Tell me if you've heard this story before... An exploration and production company is evaluating strategic alternatives to enhance shareholder value. In this case, the assets in question are of the midstream variety and the company is QEP Resources (QEP). The company expects to form a master limited partnership with some of its midstream assets and file for an initial public offering in the second quarter.
Initially, QEP will contribute a majority of its gathering assets in Wyoming and North Dakota with the intentions of growing the business from there. The plan is for an IPO of between $300 million and $400 million for a minority interest with the proceeds being used to fund operations at QEP as well as reduce some of its debt.
It's of course not the only IPO of an MLP in the pipeline. Investors will soon have the opportunity to invest in a midstream MLP from Phillips 66 (PSX 1.40%). That MLP will also initially offer units in the $300 million-$400 million range and could include assets such as crude pipelines and terminals, rail cars and other rail infrastructure, as well as natural gas liquids assets. Geographically most of those assets are in the midcontinent and Gulf Coast.
Those two soon-to-be-public MLP's will be joining what's becoming a flooded market. Along with a host of others, Marathon Petroleum (MPC 0.57%) unleashed its own midstream IPO, MPLX (MPLX 2.04%), in 2012. The company, which was seeded with crude oil and refined product pipelines, storage assets, and a barge dock, raised about $400 million in its IPO. Geographically, its assets are located in Illinois, Indiana, and Ohio giving it a foothold in the Utica Shale.
As you can see, each midstream company will have a different focus on assets held as well as initial geography. That's a key piece of information for investors to grasp. MLP's have traditionally been simple income vehicles. However, because of the energy boom and the subsequent need for infrastructure, these companies will have more upside for growth depending on how close the strategic location of the assets are to a growing resource base.
Investors considering QEP's midstream MLP need to keep a few things in mind. First, the assets are located in the Bakken, as well as the Rockies. If you want to be invested in the growth of the Bakken, then QEP might be for you. However, the company will only be initially contributing its gathering assets. It's not at this point contributing its processing businesses. Do you want to own just gathering assets or would you like a more diverse set of assets?
Second, the IPO is more about raising cash for QEP than growing the midstream business. The company's recent acquisitions of $1.4 billion of oil and natural gas properties in the Three Forks and Bakken have raised its debt-to-equity levels. Raising cash by selling a piece of its midstream business might be more about balance sheet repair than value creation.
I'd be much more comfortable investing in a more established midstream player like Enterprise Products Partners (EPD 1.93%). The company offers broad diversity across all major geographies, including the Bakken and Rockies, as well as owning a diversity of assets. Other's mileage may vary, but my money is in Enterprise Products.
