With the aim of attracting new investment and increasing growth, simpler business models are being created by partnerships between some publicly-traded U.S. energy pipeline and oil-storage firms.
New transport, gathering and storage projects worth billions of dollars have been created by increasing production of oil and gas. But the general partner is allocated up to 50 per cent of the income of the companies which are most responsible for these projects. Therefore, little is left for other holders or for purposes of investments in new projects.
Typically, selling of equity or debt for financing new projects or for acquisition has bene the strategy of these firms while they have given away a large part of their income to holders. But what the firms now offer to investors has increased in the last one year. For example, according to figures from investment firm East Daley Capital Advisors, a 9.7 percent annualized distribution instead of 7.9 per cent a year ago was paid to the holders by MPLX Energy Logistics LP.
“The higher cash yield makes the economics of these projects a little tougher,” said Kendrick Rhea, an analyst at East Daley Capital. over the past year, there has been an increase of at least a third in cost of equity for some companies, he estimates.
In another shift from the typical business models prevalent among energy pipeline and storage firms, the typical general and limited partners structures have been broken down by NuStar Energy and ArchRock recently and the companies are reducing distribution of income for the general partners and would bring units together. A similar change is being contemplated by TallGrass Energy, the firm said in early February.
“Removing a layer of complexity makes [partnerships] a lot more investible,” said James Mick, a portfolio manager for Tortoise, which invests in energy master limited partnerships (MLPs).
The comparatively lower cost of capital has prompted successful takeovers of pipeline operators engaged in the shale patch by private equity firms. And because they are open to make use of more debt for financing of projects, therefore the private equity firms are presenting strong challenge to MLPs for these deals.
There were no comments made by Nustar, Archrock and TallGrass.
Desire for possessing more independent boards and stronger corporate governance is another factor that is spurring these restructurings. Investors have said that individuals appointed by the general partner to a limited partner’s board could be about 80 percent I a few cases.
“In the real world, I don’t see how directors can be truly independent and represent the best interests of the limited partners if they can be fired by the general partner,” said Kevin McCarthy, chief executive officer at investment firm Kayne Anderson Capital Advisors.
The firms could be helped in raising new cash because investors could get interested in the new structures that are similar to corporations.
“Our view is that governance has to change if the sector is going to move to the next level and attract the attention of long-only institutional investors,” McCarthy added.
(Source:www.reuters.com)
New transport, gathering and storage projects worth billions of dollars have been created by increasing production of oil and gas. But the general partner is allocated up to 50 per cent of the income of the companies which are most responsible for these projects. Therefore, little is left for other holders or for purposes of investments in new projects.
Typically, selling of equity or debt for financing new projects or for acquisition has bene the strategy of these firms while they have given away a large part of their income to holders. But what the firms now offer to investors has increased in the last one year. For example, according to figures from investment firm East Daley Capital Advisors, a 9.7 percent annualized distribution instead of 7.9 per cent a year ago was paid to the holders by MPLX Energy Logistics LP.
“The higher cash yield makes the economics of these projects a little tougher,” said Kendrick Rhea, an analyst at East Daley Capital. over the past year, there has been an increase of at least a third in cost of equity for some companies, he estimates.
In another shift from the typical business models prevalent among energy pipeline and storage firms, the typical general and limited partners structures have been broken down by NuStar Energy and ArchRock recently and the companies are reducing distribution of income for the general partners and would bring units together. A similar change is being contemplated by TallGrass Energy, the firm said in early February.
“Removing a layer of complexity makes [partnerships] a lot more investible,” said James Mick, a portfolio manager for Tortoise, which invests in energy master limited partnerships (MLPs).
The comparatively lower cost of capital has prompted successful takeovers of pipeline operators engaged in the shale patch by private equity firms. And because they are open to make use of more debt for financing of projects, therefore the private equity firms are presenting strong challenge to MLPs for these deals.
There were no comments made by Nustar, Archrock and TallGrass.
Desire for possessing more independent boards and stronger corporate governance is another factor that is spurring these restructurings. Investors have said that individuals appointed by the general partner to a limited partner’s board could be about 80 percent I a few cases.
“In the real world, I don’t see how directors can be truly independent and represent the best interests of the limited partners if they can be fired by the general partner,” said Kevin McCarthy, chief executive officer at investment firm Kayne Anderson Capital Advisors.
The firms could be helped in raising new cash because investors could get interested in the new structures that are similar to corporations.
“Our view is that governance has to change if the sector is going to move to the next level and attract the attention of long-only institutional investors,” McCarthy added.
(Source:www.reuters.com)
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