Devon Energy Corp. is renewing long-pursued efforts to form a midstream master limited partnership (MLP) to hold some of its natural gas gathering and processing assets in Texas, Oklahoma and Wyoming.
It’s not the first time Devon has said it would form a publicly traded partnership for its onshore gas gathering assets. In 2007 a similar plan was launched (see Daily GPI, July 19, 2007). Those plans never were completed, but this one appears to be more likely as management looks for ways to create value and as gas prices have inched higher.
Stronger gas prices have opened an avenue for the gas-weighted operator to begin putting more onshore rigs back to work this year, CEO John Richels said during a first quarter earnings conference call in early May (see Daily GPI, May 2). Those higher prices helped lift the marketing and midstream business 12% higher than in the year-ago period to $125 million.
Richels said last month Devon was “examining every option to create value,” which included a midstream partnership. A final “go or no go” was expected by the end of this month.
The MLP now on the drawing board initially would own a minority interest in the U.S. midstream business. A registration statement is to be filed with the Securities and Exchange Commission in the third quarter, and subject to market conditions, an initial public offering (IPO) would follow. Once launched, Devon would own the general partner of the MLP, the incentive distribution rights and most of the common units. Proceeds from the common units sale would be used to fund continuing operations.
Analysts with Raymond James & Associates Inc. said in a recent report they remain “bullish” about U.S. onshore MLPs because of their value proposition versus alternatives on a risk-adjusted and total return basis; the opportunity for low-risk growth; and their exposure to energy equities without price/volume risk (see Daily GPI, June 3).
MLPs recently have had a good run. The ALPS Alerian MLP exchange traded fund, which follows the Alerian MLP Infrastructure Index that tracks U.S. energy infrastructure, saw a 14% increase in value from $15.73/share on May 1, 2012 to $17.91/share on May 1, 2013. As of May seven MLP funds have launched, versus a total of 14 in 2012, said Raymond James analysts.
Given that energy MLPs are trading at a “significant yield discount” to real estate investment trusts and other high-yield asset classes, “the trend of increasing institutional flows into MLPs should continue. Pairing this with the positive underlying fundamentals for MLPs, we believe the sector is well positioned to deliver substantial returns to its investors.”
On Wednesday Devon held its annual meeting, garnering majority support (at least 90%) on all of the board-backed resolutions on the proxy ballot. All of the eight directors were reelected, each carrying least 90.5% of the vote. “In this day and age, to get 90% of anything is quite an achievement,” said Chairman Larry Nichols after the final tally was announced.
Devon today carries a low-debt level, with investment-grade credit ratings and more than $6 billion in cash. However, the stock price has remained sluggish over the past two years. Some shareholders are “very frustrated,” but Devon management isn’t “doing anything wrong,” wrote Oppenheimer & Co. Inc. analyst Fadel Gheit. “The stock price has not done well for the last two years, even though management has done everything it could.
“The company bought stock, increased the dividend and paid down debt, everything that’s supposed to endear them to shareholders, but the stock price has not gone up.” Many times, when shareholders are “frustrated, they want some action. They don’t want people to throw their arms in the air and say ‘there’s nothing we can do.’ They want their executives to at least try, to not just sit there praying for higher natural gas prices.”
Devon’s “very high” exposure to gas, natural gas liquids and Canadian oilsands are “three components in the energy mix that are not doing too well right now,” Gheit said. Pipeline and refinery issues last year caused Canada oil to sell at a big discount to benchmark West Texas Intermediate oil, which affected Devon’s oilsands facilities.
“The good news is, that as we look into 2013 and forward, there are several refineries coming on and we have more pipeline capacity that is being developed to carry oil out of Western Canada,” Richels told shareholders. “We are starting to see, and we believe we will continue to see, that oil price differential get narrower…”
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