While funding is available for most segments of the energy industry, one area that seems to be attracting particular attention is the master limited partnership.
Most of the companies in the top 10 of this year's Oklahoma Inc. ranking of the state's top-performing companies are master limited partnerships focused on pipelines, processing plants and other midstream oil and natural gas activity.
“What is most attractive about MLPs to investors is their yield,” said Deborah Fleming, executive in residence at Oklahoma City University's Meinders School of Business.
“What they do is offer a yield that is more attractive, more like bonds than stocks over a longer term. One of the reasons people have loved some of the MLPs that have come out is because not only have they achieved very, very attractive yields, but they also have had price appreciation in the unit.”
Oil and natural gas producers are increasingly spinning off their midstream assets into master limited partnerships while retaining the general partner interests of the new company.
“Companies find MLPs attractive because they can sell assets to the MLP and still retain control of those assets,” Manabe said. “It's like having your cake and eating it, too. It also places value on a business that perhaps didn't get too much attention when it was part of a larger company.”
Chesapeake Energy Corp., SemGroup Corp. and Williams Cos. Inc. have followed the pattern in recent years.
Devon Energy Corp. recently announced plans to partner with Dallas-based Crosstex Energy LP to form a master limited partnership. OGE Energy Corp. this summer combined its midstream subsidiary with Houston-based CenterPoint Energy Inc. to form Enable Midstream Partners.
Master limited partnership investors receive favorable tax benefits from MLPs, but the partnerships also carry risks, Manabe said.
“From a bondholder's perspective, the MLP finance model is a riskier model because they pay out all their free cash flow. It limits their financial flexibility,” she said. “Also, MLP investors are looking for continual growth. To be able to do that, MLPs need to constantly acquire other companies or undertake construction projects. That usually entails acquisition risk or project execution risk.”
But the demand continues to grow.
“I think we're going to be hearing about MLPs for a while,” Manabe said.