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Hess Joins MLP Craze: 'Fun While It Lasts' Or 'Next Debacle?'

John Seward

Hess Corp. (NYSE: HES) on Wednesday joined a long list of energy companies forming master limited partnerships tax-exempt, publicly traded operations that return nearly all profits to shareholders.

Sometimes compared with real estate investment trusts, the partnerships must derive at least 90 percent of their business from natural resources, real estate or commodities.

It's a booming investment sector. Hinds Howard noted that last week alone saw the launch of at least three initial public offerings of the partnerships.

'It can be overwhelming," Howard said of the pace of industry news. "Like when my 3 young kids are all talking at once."

Launches last week included Westlake Chemical Partners (NYSE: WLKP) $225 million MLP initial offering; Transocean Partners (NYSE: RIG) $350 million initial offering and VTTI Energy's (NYSE: VTTI) a $350 million IPO.

But Peritus Asset Mananagement's Timothy Gramatovich called MLPs “the next great investment debacle,” in a Bloomberg interview in March.

Many of the partnerships are invested in natural gas-related assets where production can drop far more abruptly than for oil.

Such a scenario hurts profit distributions on which MLPs trade.

Yet the widely cited Alerian MLP Index is up 8.6 percent in the year to date compared with the S&P 500's 5.25 percent.

Hess also follows Royal Dutch Shell (NYSE: RDS), Marathon (NYSE: MRO) and ConocoPhillips (NYSE: COP) on the MLP bandwagon.

Hess's proposed partnership is focused on its Tioga natural gas processing plant in North Dakota along with related related transportation and storage assets.

"It signals they believe they have sufficient future growth to feed this MLP overtime," Credit Suisse analyst Edward Westlake said in a research note Thursday.
Westlake called it a "fun business while it lasts" and sees the chance for expanded gas processing given the richness of the area's gas field.

Hess traded on Thursday afternoon down two percent at $99.03.

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