Master Limited Partnerships - specifically in an O&G context. I know lots of company’s are spinning off assets into these (ie. Devon Energy), and there’s tax benefits and all that. But what’s actually happening here? Using Devon as an example, are they just taking some of their non-core reserves and selling them to this MLP, who can then lease them out to whoever? As a way of getting Devon to focus on maybe a particular formation or something but still make money off the peripheral assets? I’m just having a hard time figuring out why they wouldn’t either (A) sell them outright, or (B) even bother spinning them off to begin with.
Without going into too much detail because these can be incredibly complex transactions. In answer to A) selling them would likely generate a capital gain which in the US is taxed at ordinary income for companies. So assuming you don’t have historic losses to offset it, you’ll have to pay tax. Nobody wants that. they’re not selling these assets into the MLP, they are contributing them and receiving ownership of the MLP in return. A portion of these shares are then held by the company and most are often spun off to owners of the original company.
The big advantage to MLPs is that they don’t pay corporate tax, so at 35% federal rate, that’s a big deal and can pass that cash along to the unitholders. Also, much of the distributions they give off are classified as “return of capital” not income. ROC reduces your basis, so its more of a tax deferral mechanism.
As to who the MLP will serve is pretty meaningless. The customers before and after MLP are likely to be the same. These companies all share infrastructure and bill each other any fees that apply.
Thanks, that clears things up pretty good. So it’s basically just a legal restructuring for tax purposes.
Unless it gets some change from the govt, yes. Lots of rumors for a while (could it have something like in canada with the trust?).
The IRS began to scrutinize REIT conversions more this year because some companies decided to take a very liberal interpretation of the definition, say Iron Mountain.
MLPs may face the same scrutiny given the recent explosion of M&A and IPO activity. They’re also trading at much much higher multiples compared to the companies they’re spun out of which is part of the recent push to IPO a new MLP. The majors are trading around 9-10x TTM PEs where as MLPs are trading all over the board… +20 in most cases.
Pioneer broke from the pack this summer and bought back an MLP it spun out 4 yrs ago. They used their insanely overpriced stock as currency, issued I think 3 million shares, to buy it back. But that was an upstream MLP, not a midstream. Midstream ones are true MLPs as people commonly think of (Kinder Morgan, Enbridge, etc). TransCanada could be one but I think they’re still a regular company.
My take on MLP’s–they’re becoming securitized. Once you securitize an asset, it will behave more and more like a regular ol’ security, and you’ll lose those diversification benefits.
And if you do your own taxes, your tax prep will become significantly more difficult. Or you could look for a CPA how knows how to handle those K-1’s, but that will cost you.