When it comes to the large energy companies, BP plc (ADR) (NYSE:BP) has been the proverbial whipping boy since 2010. That’s when BP had the pleasure of being the majority owner of the Deepwater Horizon drilling operation … where a rig exploded, killing its crew and causing one of the worst oil spills in history. And ever since that time, BP stock has floundered amid a sea of asset sales, legal fines and other related troubles.
BP has tried plenty of gimmicks and shifts in focus, but it still hasn’t managed to get its mojo back. BP stock traded around $60 at its 2010 highs, and the closest it got to returning to those levels was in mid-2014 … right before oil prices plunged like a rock, taking the entire energy sector with them.
But a change might be in the offing.
BP reportedly is considering going old school and using a trick adopted by many oil and gas companies to monetize one of their biggest assets. And if it does ago ahead with its plans, it could mean abundant income and large total returns on BP stock going forward.
A BP MLP?
When a company owns a host of energy assets (refineries, tank farms, oil wells in the gulf), you need a way to connect them. Many smaller energy companies will rent space on an existing pipeline or gathering system to ship their production; the costs to own and build a pipeline system are just too vast.
But when you’re an integrated major with billions in cash flows, you tend to just build the pipelines yourself. You also rent extra capacity on those pipelines to smaller firms (which is the case for BP).
However, merely holding on to pipelines isn’t necessarily the best way to make money off them. That’s why many companies opt for the tried-and-true master limited partnership (MLP) structure. MLPs avoid paying corporate taxes by passing on much of their free cash flow as tax-deferred distributions (a payout similar to dividends) to investors.
And it appears BP is finally mulling going the MLP route.
Reports out yesterday say the firm is considering an initial public offering of a separately owned MLP that would be named BP Midstream Partners. This tactic could finally push BP out of its funk — and generate serious cash flows for the struggling energy giant.
Why This Is Big News
An MLP is divided into two parts: the limited partner (LP) and general partner (GP). Typically, when you buy units in a MLP — say, Enterprise Products Partners L.P. (NYSE:EPD) — you’re buying the LP, which essentially is a share of the cash flows backed by whatever pipelines, gathering systems and other assets that have been placed within. There’s no overhead or management of day-to-day operations, just a heap of distributions.
Here’s where it gets juicy for BP.
General partners run the show. They decide what pipelines to buy and drop down into the MLP, how to expand and other issues. In return, GPs receive fees and bonuses — called incentive distribution rights, or IDRs — for managing the MLP. Moreover, they own the vast bulk of the MLP’s units, so they collect distributions too.
It’s a win-win for sponsoring firms, which bring in tax-deferred distributions while it grows the partnership.
With an MLP structure, BP could drop a vast array of its existing infrastructure into a newly minted LP without having to do much legwork or make heavy capital expenditures to build new pipelines. BP already operates around 3,500 miles worth of pipelines and ships around 1.3 million barrels of oil, refined products and natural gas through its system day. Thus, BP is already off to a great start should it want to go this route.
As the owner of all those juicy IDRs and distributions from BP Midstream Partners, BP stock would start seeing the effect of the spinoff right away.
So would investors.
Shareholders in companies including like Marathon Petroleum Corp (NYSE:MPC), Tesoro Corporation (NYSE:TSO) and even mega-cap rival Royal Dutch Shell PLC (ADR) (NYSE:RDS.A) have enjoyed high returns as their respective spinoffs — MPLX LP (NASDAQ:MPLX), Tesoro Logistics LP (NASDAQ:TLLP) and Shell Midstream Partners LP (NYSE:SHLX) — have launched.
There’s no reason BP’s path wouldn’t look the same.
A Big Potential Win for BP Stock Holders
BP Midstream Partners right now is merely a concept — again, the idea is merely under consideration. But the sheer idea of it should have investors excited.
In the end, I believe it will provide a boost to BP stock, as it gives the company a great way to monetize its vast pipeline infrastructure assets. Meanwhile, investors get not only a revitalized energy holding, but even more income promise than BP’s already generous dividend near 7%.
This is one energy story to watch.
As of this writing, Aaron Levitt was long MPC.
