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.