• 2 hours PDVSA Booted From Caribbean Terminal Over Unpaid Bills
  • 4 hours Russia Warns Ukraine Against Recovering Oil Off The Coast Of Crimea
  • 6 hours Syrian Rebels Relinquish Control Of Major Gas Field
  • 7 hours Schlumberger Warns Of Moderating Investment In North America
  • 8 hours Oil Prices Set For Weekly Loss As Profit Taking Trumps Mideast Tensions
  • 9 hours Energy Regulators Look To Guard Grid From Cyberattacks
  • 11 hours Mexico Says OPEC Has Not Approached It For Deal Extension
  • 12 hours New Video Game Targets Oil Infrastructure
  • 14 hours Shell Restarts Bonny Light Exports
  • 15 hours Russia’s Rosneft To Take Majority In Kurdish Oil Pipeline
  • 21 hours Iraq Struggles To Replace Damaged Kirkuk Equipment As Output Falls
  • 1 day British Utility Companies Brace For Major Reforms
  • 1 day Montenegro A ‘Sweet Spot’ Of Untapped Oil, Gas In The Adriatic
  • 1 day Rosneft CEO: Rising U.S. Shale A Downside Risk To Oil Prices
  • 1 day Brazil Could Invite More Bids For Unsold Pre-Salt Oil Blocks
  • 1 day OPEC/Non-OPEC Seek Consensus On Deal Before Nov Summit
  • 1 day London Stock Exchange Boss Defends Push To Win Aramco IPO
  • 2 days Rosneft Signs $400M Deal With Kurdistan
  • 2 days Kinder Morgan Warns About Trans Mountain Delays
  • 2 days India, China, U.S., Complain Of Venezuelan Crude Oil Quality Issues
  • 2 days Kurdish Kirkuk-Ceyhan Crude Oil Flows Plunge To 225,000 Bpd
  • 2 days Russia, Saudis Team Up To Boost Fracking Tech
  • 3 days Conflicting News Spurs Doubt On Aramco IPO
  • 3 days Exxon Starts Production At New Refinery In Texas
  • 3 days Iraq Asks BP To Redevelop Kirkuk Oil Fields
  • 3 days Oil Prices Rise After U.S. API Reports Strong Crude Inventory Draw
  • 3 days Oil Gains Spur Growth In Canada’s Oil Cities
  • 3 days China To Take 5% Of Rosneft’s Output In New Deal
  • 3 days UAE Oil Giant Seeks Partnership For Possible IPO
  • 3 days Planting Trees Could Cut Emissions As Much As Quitting Oil
  • 3 days VW Fails To Secure Critical Commodity For EVs
  • 4 days Enbridge Pipeline Expansion Finally Approved
  • 4 days Iraqi Forces Seize Control Of North Oil Co Fields In Kirkuk
  • 4 days OPEC Oil Deal Compliance Falls To 86%
  • 4 days U.S. Oil Production To Increase in November As Rig Count Falls
  • 4 days Gazprom Neft Unhappy With OPEC-Russia Production Cut Deal
  • 4 days Disputed Venezuelan Vote Could Lead To More Sanctions, Clashes
  • 4 days EU Urges U.S. Congress To Protect Iran Nuclear Deal
  • 5 days Oil Rig Explosion In Louisiana Leaves 7 Injured, 1 Still Missing
  • 5 days Aramco Says No Plans To Shelve IPO
Alt Text

China Takes Aim At The Petrodollar

In a potentially disrupting move…

Alt Text

The Geopolitical Consequences Of U.S. Oil Exports

The United States has ramped…

Alt Text

Corbyn Seeks To Renationalize Britain’s Utilities

Jeremy Corbyn wants to renationalize…

Keith Schaefer

Keith Schaefer

Keith is the publisher of the Oil & Gas Investments Bulletin – an investment newsletter that looks at opportunities within the Canadian small cap oil…

More Info

MLPs - The Breakout Yield Play of 2012?

MLPs - The Breakout Yield Play of 2012?

You may have heard about MLPs, or Master Limited Partnerships.

They trade like stocks on U.S. stock exchanges, and carry a significant tax advantage (more on that below).

And with today's investing trend towards yield, they could have a big impact on the U.S. junior oil and gas market.

According to Raymond James energy analyst Kevin Smith, the stocks of Upstream Master Limited Partnerships are worth almost two times their regular corporate counterparts (In industry-speak, these are called “C-corps.”)  And that big valuation gap could kick-start Mergers and Acquisitions activity in the junior US energy space.

