Yet another LP

Reuben is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Companies often tout unlocking shareholder value when they announce spin offs and similar corporate actions. While there are different views on the ultimate benefit of such corporate moves, Phillips66's (NYSE: PSX) recently announced plan to spin off some of its midstream assets into a limited partnership (LP) certainly follows an industry trend. Is the company unlocking value for shareholders or just trying to cash in on a craze?

Just prior to a meeting with analysts to discuss its long-term plans, management made the announcement that it would take come of its pipeline, terminal, natural gas, and rail assets and form an LP with the goal of raising $300 to $400 million dollars. The company intends to file with regulators in the first half of 2013, and sell a minority interest in the back half of the year. The funds will likely be used to help support the company's nearly $4 billion worth of investments planned for that year.

A Hot Sector
There is no doubt that LPs are a hot investment category of late, as investors continue to seek dividend paying assets. Limited Partnerships are high on the list because of their generally above-market yields and tax advantages. (It's worth noting that LPs can make tax time more complicated, however.) The lack of infrastructure in this country to support a growing oil and natural gas industry is another positive.

So investors have looked to this industry with good reason. And where there's demand, supply is likely to follow. And there have been no shortage of newly launched limited partnerships to feed investors' appetites. That said, the same situation occurred with the so-called bubble, biotech companies, and, well, tulip bulbs. Those examples of demand leading to increased supply didn't end particularly well for late stage investors.

Good For The Company
From the corporate standpoint, it makes complete sense for Phillips 66 to take advantage of the recent demand for income-generating midstream assets. In fact, the Facebook (FB) debacle was a similar transaction in some ways. Investors were clamoring for the shares of the tech darling and the company made a huge sum in its initial public offering (IPO). However, many investors were shocked to see the stock fall precipitously in the days and weeks following the new listing. While bad for investors, the transaction was a clear win for Facebook, which, based on the subsequent trading, shouldn't have received as much from the IPO as it did. So Phillips 66 jumping on the bandwagon makes complete sense. 

Another Example
Inergy LP (NYSE: NRGY), however, could be a cautionary tale from a different angle. This company's recent transition from a propane distributor to a (mostly) pure midstream play involved the spinoff of some assets into a new LP, Inergy Midstream LP (NRGM). While those who purchased the new LP seem to have done reasonably well, Inergy shareholders have suffered. Indeed, the parent company, which has basically become a general partner to NRGM, was the one that faltered following the IPO.

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NRGM data by YCharts

The Right Assets Are Important
While these transaction are both different in many ways from Phillips 66's proposed move, they outline the risks investors face when companies try to satisfy investor demand. Add to the mix the ONEOK Partners' (NYSE: OKS) recent decision to cancel a planned pipeline, and there is the potential that mid-stream infrastructure asset demand is reaching a peak in some markets.

Demand appears to still exists, however, otherwise Plains All American (NYSE: PAA) wouldn't be buying similar assets from Chesapeake (NYSE: CHK). Plains is a well-respected company that is known for making solid acquisitions. While the Plains/Chesapeake deal was less than half the size of Phillips 66's proposed deal, it comes on the heels of Plains' $500 million purchase of rail assets. These bolt on deals suggest that there is likely still demand for the right assets.

Good or Bad?
Phillips 66 is probably making a good decision in spinning off assets into an LP. Assuming that there is still material demand for such assets in six months to a year, the IPO could be very successful. For the company, anyway. Potential investors, on the other hand, need to take a close look at the assets that make their way into the new LP. Phillips 66 owns some high quality assets that could get into the LP, but what eventually finds its way into the new entity is a guessing game right now.


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ReubenGBrewer has a position in Inergy LP. The Motley Fool has the following options: long JAN 2013 $16.00 calls on Chesapeake Energy, long JAN 2014 $20.00 calls on Chesapeake Energy, long JAN 2014 $30.00 calls on Chesapeake Energy, and short JAN 2014 $15.00 puts on Chesapeake Energy. Motley Fool newsletter services recommend ONEOK Partners, L.P.. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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