Last Wednesday, after a record earnings release, Hess Corp. (NYSE:HES) announced they would spin off a master limited partnership for much of their Bakken assets.
Share prices surged on the news…
The announcement came as Hess reported earnings per share that were $.20 ahead of most analysts estimates, and their new MLP should allow them to boost those earnings in the future.
An MLP has significant tax advantages for companies that use them alongside a parent company – as Hess plans to do. A ripple in the tax code allows companies that explore for and harvest natural resources to structure some of their assets in a MLP.
This allows them to avoid federal income taxes as long as they distribute at least 90% of their profits to shareholders.
Hess’s new MLP is the latest to come in a booming industry…
Just last year there were a record 19 initial public offerings for various MLPs bringing the total in the U.S. to 117, so far.
And the value of all of them combined has doubled in the last three years to $517 billion and still counting. That’s half a trillion in untaxed dollars being funneled by oil, gas, timber, and coal companies into the bank accounts of investors.
For this reason, we’ve been very excited about the prospects of master limited partnerships at Energy and Capital for a long time. Mainly because these stocks – although tax free – are still publicly traded.
So right now you could go to your brokerage and buy shares in a myriad different MLPs, and start collecting the dividends which can sometimes go above 10% per share.
Of course, you’ll have to wait until sometime early next year to buy Hess’s new MLP, but that shouldn’t discourage you.
In fact, The Alerian MLP Index which has 50 of the 117 MLPs on the market has outperformed the S&P 500 with a 12% gain so far this year, and with news of this latest spin off from a major oil company, you can expect to see more MLPs do well on the market.
Another master limited partnership that’s done quite well this year is Breitburn Energy Partners (Nasdaq: BBEP), who announced a couple weeks ago that they would purchase Houston based QR Energy for $1.6 billion, making it the largest oil-focused MLP.
Of course, put in a grander context it makes sense that these companies are sprouting up all over the place…
Since the U.S. has a corporate tax rate around 35%, these oil and gas companiesare constantly searching for ways to avoid taxes that add to already high up-front costs.
So by redistributing their money to shareholders instead of to the government, they have greater control over what they bring in and less of a drain on their cash flow (since plenty of people at the companies hold shares).
Not to mention that this is also happening as U.S. oil and gas production has gone through the roof, nearing our record 40 years ago. Hess’s oil is a huge part of this since they operate more wells in the Bakken than any other company.
And if you follow these pages regularly, you know that the Bakken just broke the 1 million barrel per day record for crude oil…
Which means you can probably expect to see more MLPs in the near future as these numbers will continue to climb. Now it’s up to you to decide whether or not you want to take advantage of the yields from these booming investments.
