The current shale boom in the U.S. has led to an influx of Midstream Limited Partnerships (MLPs) in the U.S. and the trend seems unlikely to wane in the coming years. The MLP sector has seen unprecedented growth over the last few years with market value rising sharply from just $8 billion in 1996 to $464 billion in early 2014.
The latest to join the MLP bandwagon are CONSOL Energy Inc. (CNX) and Noble Energy Inc. (NBL). The companies announced their plan to form an MLP that would provide midstream services for production from their joint venture in the Marcellus Basin.
Both the companies will each own a 50% interest in the partnership called Cone Gathering LLC and will control the general partner of the MLP. In addition, they will hold the majority of limited partner interests of the MLP. The companies have submitted a proposal for the initial public offering for a minor stake in the MLP, which is expected to be closed in the third or fourth quarter of 2014 subject to market conditions and approval of Noble Energy’s board.
Factors that Drove the Decision
With pro-environment legislations tightening the noose around pure coal operators, CONSOL Energy has been gradually transitioning to natural gas production. The company aims to increase annual gas production by 30% in 2015 and 2016. However, a dearth of pipeline infrastructure in the U.S. to supply natural gas to the end markets has created a substantial demand for these services.
Filling this demand are the MLPs which enjoy considerable tax advantage and require a lower cost of capital. MLPs generate stable cash flow and offer high distribution yields to unitholders. The cash distributed from an MLP to unitholders is tax-free saving it from double taxation.
The attractive attributes of an MLP structure must have prompted CONSOL Energy to embark upon the pipeline business. The spurt in production witnessed by both these companies in the first quarter in the prolific Marcellus Shale must have also led to the decision.
What does the future hold for CONSOL and Noble?
The MLP is a big leap for both Noble and CONSOL. With the Department of Energy approving natural gas exports, we believe the decision to form an MLP has come at an appropriate moment.
As per the Energy Information Administration, estimated liquefied natural gas exports will reach 5.8 trillion cubic feet (Tcf) by 2040 while shale production will likely increase to 19.8 Tcf by 2040 from 2012 levels. So, the future looks quite promising for energy focused MLPs.
Other Companies Going the MLP Way
Energy operators that are following the MLP route include WPX Energy Corp. (WPX) and Dominion Resources Inc. (D). WPX Energy intends to form an MLP to develop natural gas properties in the Piceance Basin. Dominion Resources went for an MLP structure for natural gas transportation assets that are expected to generate $2 billion in earnings annually.
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- CONSOL Energy Inc.