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By Madhu Dube

Devon Energy's (NYSE:DVN) stock stayed largely range bound in the last twelve months, trading around the mid-fifties mark. Recently though, Devon Energy made an interesting move in order to join the growing list of Master Limited Partnerships in the oil and gas sector. This shows the company's intent to streamline its operations in order to better focus on the growth opportunities.

Subsidiary spin off

Devon Energy's assets are held by its wholly owned subsidiary Devon Midstream Holdings. Recently, Devon Energy made a move to spin off this subsidiary by forming a new entity Devon Midstream Partners, L.P.

Two weeks back, Devon Midstream Partners filed its S-1 registration form with the SEC. This SEC filing is for an IPO of common units in Devon Midstream Partners representing limited partner interests. Devon Energy will thus become a part of the Master Limited Partnerships in the energy sector. Let's take a look at the assets that this partnership will bring to the market, and how the company will use the IPO proceeds.

Devon Midstream Partners owns a 20% stake in Devon Midstream Holdings and will acquire the remaining 80% stake over a period of time. This will help Devon Midstream Partners achieve organic growth, and also support Devon Energy to build up its production portfolio. Devon Midstream Holdings' assets include natural gas processing facilities, natural gas fractionation trains, and pipelines in Barnett Shale, Cana-Woodford shale, Arkoma-Woodford shale, and the Gulf Coast.

The proposed maximum aggregate offering price of the IPO is $400 million. Devon Midstream Partners intends to use the IPO proceeds to reimburse Devon Energy for certain capital expenditures that it incurred to contribute assets for the partnership. Any balance amount left over will be used to meet the general expenses of the partnership.

This move will help Devon Energy concentrate on its production business. Additionally, it will also help in monetizing the value assets not reflected properly in Devon Energy's stock price. The partnership also helps both the company and investors, as U.S. Partnerships don't have to pay corporate income tax and have more distributable cash available to pay the holders of units (akin to dividend in the case of shares).

Same strategy by other companies

Two other companies are aiming to join the growing list of Master Limited Partnerships in the oil and gas sector. Recently, Valero Energy's (VLO) wholly owned subsidiary, Valero Energy Partners LP, also filed a registration statement on Form S-1 with the SEC. Similar to Devon Midstream, this filing is also related to a proposed IPO of common units representing limited partner interests. The offer is expected in the first half of 2014, with the Valero Energy Partners' common units trading on the NYSE under the symbol 'VLP'. The proposed maximum aggregate offering price of the IPO is $345 million. Valero Energy Partners will use the net proceeds from this offering to pay revolving credit facility origination and commitment fees. The remainder of this offering will be used for general partnership purposes, which will include funding future acquisitions for Valero Energy to facilitate organic growth.

Back in July this year, Western Refining (NYSE:WNR) filed a registration statement with the SEC for a master limited partnership spinoff called Western Refining Logistics LP. This filing is also related to a proposed IPO of common units representing limited partner interests. Western Refining Logistics proposed listing on the NYSE under the ticker (NYSE:WNRL). On September 30, 2013, Western Refining Logistics filed a third amendment to its form S-1, showing an estimate of expenses and distribution related to the IPO. The proposed maximum aggregate offering price of the IPO is $287.5 million. $50 million of these proceeds will be used for general partnership purposes. It would distribute the balance of the net proceeds to Western Refining as a consideration of its contribution of assets to the partnership, and to reimburse the company for the capital expenditure related to these assets.

Rewarding investors with dividend

Devon Energy, Valero Energy, and Western Refining, all reward investors with dividends. We have compared the dividend yields of the three companies based on the dividend paid in the last quarter.


Current Price

Latest Quarterly Dividend

Annual Dividend Yield

Devon Energy




Valero Energy




Western Refining




From the above table, it is clear that Valero Energy and Western Refining have decent dividend yields. Devon Energy is not very high on the dividend yield front. However, investors should not consider just a stock's dividend yield, but also the long-term growth rate and future growth potential of dividends. Devon Energy raised its dividend by 10% in the second quarter of 2013. Additionally, the company has a history of providing investors with dividends for the last 20 years. The company has also raised its dividends for the last ten years, with the exception of the recession-hit years of 2009 and 2010. So, investors with a long-term horizon can consider investing in this stock with the expectation of annual dividend growth.


Devon Energy's strategic move to become a Master Limited Partnership will help it combine the tax benefits of a limited partnership with the liquidity of publicly traded securities. Additionally, Devon Midstream Partners will help Devon Energy carry out acquisitions going forward. The continuously growing income stream in the form of dividends also makes the company an attractive option for income investors.

Disclaimer: Fusion Research is a team of equity analysts. This article was written by one of our research analysts. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.

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