Devon is late to the MLP game. Companies such as Chesapeake Energy Corporation (NYSE:CHK) having already recognized and implemented the potential of such a strategy. Still, Chesapeake Energy Corporation (NYSE:CHK)’s experience alone demonstrates how this move will create a significant opportunity for Devon.
Chesapeake is now something of a turnaround story, on the back of shifting production from natural gas to oil and deleveraging its balance sheet. This transition in strategy was in part funded by Chesapeake selling midstream assets to its 30%-owned MLP Chesapeake Midstream Partners. This change in strategy saw Chesapeake report a massive 56% year-over-year increase in oil production for the first quarter of 2013.
Clearly, Devon’s announced strategy of creating a midstream MLP will raise capital for much-needed investment in developing oil-producing assets. This will then allow the company to benefit from the higher margins enjoyed by oil producers as it transitions more of its production away from natural gas. In another advantage, the move will monetize Devon’s midstream assets by providing a tax-effective revenue stream through the creation of a fee-based business model for those assets.
Is a Midstream MLP a Good Investment?
While MLPs – because of their tax effectiveness – may be particularly attractive for investors seeking yield in a zero-interest-rate environment, the key beneficiaries will be Devon’s shareholders. Certainly, unit holders will enjoy the tax advantages afforded by such an investment — but they will miss out on the capital growth that a company such as Devon can generate.
Furthermore, it is difficult to determine exactly how much of Devon’s midstream assets’ operational profit will benefit the MLP, because Devon has yet to announce the structure of the MLP. It is expected that the MLP will file a registration statement with the SEC in the third quarter of 2013. This will then be followed by an offering of partnership units in the MLP. All of these filings will clarify the benefits that will flow through to unitholders.
Foolish Bottom Line
Any move by Devon to unlock value for shareholders and transition further production to oil rather than natural gas will significantly benefit shareholders. This is clearly evident by the strides that Chesapeake has made to turn around its business using a similar strategy. It will also provide the necessary capital to allow Devon to maintain its current growth trajectory, making now the time for investors to take a closer look at the company.
The article Will Devon’s Midstream Spinoff Boost the Company’s Performance? originally appeared on Fool.com.
Matt Smith has no position in any stocks mentioned. The Motley Fool owns shares of Devon Energy and has the following options: long January 2014 $30 calls on Chesapeake Energy. Matt is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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