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Why BWP’s Commodity Price Exposure Is Key for Investors

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Apr. 13 2016, Updated 8:06 a.m. ET

BWP’s commodity price exposure

Many analysts believe that midstream companies including the larger ones like Williams Partners (WPZ) and Energy Transfer Partners (ETP) and the smaller ones like Boardwalk Pipeline Partners (BWP) and Crestwood Equity Partners (CEQP) do not have much direct commodity price exposure.

The correlation between BWP’s stock price and crude oil (USO) resulted in a correlation coefficient of 0.44 over the past one year while natural gas (UNG) and BWP have a correlation coefficient of 0.22 for the same period. The correlation between BWP and natural gas has decreased to 0.18x during the last three months. A correlation coefficient close to one indicates a strong relationship between two variables. BWP’s low correlation with natural gas reflects its fee-based revenue from firm contracts. We’ll discuss BWP’s revenue mix in part two of this series.

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BWP’s commodity exposure

Midstream companies are indirectly exposed to commodity prices through production levels. If the crude oil and natural gas prices continue to stay low, upstream producers might cut their production or even go bankrupt, which might result in lower throughput volumes, lower earnings, and higher counterparty risk.

On counterparty risk, Jamie Buskill, Boardwalk Pipeline’s CFO, highlighted, “We earn approximately $1 billion of our revenues from our top 50 customers. Of our top 50 customers rated by the rating agencies, all of them or their parents are currently rated investment grade by at least one of the rating agencies with the exception of four customers. The four customers that do not currently have an investment grade rating represent approximately 5% of the $1 billion in revenues. Related to our $1.6 billion of growth projects under development, there are three customers below investment grade, excluding the one customer we discussed last quarter that did not post the required credit support.”

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