Activist Investors: Creating, Not Managing, MLPs

I don’t know what I was thinking when I pitched this article to my editor. The unique corporate governance structure of MLPs is known to anyone who scratches the surface with MLP research. The GP decides who will sit on the board, and does not owe fiduciary duty to LP unitholders. Now, this does not stop investors from trying to influence management, and we’ve seen some really fabulous open letters over the years. The most recent of these is the one MarkWest Energy Partners (MWE) co-founder and former CEO John Fox wrote to try to stop the merger with MPLX (MPLX).

While we all love a bit of gossip, the real way activist investors influence MLPs is by creating them. Since most energy companies are corporations (not MLPs), it’s much easier for activist investors to gain a foothold there. One way to create additional value is to insist that the company spin off any qualifying assets into a new MLP. Carl Icahn alone is responsible for at least two of these: CVR Refining (CVRR) and Transocean Partners (RIGP). And his company, Icahn Enterprises (IEP), is itself an MLP.

Creation of MLPs

When Icahn took a stake in Transocean (RIG) in 2013, he insisted on having members of his team sit on the board. The negotiations were openly hostile, with both Icahn and RIG management sides issuing open letters of criticism. Fourteen months after his letter, the IPO of RIGP was completed.

Jana Partners has also had significant success in convincing companies to spin off assets into an MLP. However, perhaps due to his rumored cooperative and respectful approach, Managing Partner Barry Rosenstein doesn’t grab headlines in quite the same way as Icahn. Still, in 2011, Jana revealed a stake in El Paso Corporation (former ticker: EP), which promptly announced the intention to spin off its upstream business in order to focus on energy infrastructure, which would include its MLP, El Paso Pipeline Partners (former ticker: EPB). Later that year, Kinder Morgan (KMI) bought the entire company.

In January 2012, Jana bought a stake in Marathon Petroleum Corporation (MPC). Shortly thereafter, management announced its intention to spin off assets into an MLP, and the IPO of MPLX (MPLX) was completed in October of that year. Fascinatingly, Jana began reducing its stake less than a month after acquiring it.

Jana also acquired an ownership interest in QEP Resources (QEP) around the time of the IPO of its MLP, QEP Midstream Partners (former ticker: QEPM), in mid-2013. Rosenstein wrote a letter to QEP management urging the increased use of (and separation from) the MLP so that capital could be redeployed into its drilling efforts. He also suggested that QEP no longer needed to have control of the assets, something which many general MLP investors might agree with. In October 2014, QEP agreed to sell its midstream assets, including its stake in QEPM, to Tesoro Logistics (TLLP), and Jana exited its position shortly thereafter.

Performance of Activist Created MLPs

More important to our concerns for MLPs, how do these newly created MLPs perform?

Results are mixed compared to the Alerian MLP Index (AMZ), with two underperforming and two outperforming from IPO to the present. With respect to CVRR’s outperformance, one could argue that had more to do with being in the refining business during a period of falling oil prices than Icahn’s intervention. Then again, I guess you could make the same argument in the opposite direction for RIGP being in the offshore drilling business.

The creation of these MLPs may have been a boon to their sponsors, lifting share prices there. Activist investors are typically short-term investors (and for this, they were criticized by Larry Fink, Blackrock CEO, in a letter to S&P 500 CEOs earlier this year). Given that the activist mandate is typically to unlock as much value as possible, and additionally given that becoming a company’s largest shareholder takes a great deal of capital, activists tend not to stick around after the change they want has been implemented. In these cases, that’s after the creation of the MLP.

Who’s Next?

If you’re wondering who might be next, Paul Singer’s Elliot Management took a stake in Hess Corporation (HES) in 2013, and the S-1 for Hess Midstream Partners (proposed ticker: HESM) has already been filed.

Word to the Wise

Very often, share prices will jump when the news is released that an activist investor has taken a stake in a company. Since both the activist investor and the average investor are shareholders, your interests are aligned since you both own the same thing. This can be good for everyone. But never forget that active investors not only have more power than you, they don’t work for you. Just like it’s important to evaluate the management team of a particular company before you invest, if a company has an activist investor involved, be sure to evaluate them on the same stringent criteria.

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