|
|
 |
 |
|
|
|
|
|
New Oil, Gas Partnerships Face Key Tests |
Dow Jones, December 4, 2007
Master limited partnerships aimed at exploring for and producing oil and gas are hitting some turbulence, just after takeoff.
Although the first wave of partnerships, known as MLPs, found secure footing for their initial public offerings in 2006 and early 2007, share prices for the most recent batch have tanked. On Nov. 27, Pioneer Natural Resources Co. (PXD) said it would delay an offering for its MLP to the first quarter of 2008, citing market conditions. In a tight credit market, investors are uneasy about the ability for relatively unproven MLPs to raise the large amounts of cash they'll need to grow. With high oil prices driving up the cost of acquiring oil and gas fields, there are also fewer bargains to be had.
An MLP, available only to certain segments of the energy and real estate sectors, avoids corporate taxes by returning income to shareholders in the form of dividends, a structure well-suited for steadily producing assets that generate cash but offer little potential for growth. Only a handful of industries are eligible to form a partnership, with energy the most common. Certain sectors, including pipelines, have long been dominated by MLPs, while the first exploration and production partnership didn't form until 2006. Companies can create an MLP from scratch by buying new assets, or spin off existing holdings into a new partnership.
Despite a climate of rising oil prices that has some predicting the exploration and production MLP sector, known as upstream MLPs, will grow from nothing to a $50 billion market capitalization over just a few years, the most recent three public offerings have not been well received. Costs are rising with the price of oil, making it difficult for MLPs to find cheap assets to buy and existing fields more expensive to exploit. Since MLPs are heavily dependent on raising cash in order to grow, the tightening credit market has the potential to hit them hard. The provisions in the U.S. tax code that allow MLPs to exist are also not set in stone, as seen in Canada, which in 2011 will start taxing profits on a similar corporate structure known as royalty trusts.
The next wave of IPOs, expected in the first quarter of 2008, will be closely watched for clues to the sector's overall health. Upstream MLPs are at a crossroads: at 1% of exploration and production market capitalization, they haven't quite caught on, but have a huge upside if they do.
"(MLPs) have barely scratched the surface as a participant in the e&p business," said Rick Gross, an analyst with Lehman Brothers, speaking at a conference in Houston sponsored by Platt's.
Linn Energy LLC's (LINE) IPO in early 2006 was the first for an upstream MLP since at least the mid-1980s, and was followed quickly by four others in 2006 and four more in 2007. Linn traded at $24.16 on Tuesday, compared with an offering price of $21 in January 2006. Even with MLPs' uncertain future, partnerships that have filed to go public in 2008 will add at least another 50%, or $2 billion, to the sector's total market capitalization, according to Lehman Brothers.
"The sector is here to stay. It's not going to melt down," said Steven Pruett, CEO of Legacy Reserves LP (LGCY), which went public in January and at around $21 is trading at an 11% premium to its offering price.
Copyright 2007 © Dow Jones & Company, Inc.
|
|
|
|
|
|
| Partner Market Place |
|
|
Search and buy over 25,000 Bonds at Institutional Prices: ZIONS
Choose Your Own CD Yields: How would you like to choose the yields you want on FDIC-insured CDs – instead of the yields someone else has chosen? ZIONS
|
|
| Stuff to look at |
Yield and Income Newsletter: A must have for income investors. subscribe NOW
|
|
| BondsOnline Advisor |
Income Security Recommendation August 2010 Issues [ Read It Now]
Samples of past Issues: Read More [+]
Keep up with monthly, in-depth coverage of fixed income market strategies, commentary, and insights as seen by our sources. Sign up for the free BondsOnline Advisor now!
Unsubscribe here [+] |
|
|
|
|
