Since BP plc (ADR) (NYSE:BP) announced July 18 that it was considering spinning off some its pipeline assets into a master limited partnership, BP stock only rose marginally on the news.
The consensus about spinoffs — MLPs or otherwise — is that both the parent’s stock and that of the newly independent division do better on their own because they’re able to better focus on the task at hand.
Spinoff ETF’s Mediocre Performance
The Guggenheim S&P Spin-Off ETF (NYSEARCA:CSD) got its start in December 2006. In the decade since, CSD has an annual total return of 6.54%, 77 basis points less than the S&P 500.
More recently, VanEck created the VanEck Vectors Global Spin-Off ETF (NYSEARCA:SPUN) in June 2015. It’s total return in the two years since its launch is 7.7%, 150 basis points less than the S&P.
Both have underperformed the index, and while you can argue that the better benchmark might be a mid-cap or small-cap index, I was merely trying to point out that despite all of the academic research that shows spinoffs outperform, it seems these gains remain elusive for the average investor.
How Is BP’s MLP Spinoff Different?
Well, other than the taxation differences of MLPs, it’s not different from spinoffs in other industries. BP is pondering the move as a way to generate greater shareholder value from BP stock by putting its pipeline business in a better position to grow while generating attractive tax-deferred returns.
InvestorPlace energy guru Aaron Levitt recently discussed the upside of BP’s move. He believes it will give the company’s stock a boost while continuing to provide investors with a healthy BP dividend.
BP would benefit from BP Midstream Partners (the proposed name) in two ways.
“General partners run the show. They decide what pipelines to buy and drop down into the MLP, how to expand and other issues. In return, GPs receive fees and bonuses — called incentive distribution rights, or IDRs — for managing the MLP,” Levitt wrote July 19. “Moreover, they own the vast bulk of the MLP’s units, so they collect distributions too.”
It’s a pretty sweet deal for the company as it allows BP to defer taxes on its pipeline earnings while generating additional fees for operating the MLP. Nothing changes regarding costs to the company yet taxes get deferred.
It’s a big reason why some large oil and gas companies have spun-off their pipeline assets in recent years. Levitt gives three prime examples of companies—Marathon Petroleum Corp (NYSE:MPC), Tesoro Corporation (NYSE:TSO) and Royal Dutch Shell PLC (ADR) (NYSE:RDS.A)—who’ve seen good returns relative to their respective spinoffs.
Stock Performance Since Spinoff
MPLX LP (NASDAQ:MPLX)
Tesoro Logistics LP (NASDAQ:TLLP)
Royal Dutch Shell
Shell Midstream Partners LP (NYSE:SHLX)
Bottom Line on BP Stock
As big companies go, I see BP as the best-integrated oil and gas firm to bet on in the next three to five years regardless of whether the company spins off its pipeline assets.
However, I have to agree with my colleague. The move to make BP Midstream Partners an independent company seems like an easy decision.
So, unless I’m missing something, BP shareholders can expect good news in the months ahead. If you don’t own BP stock, but were thinking about it, this ought to make your decision much easier.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.
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