This Does Nothing For The Limited Partners

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

ONEOK (NYSE: OKE) is spinning off its natural gas utility assets to become just the general partner (GP) of limited partnership ONEOK Partners (NYSE: OKS). That's good for ONEOK shareholders, but doesn't do much to help ONEOK Partners unit holders.

Lots of Partners

Limited partnerships (LPs) usually have general partners (GPs) that run them. The GP handles the day to day tasks, while the limited partners put up the capital and receive distributions for taking on the financial risk. GPs own a percentage of the LP and get fees and incentive payments that are normally tied to distributions.

Although tying incentive payments to distribution growth generally aligns the GP with the LP unitholders, the incentives can get quite generous (up to 50% of distributions over set levels in some cases). That can lead to rapid distribution growth at publicly traded GPs, but slower distribution growth at the LP. Thus, GPs can be a great option for investors, but for limited partners they can quickly turn into a hindrance.

Shifting Gears

ONEOK owns natural gas utility assets and the general partner interest in ONEOK Partners. It is spinning off the gas utilities as a new entity called ONE Gas and retaining the GP interest, effectively turning itself into a pure play general partner.

That should be a good thing for ONEOK shareholders since it will, most likely, lead pretty quickly to faster distribution growth. Investors should be pleased with the split. However, the shares rose about 20% on the news, which fully prices in the transaction. Now probably isn't the best time to consider a purchase.

Thanks for Nothing

ONEOK Partners, meanwhile, owns natural gas pipelines in The United States and Canada. The LP has seen revenues explode over the last decade, going from $500 million to over $10 billion. The distribution has increased from $1.60 a unit to $2.59 over that span. That's a 62% increase, which isn't bad at all.

However, it isn't nearly as impressive as ONEOK's dividend, which increased from $0.34 a share to $1.27, a 274% increase. That's the leverage that a GP has over an LP. Once ONE Gas is jettisoned, dividend growth should accelerate and investors seeking dividend growth should take a look at the pure-play GP.

That said, GPs generally yield less than the LPs they manage, giving investors the choice between distribution growth or current income. ONEOK shares yield about 2.9% while ONEOK Partners yields around 5.7%. That discrepancy should continue to exist even after ONEOK becomes a pure-play GP, though there hasn't been a dividend announcement yet.

And it's important to note that the corporate actions at ONEOK do nothing to change ONEOK Partners' outlook. Despite recently weak results in it ethane business, the LP has solid growth prospects. It has around $5 billion worth of projects in the works, with more on the drawing board. This should lead to slow and steady distribution growth for the LP. Ethane concerns, however, have taken the units down about 15% so far this year, which makes now a good time to consider the well-respected partnership.

Different Models

Not all LPs have GPs, however. For example industry giant Enterprise Products Partners (NYSE: EPD) bought its GP in 2010 and is now self-managed. That means that more money goes directly into the hands of the limited partners or can be used to fund growth. The company is among the largest players in the midstream space and has economies of scale that few can match. It's a great company.

The market knows this, however, and the units are up about 25% or so far this year. It yields just 4.4%. This is in contrast to Kinder Morgan Partners (NYSE: KMP), which is every bit as large and well run but has a GP and a generally more complex structure. Its units yield 6.4% and are up only around 5% so far this year.

Both partnerships have long histories of annual distribution increases, so income seekers should favor Kinder Morgan right now since Enterprise is priced so dearly. In fact, Kinder Morgan is probably a better option than ONEOK Partners, too, for income seekers. However, ONEOK Partners' smaller size will likely lead to faster growth, which might make it more appealing over the long-term.

Good and Irrelevant

For ONEOK shareholders, splitting off ONE Gas is a good thing. That said, now isn't the time to buy into ONEOK for those who don't own it, take a closer look at the company after the split. The outlook for ONEOK Partners, meanwhile, doesn't change at all. It has to make good on its growth spending and work through weakness at a key unit.

ONEOK Partners unitholders trying to make sense of the transaction, however, should look at the yield discrepancy between Enterprise and Kinder. This pair will give you a feel for how much of a drag a GP can have on an LP's shares. That said, Kinder is a great option for income investors largely because of the yield discount imposed by the market because of its more complex corporate structure.

Reuben Brewer has positions in Enterprise Products Partners and Kinder Morgan Energy Partners. The Motley Fool recommends Enterprise Products Partners L.P., ONEOK, and 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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