asset, but was still able to use the asset as it signed a 20-year gathering agreement with Eagle Rock.

Eagle Rock Energy Partners, L.P. (NASDAQ:EROC) was then able to leverage its extended footprint into a new fee-based gathering and processing agreement with Apache Corporation (NYSE:APA). This agreement, which is an expansion of a previous agreement, again adds important fee-based revenue from one of the most active drillers in the region. Meanwhile, Apache Corporation (NYSE:APA) is able to get its growing natural gas production gathered and processed. Eagle Rock’s ability to continue to leverage its assets to build out its platform is a key to rewarding investors over the long term.

Rocky ground
The issue when it comes to Eagle Rock Energy Partners, L.P. (NASDAQ:EROC)’s midstream business is that two-thirds of its income is subject to commodity price volatility. That means that its income, and therefore its distribution, could be hit when commodity prices sink. The good news is that thanks to those new contracts, Eagle Rock’s midstream operations are strengthening:

Eagle Rock Energy Partners Investor Presentation

However, for perspective, top midstream operator Enterprise Products Partners L.P. (NYSE:EPD) derives 81% of its gross operating margin from fee-based activities. That means that substantially more of Enterprise’s revenue and profits are rock solid which provides ample safety to its distribution. This is one reason why Enterprise has been able to raise its distribution for 36 strait quarters while Eagle Rock Energy Partners, L.P. (NASDAQ:EROC)’s payout is at risk of being cut.