Unlike most energy-related MLPs, Eagle Rock Energy Partners LP (EROC) operates in both the upstream and midstream segments of the energy business. Roughly 60 percent of the partnership's total operating income comes from oil, gas and NGL production, while its gathering pipelines and processing facilities account for the remaining 40 percent.

Eagle Rock Energy Partners is a far stronger company than it was two years ago. The MLP went public in late 2006, and the bull market for energy commodities enabled the firm to boost its quarterly payout steadily throughout 2007. But two obstacles tripped up the MLP in 2008: significant exposure to oil and gas prices, and a heavy reliance on short-term lines of credit with banks.

By their very nature, upstream operations have some exposure to commodity prices. Some partnerships such as Linn Energy LLC (LINE) limit their exposure to fluctuations in oil, gas and NGL prices by hedging future production. Eagle Rock Energy Partners doesn't fully hedge its expected output, a strategic decision that decimated the firm's cash flow when oil and gas prices collapsed in later 2008 and early 2009.

Eagle Rock Energy Partners' midstream business also has some built-in exposure to commodity prices, as a slowdown in drilling activity reduces the number of wells hooked up to the MLP's gathering system and weighs on throughput. In 2008-09, the firm's processing margins also suffered because of the collapse in energy prices.

The MLP's debt structure compounded these problems. At the beginning of 2010, Eagle Rock Energy Partners' outstanding credit facility accounted for 60 percent of the firm's $1.2 billion enterprise value. This outsized debt amounted to more than 4.5 times the MLP's earnings before interest, taxation, depreciation and amortization (EBITDA).

Credit facilities are subject to periodic evaluations and potential redetermination. At the height of the financial crisis, Eagle Rock Energy Partners faced an unwelcome liquidity crisis, as the MLP's lenders slashed its credit facility.

To conserve cash, the firm in early 2009 cut its quarterly to $0.021136 per unit from almost $0.35 per unit. This news sent the stock plummeting to a low of $2.24 per unit from a high of about $23 per unit.

In 2010 Eagle Rock Energy Partners completed a series of transactions that drastically altered the MLP's risk profile. The firm sold off its volatile minerals business for $174.5 million, raised another $53.9 million by issuing common units and warrants, and eliminated its incentive distribution rights - fees an MLP pays to its general partner for managing daily operations.

Today, Eagle Rock Energy Partners' credit facility is only 24 percent of the firm's enterprise value. The partnership's leverage ratio has declined to less than 3.5 times EBITDA.

As market conditions improved, Eagle Rock Energy Partners has returned to growth mode, expanding its midstream and upstream businesses via acquisitions and organic projects. The MLP now disburses a quarterly payout of $0.22 per unit, and management aims to growth the distribution to $0.25 per unit by early 2012.

Although Eagle Rock Energy Partners has reduced its business and financial risks, the stock's valuation continues to suffer from the stigma of the MLP's troubles in 2008-09.

Eagle Rock Energy Partners' upstream segment comprises 591 operated oil and natural gas wells and the equivalent of 371 billion cubic feet of natural gas reserves. Gas accounts for about 63 percent of the MLP's total reserves, while oil accounts for 19 percent of this resource base and NGLs represent 18 percent. Daily production in 2011 averaged 85 million cubic feet of natural gas equivalent.

As explained in Jim Fink's article, Natural Gas Prices Will Rise in 2015 on LNG Exports, U.S. natural gas prices will likely remain depressed for at least the next few years, thanks to reduced demand during the unseasonably warm 2011-12 winter and rising production from the nation's prolific shale plays. Based on my outlook for natural gas prices, Eagle Rock Energy Partners' significant exposure to this out-of-favor commodity is a red flag.

Fortunately, the MLP has hedged 81 percent of its estimated natural gas and ethane output at an average price of $5.82 per million British thermal units-more than double the current price of natural gas. The firm has hedged about 70 percent of the firm's estimated gas and ethane production in 2013, 43 percent in 2014 and 24 percent in 2015. Eagle Rock Energy Partners has also hedged about 87 percent of its expected oil and NGL production in 2012.

More important, Eagle Rock Energy Partners has a significant inventory of drilling prospects in the Cana Shale and the Golden Trend in Oklahoma, two liquids-rich plays that offer superior wellhead economics.

Continental Resources (CLR), Devon Energy Corp (DVN) and other independent exploration and production firms are spearheading development in the Cana

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