When we search for value-creating companies, we always look for companies that have engaged in share buyback programs. The fewer shares out there, the more profit per share for us. What we don’t want to see is management issuing new shares and thereby diluting our position in the company. But there’s one exception to the rule and that exception is called Master Limited Partnerships, aka MLPs.
What are MLPs?
Master Limited Partnerships are a form of corporate organization that carry the tax benefits of a partnership. Because MLPs do not have to pay corporate taxes, they have more cash available to fund their distributions. To incorporate as an MLP, a firm must earn 90% of its income from activities related to natural resources, commodities or real estate. In particular, you can find many MLPs in the pipeline energy business.
With MLPs, an increase in the number of units doesn’t necessarily spell dilution. In most cases, when MLPs issue more units, it means they are gearing up to fund new growth projects. You see, when MLPs raise capital, it means they’re on to something very lucrative. Otherwise, they would do nothing but sit on their current projects and return some sort of satisfactory dividend to their unit-holders. When an MLP steps up for fresh capital, it usually means there’s lots of money to be made. We want to be there when that happens.
Who’s raising capital?
Let’s turn the spotlight on MLPs that have raised capital lately for some clues about the future. Below are my favorite three:
1). Energy producer Vanguard Natural Resources, LLC (NASDAQ:VNR) sold about $8 million new common units at $28.35 each. VNR has $347 million in annual sales. Vanguard Natural Resources, LLC (NASDAQ:VNR) owns full and partial interests in 6,800 oil and gas wells. It also holds full and partial interests in more than 1.2 million acres of land in nine major producing regions around the United States. In 2012, Vanguard Natural Resources, LLC (NASDAQ:VNR) produced 3.9 times as much crude oil as three years ago and four times as much natural gas. I believe that most of the new cash will go to buying out rivals in the industry.
2). Natural gas liquids (NGL) producer Williams Partners L.P. (NYSE:WPZ) recently filed to sell up to $600 million of new common units. Williams Partners L.P. (NYSE:WPZ) is one of the biggest natural gas pipeline companies in the U.S., with $8.5 billion in yearly sales and more than 4,100 employees. It moves 15% of all U.S. natural gas. Without its pipelines, 30 million people wouldn’t be able to heat their homes or cook food indoors. It’s also a big source of steady investment income. Williams’ natural gas pipeline business provided 37% of its gross profit in 2012. Most of Williams’ natural gas pipeline sales come from three large pipeline systems: Transco, Northwest, and Gulfstream. I believe that the lion’s share of the new capital round will be spent on building new pipelines and plants.
