Energy producers continue to look for ways to get the most value out of the pipelines and other midstream assets they need to extract oil and natural gas from the ground.
Oklahoma City-based Devon Energy Corp. is one of the latest to spin off its pipelines and compressors. The company in March merged its midstream infrastructure with Dallas-based CrossTex Energy Inc. to create EnLink Midstream Partners and its general partner EnLink Midstream LLC.
Master Limited Partnerships are popular both because of their favorable tax structure and because they allow companies to attract new and different shareholders.
Often, investors who want to buy a stake in an oil producer are not the same as investors who prefer pipelines and midstream assets. As a result, producers tend to not receive from Wall Street what they see as the full value of their assets.
For example, Devon moved about $4.8 billion of assets to the EnLink companies, which just two months later now boast a combined market capitalization of $8.6 billion. Devon has retained about 70 percent of the EnLink companies.
Devon and the EnLink companies this week all reported profitable first quarters. During a conference call with analysts Wednesday, Devon CEO John Richels was asked why the company has held on to such a large stake in the midstream assets it spun off.
“It’s a strategic asset for us,” said Richels, who also is EnLink’s chairman. “We’ve always wanted to keep control of those assets or have some influence over those assets because they’re so integral to our operations. And we think there’s going to be a lot of value accretion at the EnLink level over the next few years, not only from a bunch of really exciting ideas that the management team at EnLink has, but also through the continuation of the drop-downs from the general partner and also from Devon.”
Still, 70 percent might be too much.
“Now having said that, you’re absolutely right that we’ve got a larger position today than we ultimately need to control,” Richels said. “That’s not lost on us. We’ll always look at ways to realize that. But frankly, we’ve got to do something that is creative and innovative because selling a bunch of units and paying a lot of tax isn’t the way to do it. So we’re really actually excited about that position and the continued growth, but we’ll always keep our eye on that.”
Richels didn’t elaborate on what options the company is considering, but we can speculate.
One possibility is that the company could use part of its stake in EnLink to buy more producing assets. Devon has been retooling its asset portfolio lately. The company recently sold some properties in Canada for almost $3 billion, and in the first quarter alone, Devon spent almost $6 billion buying assets, including properties in south Texas’ oil-rich Eagle Ford basin and in western Oklahoma’s Cana Woodford.
Another option is that Devon could use the stake to buy pipelines or midstream assets where it is producing, possibly in its new Eagle Ford production area. The company then could sell or transfer the assets to EnLink.
No doubt there are many other possibilities and Devon has teams of people considering what option makes the most sense for the company.