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Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: Elroy who wrote (54094)	6/27/2014 9:17:44 PM
From: Spekulatius	Read Replies (1) \| Respond to of 78572

The shares in dropdown MLP's go to new investors. While I think that the Shell/SHLX will be interesting, the low projected yields seem to indicate that this is going to be sold at full price. In the end, it's all a matter of valuation.

To: Elroy who wrote (54094)	6/27/2014 10:33:14 PM
From: E_K_S	Respond to of 78572

What happens is the company that does the "drop down" acts as the General Partner (GP) and gets all the MLP income based on the units they hold. Also, in their partnership agreement, the GP will usually get an over ride incentive if income and/or baseline revenue objectives are met. It's always better to own shares in the GP. However, many investors want the guaranteed income and tax benefits of the MLP. The GP also receives the IPO revenue from the sale of a portion of the units to the public. This is a source of capital for the GP that can go back into new asset investments to (1) build out the MLP infrastructure, (2) acquire other Midstream properties, (3) or invest in new projects. MLP's are the "new way" to bring out shareholder value in a company. The COP divestiture of their refiner and midstream asset through PSX was a winner for the shareholders. COP shareholders got shares in PSX in 2012 valued around $32.00/share. PSX's market price is well over $80.00/share today and still so large that they could even do a "drop down" MLP of their Midstream property. The point is that these integrated oil companies are so large with so many pieces that if broken out into a few very large operating segments, the shareholders are the winners. A lot depends how they structure the MLP, how many of the units they keep and if they use those units to acquire other complementary Midstream assets. The DVN deal took the form of the latter. They did a drop down of their U.S. Midstream assets and merged it with a comparable Midstream. As a result, DVN obtained an increase in FCF from the units they kept which allowed them to pay shareholders a larger dividend. The net impact was that the Midstream piece they "dropped down" increased in value (maybe by 20%) and the combined new midstream property is even better and generates more FCF for all the unit holders. So yes, it's a net positive for everyone IMO. EKS