Why non-traditional master limited partnerships are growing (Part 1)
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Master limited partnerships, or MLPs, have historically been associated with midstream energy. However, the MLP structure has been growing in popularity among other companies that don’t resemble the traditional midstream energy footprint but that still classify as MLPs under the current tax code.
Generally speaking, MLPs must generate at least 90% of their income from “qualified sources,” which mainly include real estate and natural resources. “Natural resources” currently covers crude oil, natural gas, petroleum products, coal, other minerals, timber, and any other resource that’s depletable under section 613 of the federal tax code. In 2008, this statute extended to cover industrial-source carbon dioxide and ethanol, biodiesel, and other alternative fuels. Qualifying natural resource activities include exploration and development, mining, gathering, processing, refining, compression, transportation, storage, marketing, and distribution.
Though the MLP sector covers a broad range of operations and sectors, traditionally, the types of companies that have taken advantage of the structure most have been midstream companies, which generally includes companies that are involved in the transportation, gathering, processing, storage, and distribution of hydrocarbons. In recent years, non-midstream energy companies have been choosing to use the MLP structure noticeably more because of the tax advantages. Generally speaking, the tax advantage of the MLP structure results in better valuation than equivalent assets that aren’t structured as MLPs.
Recent non-traditional MLP initial public offerings
In October 2012, the market received the first initial public offering (or IPO) ever of a deepwater offshore drilling MLP, Seadrill Partners (SDLP). Other examples of non-traditional MLPs include Emerge Energy Services (EMES), which made its IPO in May 2013 and which is primarily involved in sand mining for use in fracking oil and gas wells, and CVR Refining (CVRR), a refiner that made its IPO in January 2013.
This analysis continues in Part 2.