Somehow a $9.3 billion deal went relatively under the radar of many investors last week as Tulsa, Okla.-based natural gas storage and transportation company Oneok (OKE) announced it would acquire its affiliated master limited partnership, or MLP, Oneok Partners LP (OKS) .
Though the transaction wasn't greeted with much in the way of Wall Street headlines, the deal signals what is becoming increasingly apparent in the oil and gas business: the MLP structure, one that is set up much like a real estate investment trust, may be a broken model.
Oneok, like the rest of the oil and gas industry, has suffered in producing cash in recent years due to lower commodity prices, so it is following the developing trend of eliminating a key component of the MLP structure called incentive distribution rights, or IDRs. (See our related stories on MLPs as an endangered species and a recent legal challenge to how they operate.)
To be sure, Oneok saw its shares rebound around 165% in the past 12 months as commodity prices came off the bottom, and it was likely looking to use its currency for a deal, Hinds Howard, an associate portfolio manager at CBRE Clarion Securities, ventured. A deal to acquire its MLP and eliminate the partnership's pesky IDRs in the process may arguably have served as something of a two birds, one stone device.
But according to industry sources, IDRs are across the board less attractive in the current industry environment, with oil just above $50 per barrel and natural gas heading back toward $3 per million British thermal units—much less attractive than when these mechanisms were in vogue at $100 oil and $6 natural gas—making the MLP in turn less attractive to many investors.
The second, more glaring factor that Oneok may have been looking to get in front of, is potential tax reform by President Trump. Industry watchers speculate that Trump could impose reform that would make C-corp structures more appealing or even cause double taxation on MLPs, one at the corporate level and the other at unit-holder level, making the structure that much less lucrative for everyone involved.
Facing these headwinds, its likely that a number of MLPs could look to buy out their IDR agreements or be acquired by their sponsors (in recent transactions, both methods have been applauded by investors):
Following last week's announcement, CreditSights analysts noted investors will naturally be wondering what the Oneok deal means for Energy Transfer Equity LP (ETE) given that it is now the last large pure play holding company that hasn't addressed IDRs.
There are actually quite a few other MLPs that have yet to address the issue of IDRs, though, not the least of which is ETE and its affiliate Sunoco Logistics Partners LP (SXL) . But SXL first has to work out the acquisition of its sister MLP, Energy Transfer Partners LP (ETP) .
Whether in fact the company will eventually go the route of Oneok and Kinder Morgan (KMI) , opting to gobble up the entirety of their MLP to effectively simplify their structure and wipe out the IDR altogether, or restructure its IDR while remaining a separate MLP is anyone's guess (though the better bet is probably on the latter).