Activist investor Elliott Management strikes again.
As the largest shareholder of oil giant Hess Corporation (HES), the $23-billion hedge fund run by Paul Singer has successfully convinced the company to spin off its distribution assets in North Dakota's Bakken shale region. Hess announced today that it will put those assets into a new investment vehicle to be marketed to the public as a master-limited partnership (MLP) through an initial public offering in the first quarter of 2015.
"Hess remains focused on value creation and the pursuit of its previously announced intention to monetize its midstream assets in the Bakken oil shale play in North Dakota," the company said in a press release.
Hess will act as general partner, meaning it will still manage the assets of the MLP, while simultaneously continuing to explore for oil under the management of the parent corporation.
Oil and gas exploration is a risky, capital-intensive business. Distribution, on the other hand, enjoys stable, predictable cash flow. Elliott Management Corp. has long advocated separating the two, arguing each can command a higher valuation when judged on its own merit, rather than as a sum of the parts.
As for why Hess has chosen a master-limited partnership structure for the spin-off, there are several reasons. Most notably, MLPs are more tax efficient. They pass nearly all net income directly to unit holders in the form of dividends (much like real estate investment trusts). So profits are taxed only at the individual level and not at the corporate level. Second, generous depreciation allowances allow much of the cash distributions to qualify as "return of capital" thereby lowering taxable income.
Investors need not wait for the Hess MLP. Several exchange-traded funds (ETFs) invest exclusively in MLPs and currently trade in the market. Three such funds include: the Alerian MLP ETF (AMLP); the Global X MLP ETF (MLPA); the Yorkville High Income MLP ETF (YMLP).
All three funds focus on energy MLPs, though the Yorkville fund skews more to smaller pipeline operators. Dividends, expense ratios and tax consequences vary across the funds, so we suggest further research. One final note: Dividends net of annual fees top 4 to 5 percent. This is well above rates available on most dividend-paying stocks, hence the appeal of MLPs in general.