An investor named Donald recently wrote me asking a very good question about companies that operate both as a conventional corporate entity and a related partnership under the same name.
“What is the difference between Cheniere Energy Inc. (NYSE:LNG) and Cheniere Energy Partners LP (NYSE:CQP)? I do know that CQP is an MLP [master limited partnership] and pays a dividend and LNG is a stock. But which one owns which? Which one is safest? Which one is potentially the biggest gainer?”
This question applies to many energy companies, including Cheniere, Kinder Morgan Inc. (NYSE:KMI) vs. Kinder Morgan Energy Partners (NYSE:KMP), and a host of others. I’ll steer clear of individual stock analysis and instead try to focus on the differences between an Inc. and an LP under the same name.
In the case of Cheniere, CQP is a partnership with a big dividend, and LNG operates under the model of a profit-seeking stock out for growth. The “parent” in this case is is Cheniere Inc., which owns about a 90% stake in the partnership — and that’s typically the case. Some partnerships are sliced and diced more creatively. For instance, Kinder Morgan Inc. owns 11% of KMP, and a third publicly traded stock, Kinder Morgan Management LLC (NYSE:KMR), owns about 30% more of the KMP partnership.
I know, confusing. You can’t tell the players without a program sometimes. But the good news is that a quick review of company profiles in Yahoo! Finance or Google Finance will offer the relevant details for almost every Inc. vs. LP ownership question.
Now we get to the sticky part… which one is “safest” or the “best” investment. Well, let’s look at Cheniere as a case study. CQP is a “pass through” partnership, meaning it’s simply a toll collector operating a Louisiana facility. It takes a fee from anyone who moves energy through its terminal. That is very low risk, since it’s unlikely business will ever dry up for CQP unless there’s a brutal supply-chain problem or global demand disruption on a large scale. Hence, the big dividend due to a reliable revenue stream.
But it also means there isn’t a lot of upside potential, since CQP stock will never break out… it’s not like it will open a port in Dubai or Australia in 2012, after all.
LNG, on the other hand, has definite breakout potential. Case in point: It’s up 70% in the last year because it can operate as a company seeking big growth in profits and revenue. The downside? It could also drop just as sharply, and it doesn’t pay a penny in dividends. It’s also bleeding cash, if you look at the balance sheet, which proves that its revenue and profits aren’t nearly as reliable.
So, the bottom line is that you’re faced with a strategic choice here: Go for a sleepy income investment, or go for a company that could deliver big share appreciation but also fall off a cliff.
Which one should you chose? Well, It all depends on what kind of investor you are and what kind of portfolio you’re trying to build. In this case, as with so many others in investing, it’s question of how much risk you’re willing to take on in the quest for bigger rewards.
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Jeff Reeves is the editor of InvestorPlace.com. Write him at editor@investorplace??.com, follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook. Jeff Reeves holds a position in Alcoa, but no other publicly traded stocks.