NEW YORK, Jan 23 (Reuters Breakingviews) - Big Oil may be on the verge of a beautiful friendship with a new sidekick. The likes of BP are sitting on the mature wells that often don't generate a decent enough return. Until now they had few options for offloading them. But the emergence of a subset of Master Limited Partnerships specializing in pumping oil and gas provides a growing group of buyers.
Most MLPs concentrate on fee-based businesses like pipelines that are impervious to commodity-price swings. But the oil- and gas-producing MLPs are expanding fast. There are now 13 such publicly listed companies, with a combined value of $20 billion - compared with just five worth $3.2 billion six years ago. Two more may hit the stock market this year.
Driving their ascendancy is the growing number of oil and gas assets that don't hit their current owners' financial targets. Larger American explorers like Exxon Mobil typically target returns on capital employed of more than 15 percent. After around five years of production, the ROCE on most wells typically falls to around 7 percent, according to MLV & Co.
MLPs, though, don't pay corporate income tax and partners can also deduct their share of capital spending from their individual tax bill. That should allow these new owners to produce returns on older wells in the low teens - and thus give them the currency to make attractive offers for the assets, boosting Big Oil's overall margins.
BP and Anadarko have already sold such fields to Linn Energy , the largest of these producer-MLPs. In total Linn scooped up $2.8 billion of assets last year, almost twice the pace of 2011.
That trend should continue. Producer-MLPs own just 3 percent of America's oil and gas wells - and the first shale fields are now maturing. On paper, 80 percent of all wells may be a better fit for these partnerships than with Big Oil, according to analysts at MLV & Co. They reckon, though, that a five-fold ownership increase to 15 percent over the next five years is more realistic.
Producer-MLPs are riskier than their pipeline brethren - commodity hedging is never perfect. But so long as this is reflected in higher yields, everyone is a winner. Except for the tax man, that is.
- New Source Energy Partners and Quicksilver Production Partners look set to list on the stock market this year. Both filed with the Securities and Exchange Commission for an initial public offering last year.
- The two firms are master limited partnerships that specialize in energy exploration and production.
- MLPs are exempt from paying corporate income tax and distribute most of their earnings directly to investors.
- Linn Energy is the largest exploration and production MLP with a market capitalization of $7.5 billion. Last year Linn bought $2.8 billion of assets from the likes of BP and Anadarko Petroleum, compared to $1.5 billion of asset purchases in 2011.