“We are not saying that you should expect a rash of Upstream MLP acquisitions of C-corps tomorrow, but we are saying we think that it is coming over the next few years,” he writes.

Now here's how the tax advantage works: MLPs don’t pay corporate tax; investors are treated as owners of the company, which means the investors actually get the corporate tax breaks as well. This lowers the income tax paid on the earnings.

Then the MLP pays out most of its excess cash flow to shareholders in the form of a distribution - which can end up creating a big cash yield.  (That’s why I think the U.S. will see a LARGE increase in MLPs over the coming few years as interest rates stay low. Investors love seeing this money dropped into their account, and price the stocks based on the yield they give.)

And in this tough junior oil and gas market, yield stocks are holding up the best. The reason is that MLP investors are looking at yield for its primary valuation method. Regular corporations, or “C-corps” as industry jargon goes, investors are looking at earnings and cash flow valuation methods — and those are likely going to decline this year and next due to the weakness in the natural gas pricing.

And overall market volatility is reducing valuations on the junior oils. That’s what’s making Upstream MLPs valuations (stock prices) much more sticky vs. the “regular” C-corps.

They’re holding up so well in fact, that Smith says it’s only a matter of time before the MLPs use their much better valuation — stock price — as a currency to buy regular junior oil and gas companies.

“While no (upstream) MLP has bought a producing C-Corp yet, I think it will, I think it’s inevitable,” Smith told me in a phone interview from Houston.

Upstream MLPs have bought many producing oil and gas assets, but they have yet to swallow an entire company.

strong>Editor's Note: Keith's trading service focuses exclusively on fast-growing international junior oil & gas companies – as well as companies in the booming energy services sector. If you'd like to learn more about one of Keith's favorite trades right now, follow this link to get the full report.

“At some point, $100 million (asset) deals won’t quench your thirst… as MLPs grow, they will need to do bigger and bigger deals,” Smith says.

There is a tax issue when MLPs buy C-Corps, but the valuation difference between the two groups now make up for most of that.

Upstream MLPs

LINN Energy (LINE-NASD) is the most well known of the new upstream MLPs that are going public.  In five years it has grown from a market cap of just over $500 million to now $7 billion, and is a Top 20 oil producer in the US.

So, as an investor in junior oil and gas companies, where should I be looking at take-out candidates?

While the difference in valuation between MLPs and natural gas-weighted companies are the greatest, Smith points to the oil producers.

“I would bet (MLPs buy) oil-weighted C-Corps that are under-loved.  The most active market is the Permian Basin. We have seen quite a bit of activity in this area over the last 24 months.  And some California plays will get some looks, with low decline rates.”

In his October 31 report, Smith said that public C-corps are trading at a discount to what many private E&P property packages can be purchased for today (5-6x EBITDA for sub $500 million transactions).

This game that Smith is talking about completely changed the way junior oil and gas companies operated in Canada.  In Canada, MLPs are called “Income Trusts,” and while there might be some subtle differences, they are basically the same tax-advantaged public company that allows big chunks of their cash flow to pass through to unitholders.

First these trusts started buying intermediate producers, those producing over 10,000 barrels a day.  When they were gone, and the number of trusts kept increasing, they went after juniors producing only 1,000 barrels a day.

The number of junior companies soared as management teams now had an easy exit plan — build up production with a decent land base and get bought out fast by a trust.  They didn’t need to plan for the long term and, generally speaking, didn’t need to be as disciplined in how they spent their capital.

With all the shale plays being discovered in the US, could this be the beginning of the same type of mania that overtook Canada?

“We’re not quite to point where we were in Canada in 2005,” says MLP Profits editor Elliot Gue. “We are seeing a number of MLPs getting listed.  Some are small and hoping to get bought out.”

Gue says he is already seeing a lot of MLPs buying out private oil and gas companies.  “In the Permian Basin in Texas there are over 1,500 operators. Most only own a small amount of land. Those guys are selling out to MLPs.”

So there is definitely a trend here, similar to what Canada went through starting 15 years ago?
“We’re entering that growth phase now,” says Gue.

Smith says the new upstream MLPs could be a long trend: “With current interest rate trends, it doesn’t look like that valuation gap will close anytime soon.”

By. Keith Schaefer

Back to homepage

Leave a comment

Leave a comment

Oilprice - The No. 1 Source for Oil & Energy News