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Transocean Ltd. Message Board

  • save_n_investte save_n_investte Mar 4, 2013 3:14 PM Flag

    RIG is considering moving into the MLP business

    Transocean Brings Back Dividend, Weighs MLP Options.
    Transocean might also please income investors by moving into the MLP business. From the company:

    In the interest of driving long-term value through a disciplined capital allocation strategy, the company will continue its evaluation of alternative corporate and financing structures. This includes Master Limited Partnerships (MLP) or MLP-like structures.

    Understand that MLP's offer a unique payout, different from that of dividends. The MLP payout is generally a higher payout than the company's dividends. And the pps of the MLP will generally gain in respect to the gains of RIG common shares. But the really neat thing about the MLP payouts is that they aren't counted as dividend payouts. Instead, for federal/state tax reporting, they are counted as a non-taxable 'return on investment'. That's right, no taxes until total returns from the MLP exceed the investor's cost basis in the MLP.

    So, the RIG MLP shareholder would recieve higher payouts than the common shareholder dividend payouts. But the MLP shareholder would avoid paying the annual 15% (or higher) capital gains tax on dividends. And a particular advantage for the MLP lies with eldery shareholders. Not to be morbid, but an MLP generally takes about 15 years for the payouts to exceed the cost basis, so an elderly MLP shareholder could enjoy the payouts tax free, before the cost basis is surpassed. And if the elderly shareholder dies, before surpassing the cost basis, then no taxes at all will be paid for the shareholder, or his/her heirs. The heirs will inherit the MLP shares at the value of the shares at which they inherited them, with no taxes due should they turn around and sell them.

    MLP's are an exciting and profitable investment vehicle if you take the time to learn about them.

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    • One point, MLPs should not be held in a tax deferred account, like a 401k or a Traditional IRA account.

      • 1 Reply to save_n_investte
      • It seems like all the drillers are getting a pretty steady push from the investment banks to switch some/all of their operations to an MLP mode. You can see why, the bankers would love to do the deals, and the public has been so yield-starved for so long, that there's a real pull of non-traditional assets into MLPs. Some smaller refineries have made the switch, and that's been a real success given the monster crack spreads lately, of course, those spreads will fade eventually, and the MLP holders will probably realize that refining is a highly cyclical business, as their distributions fall.

        Drilling is pretty darned cyclical too. Certainly more so than the pipelines and energy producers that have traditionally made up the bulk of MLPs. This is not to say I don't like MLPs or that drillers can't be MLPs I've done well with them, better than with the drillers, come to think of it. . It's just that some things make better MLPs than others. Also, the tax accounting is numbingly complex, the sort of thing that will have many ask a CPA for help.

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