As a result, some pipeline companies (which actually have limited exposure to these prices) have unduly suffered.  For example, Crosstex Energy LP (XTEX) has fallen over 70% since July – even though it has continued to grow cash distributions to investors.  While it had a rough 3rd quarter due to major Hurricanes, at a price of $8 Crosstex has a whopping 25% distribution yield!  However, I like to see a coverage ratio close to 1.3x – Crosstex is below this benchmark with a coverage of around 1x.  Still, bottom line is the same – the market is likely undervaluing some of these companies as commodity prices fall.

We’ve Got it – We Just Need to Get It

The US actually has abundant reserves in the Rocky Mountains, the Gulf of Mexico, and in Alaska. In fact, some estimates put the amount of undiscovered gas resources at over 1,040 trillion cubic feet (enough to last almost 50 years!). However, environmental concerns (reasonably so) restrict drilling access to these reserves. Because of this, the demand for “unconventional” natural gas production sources such as coalbed methane, deep water, and tight sands has increased.

The Opportunity for Pipelines

Texas & Mid-Continental tight sands and shales are estimated to represent about about 40% of reserves by 2012. With unconventional sources on the rise, more and more gas will come from these areas. The bottom line: the gas has to get where there is demand for it – and there is significant demand in the Northeast United States and other areas. This is where pipelines benefit, as demand for long haul transportation will increase which will, in turn, increase revenue via tariffs, etc. Add into the mix the fact that pipelines have a reduced exposure to commodity prices due to their tariff based revenue structure, and you have yourself quite a compelling argument.