Upstream MLPs are more likely than midstream MLPs to be abandoned by their upstream parent should they face financial difficulty, according to Standard & Poor's energy-credit analyst David Lundberg.

Why? Strategic importance to the parent, he said recently at an S&P energy conference in Houston. "Do we believe the C-Corp will have strong incentive to support their MLPs in a time of distress?" For MLPs with upstream assets, the answer is likely no, he said.

"If the E&P MLP defaults-maybe because of some unforeseen geological risk or perhaps it makes a leveraging acquisition right before a crisis falls-we think in many cases the (parent) would not be highly incentivized to come in and provide support, and in many cases could continue operations 'business as usual.'"

S&P doesn't rate MLPs separate from the parent, but if it did, the ratings analyst would have to determine whether to use a consolidated or unconsolidated approach when rating the partially owned subsidiaries. Lundberg said, at present, he would use an unconsolidated approach for MLPs with upstream assets and the consolidated approach for upstream MLPs with midstream assets.

The midstream assets support the E&P company's upstream operations. "We think the company would be incentivized to provide some support if necessary to ensure operations continue business as usual."

An exception exists, however, if an upstream MLP's cash flow were to become so large as to be a significant percentage of the C-Corp's overall cash flow, in which case he would use a consolidated rating approach.

Lundberg predicts E&P corporations will become the "exploration factory" and the MLP will be where all the proved developed producing assets are parked. "In a case like this, the stand-alone rating on the MLP would be better than that of the parent company. And that would raise a whole host of other criteria issues."

If analysts rated MLPs separate from the parent, it would look a lot like the approach used to rate a traditional E&P company-with a few special considerations, he said.

"We certainly expect upstream MLPs to become more of a prominent force, assuming the valuation discrepancies remain so wide between how mature assets are being valued at C-Corps versus how they are being valued at MLPs. There's no reason to think this trend has stopped."

When looking at positive ratings considerations, Lundberg said, upstream MLPs first carry less geological risk than their E&P partner.

"You are talking about for the most part long-lived, low-decline-curve assets. Usually the business model does not have much exploration risk. That has been key to their success. These are things that we view positively from a credit perspective."

MLPs are also less capital intensive relative to C-Corps, he said, as most hold upward of 80% to 85% of proved developed reserves. "That might compare to 60% to 65% for an E&P high-yield C-Corp company."

Another positive: current MLPs have low financial leverage, although he cautioned that could change. And too, they hedge more aggressively than is typical in an E&P company, which may hedge 50% to 60% over a couple of years. "A lot of upstream MLPs are hedging out north of 80%, not for just two years, but for three, four, five years," he said.

"These are all positive factors. It could speak to generally a higher level of success for upstream MLPs this go-round relative to 25 years ago," when a lack of hedging opportunities and falling commodity prices sunk the earlier upstream MLPs, he said.