Plains is a well run MLP, but it is very large relative to many other MLPs and rapid growth will be difficult. They manage assets very well, and the plans to spin off the natural gas storage assets into a stand alone MLP actually makes PAA less attractive. I for one will be a strong buyer of the PNGS when it IPO's. It will be a premier platform for storage assets, which should command a healthy valuation premium over crude gathering assets etc.
MLPs are cash flow machines, and many investors buy them and sit back and collect the distributions every 3 months and pay little attention to the daily price fluctuation. Over time, most MLPs manage to grow the distribution at a good healthy clip which is rewarding and over time, causes the yield on original investment to become very attractive.
"They manage assets very well, and the plans to spin off the natural gas storage assets into a stand alone MLP actually makes PAA less attractive."
rrb1981, I have respect for your posts. You are a knowledgeable poster and investor. I wish to express an alternate wiev of the statement that the PNGS IPO will make PAA less attractive.
Before we are able to make a determination of the benefits to PAA of the creation of PNGS we need to know the following:
(1) Will PAA be the general partner? (2) If PAA is the GP what are the GP - LP "splits"? (3) Will PAA continue to develop NG storage asstes and drop such assts down to PNGS when ready to generate cash flow (potentially at a profit to PAA) (and PAA continue to benefit from IDR's)? (4) Drop down price and terms of initial PNGS IPO? (5) Market yield for PNGS (initial and over time)? (6) Other details of the PAA - PNGS relationship.
In summary, the IPO of PNGS could effectively result in an attractive financial vehicle to PAA, with PAA retaining substantial upside through IDR's. Currently, we do not have enough information, but PAA management has a history of very solid management. PNGS investors are likely to accept a lower yield, along with lower debt costs than PAA. This would result in a win for new PNGS investors and a long term win for PAA holders.
I agree with what you are saying, it could be very profitable for PAA to spin off the storage assets into a separate MLP and retain the IDRs (but then they would have to grow the heck out of the storage biz to make the IDRs worthwhile). I am not a proponent of making the business more complex, which is what they are doing. Plains has excellent management, they know how to get the maximum utility out of there assets, but honestly, without the storage assets, their asset base is a lot less attractive. I won't be selling PAA, but they are doing this because the IDRs are oppressive. If they wanted to do something about it, they would merge the GP and the MLP and keep the storage assets.
Will be interesting to see how this situation develops but my hope is that they cancel the idea of a separate storage focused MLP and continue growing PAA and perhaps looking to combine the GP and MLP to eliminate the IDRs. That would make PAA one of the most attractive MLPs.
"What happens to a covered call if the company spins off its major investment section."
The short answer is that the strike price is adjusted to reflect the effect of the spin off.
However, to be clear, I do not believe PAA is considering a spin off of PNGS. A spin off would be PAA distributing units of PNGS to PAA unitholders. In this case, PAA is considering an IPO of a subsidiary. The proceeds would go to either PAA or PNGS depending on the structure of the transaction.