Oil Companies That Haven't (Yet) Capitalized on MLPs - Barron's

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The New Math of Oil and Gas by Dimitra Defotis

Summary: A Master Limited Partnership [MLP] combines the tax benefits of a limited partnership (corporate tax avoidance) with the liquidity of a publicly-traded company. They are limited by the U.S. government to natural resource companies and some real estate enterprises. MLPs pay investors through mandatory dividends called quarterly required distributions [QRD]; failing to pay QRDs can cause a company to go into default. Over the past five years, the Alerian MLP index is up 100% vs. just 40% for the DJIA (see chart). In the past year, MLPs have yielded 6% while shares are up another 30%. Most MLPs are pipeline companies, but E&P (exploration and production) companies are starting to get into the act. Barron's likes smaller E&Ps that could benefit handsomely by spinning off some of their assets into MLPs:

• Forest Oil Corp. (FST) -- its daily energy production carries a $60,000/barrel value, vs. an average $200,000/barrel for MLP entities. Shares could rise 20% if it sells West Texas assets into an MLP, and analysts have pegged it for 15% 2008 earnings growth before any partnerships.
• Pioneer Natural Resources Company (PXD) -- it may spin up to $500M of its $6.2B value into MLPs in the coming year. A Friedman, Billings, Ramsey analyst says up to 90% of its assets are ideal MLP candidates. They see Pioneer's earnings up 18% in 2008, and 40% share appreciation with the potential partnerships.
• Kinder Morgan Energy Partners L.P. (KMP) -- already existing MLP with a $12B market cap and 6% yield. Its fee-based service revenues make it more reliable should oil prices fall.

Investors may also consider broad MLP funds like Tortoise Energy Infrastructure Corp. (TYG), which yields 5%, and outpaced the Alerian index over the past year.

Related Links: Wikipedia on Master Limited Partnerships • Pioneer Drilling: At Leading Edge of Capital Management • Goodbye Kinder Morgan • Barron's: Oil Guru Art Smith's Picks for 2007

Alerian MLP Index vs. Dow Jones Industrial Average 5-yr

Comments

[Mmarrkk:]

The great thing about MLP's is that they avoid the double taxation that our great and illustrious socialists in government love. Instead of having a tax on the company and then a tax on the shareholders there is only one tax paid by the unit holders. I wish we could get enough fiscal conservatives in office to where we could get this treatment for all companies. But even the small reduction in dividend taxes and capital gains taxes are under attack by the Demoncratic Socialists party and the moderates. How many of you are ready for the biggest tax increase in US history when the Demon's let the tax rate reductions expire in 2010? Get ready for it unless someone does something about it.

2007 Jun 16 04:09 PM