Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

1 New Energy MLP in the Works: Devon Energy Corporation (DVN)

Page 1 of 2

As it turns out, Fools, energy companies are just like teenagers: They want what all their friends have. The item that all the kids are clamoring for these days is a midstream master limited partnership. Earlier this week, Devon Energy Corporation (NYSE:DVN) announced that it could no longer ignore the midstream temptation and is considering creating an MLP to better reflect the value of its assets. Today we’ll take a look at what those assets are, and why it might make sense to spin off an MLP. But first, let’s remind ourselves what the midstream MLP space looks like.

The in crowd
Midstream master limited partnerships typically consist of a network of pipelines, and some combination of natural gas processing centers, NGL fractionation facilities, terminals, and storage facilities. The size of these partnerships ranges from very large — industry leader Kinder Morgan Inc (NYSE:KMI) is the third-largest energy company in the U.S. — to relatively small.

Devon Energy Corp (NYSE:DVN)MLPs have a tax-advantaged structure, which means they don’t pay taxes but must pass almost all of their income on to its partners, who take up the tax burden themselves. In most cases, there is a general partner that manages operations at the MLP and unitholders, who are considered limited partners.

There are multiple ways to structure an MLP, however. For example, Enterprise Products Partners L.P. (NYSE:EPD) doesn’t have an external GP, and therefore doesn’t pay a general partner any incentive distribution rights, which lowers Enterprise’s cost of capital and allows it to retain more cash for expansion. Kinder Morgan is the GP of Kinder Morgan Energy Partners LP (NYSE:KMP) and gives investors the opportunity to profit from the midstream industry without the headache of additional tax paperwork.

Because MLPs have to pay out so much cash, the yields for these MLPs tend to be high. Enterprise yields 4.7%, Kinder Morgan Energy Partners yields 5.9% right now, and Energy Transfer Partners LP (NYSE:ETP) yields 7.6%.

New kids on the block
Increasingly, oil and gas companies are spinning off their midstream assets to take advantage of the MLP structure. At the end of last year, Marathon Petroleum Corp (NYSE:MPC) spun off MPLX LP (NYSE:MPLX). Exploration and Production company QEP Resources Inc (NYSE:QEP) has its midstream IPO slated for the second quarter, and Phillips 66 (NYSE:PSX) plans to IPO its midstream MLP during the second half of this year.

During the fourth-quarter conference call for Plains All American Pipeline, L.P. (NYSE:PAA), an analyst asked CEO Greg Armstrong whether we’d see some contraction from all of this MLP action. Armstrong’s response gives us a clue about why so many companies are considering Devon’s move right now:

My understanding is that there [are] probably 10 to 15 more in the hopper. It would surprise me if the answer is that number just gradually goes up and doesn’t contract at all with respect to some consolidation. … And there’s fundamental industrial logic as to why some of that consolidation should happen. It’s easier to do when the markets aren’t as robust as they are right now, because, quite candidly, people, you know capital is abundant and it’s relatively cheap. And people would rather do their own MLP than they would consolidate.

Now that we understand the motivation behind Devon’s plan, let’s take look at the details.

Devon’s plan
Devon has considerable midstream assets, including 6,500 miles of pipeline, 300 compressor units, and eight gas processing plants spread across its footprint in the U.S. and Canada. The company’s Bridgeport plant has an NGL processing capacity of 50,000 barrels per day, making it one of the largest in the United States.

Page 1 of 2

Biotech Stock Alert - 20% Guaranteed Return in One Year

Hedge Funds and Insiders Are Piling Into

One of 2015's best hedge funds and two insiders snapped up shares of this medical device stock recently. We believe its transformative and disruptive device will storm the $3+ billion market and help it achieve 500%-1000% gains in 3 years.

Get your FREE REPORT and the details of our 20% return guarantee today.

Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.
Loading Comments...

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 102% in 3 years!! Wondering How?

Download a complete edition of our newsletter for free!