NEW YORK (
) -- I was talking to Jim Cramer today about master limited partnerships, or MLPs, and why there's a mad rush for energy companies to create them.
The MLP structure is tax-advantaged because MLPs are forced to disburse most, if not all, of their profits as distributions to their shareholders. That direct distribution becomes an incredible opportunity only in a very low interest rate environment as investors continue to search hard for yield.
And that yield craze is exactly what benefits the energy companies who have been rolling out MLP IPOs as fast as they can. They install themselves as large shareholders of the newly public company, monetizing their storage and transport assets and using the cash flow from distributions to help finance other capital expenditures. And when the retail customer takes the price for the new IPO up, the energy often can then sell their ownership interest for a big cash infusion, at a price that they'd never realize with a pure asset sale to another energy company.
This is what happened with
(CHK - Get Report)
and its MLP rollout
Chesapeake Midstream Partners
. The early IPO price was incredibly cheap compared to their likely distributions. But as the MLP share price rallied, Chesapeake sold its interest.
As Chesapeake ended its direct connection with its MLP, Chesapeake partners renamed itself to
Access Midstream Partners
. But the point is that this maneuver and the cash flow that came from it was a tremendous winner for Chesapeake and one of the main reasons that Chesapeake did not threaten bankruptcy in 2012, which I thought was a very possible outcome.
I talk more about MLPs -- which ones should be bought and when -- with Jim in the video above.
At the time of publication the author had no position in any of the stocks mentioned.
This article was written by an independent contributor, separate from TheStreet's regular news coverage.
Action Alerts PLUS, which Cramer co-manages as a charitable trust, has no positions in the stocks mentioned.