Nobody likes a monopoly… except investors, of course. We love monopolies, as long as we can own shares. There’s almost nothing better than a lack of competition, because that gives pricing power and better margins and a nice steady stream of profits.
And if you can own a monopoly company that also pays out a royalty stream, well, then bring me a cold compress cause it’s gettin’ hot in here!
That’s pretty much what pops in my head after reading through Marc Lichtenfeld’s latest pitch for his Oxford Income Letter… so, wanna make a fortune like John D. Rockefeller because of one of the many companies that’s a legacy of Standard Oil? Let’s see what they’re pitching.
Here’s the intro:
“The company we’ve uncovered is scheduled to pay out a $583 million royalty disbursal in the second week of November.
“Even better… it’s tax-advantaged.
“Let me give you a sneak peek of the opportunity…
“It has to do with a company John D. Rockefeller originally founded 129 years ago.
“It has the same sort of competitive advantages Rockefeller’s Standard Oil monopoly enjoyed more than a century ago…
“Only this time… the competitive advantages are 100% legal.
“In fact, the U.S. government is one of its biggest clients. It recently landed a hefty portion of a $7.1 billion contract to manage fuel for the Defense Department.
“And this company has become even more profitable despite the crash in oil prices from $115 last year to near $40 a barrel.”
As most of the ads do, this one tosses around lots of big numbers — the royalty stream is paying out $583 million next week, and we’re told that some individual investors have pocketed huge payouts…
- Ralph Marlow of Ponte Vedra Beach, Florida, collected a lump-sum payout of $71,120 on February 12, 2015.
- Kevin Stratford of Greenville, North Carolina, opened his account to find a deposit of $83,556 on May 7, 2015.
- And Frederick White of Prescott, Arizona, received a royalty disbursement of $155,237 on August 6, 2015.
To their credit, the Oxford Club folks do say that “how much you can collect depends on how much you put in.” But, of course, we can’t stop thinking about that $155,237 payout from August 6.
And maybe we can even avoid taxes on this royalty disbursement? Man, this gets better and better…
“… through the right channels, ANYONE can tap Standard Oil’s Last Great Royalty Stream. But few know how.
“Even fewer know an investment like this comes with a special tax benefit.
“Rockefeller’s secret royalty stream enjoys special tax advantages found buried on Page 3,706 of the government tax code.”
Oh man oh man oh man oh man… this is good stuff! Where do I sign up for my river of wealth?
“Imagine for a minute an account that pays a full 40 to 50 times more than the average savings account… and also increases its interest payments every single year without fail.
“Imagine an account that pays you large lump sums on specific dates each year.
“And one that offers a special tax-advantaged status.”
Oh, I’m imagining it all right. And I’m imagining my Maserati, too, and a nice little seaside mansion… and there’s the chef, preparing fresh lobsters for me. Oh, just one little taste? I shouldn’t… OK, fine… you spoil me Chef, you cheeky rascal.
Hmmm? Oh, right, back to our teaser pitch. So how does one get on the “Path to Rockefeller’s Riches?”
OK, first… buy up every single channel of the supply chain, from drilling land to refineries to pipelines to barrels. Get rid of your competitors. Charge what you want. Simple, right? Much like my favorite Steve Martin routine, “How to be a millionaire and never pay taxes” … step one is, of course, “get a million dollars.”
There’s a long spiel about Rockefeller and the incredible wealth he amassed — he would have been several times wealthier than Bill Gates or Warren Buffett if you adjust for inflation, and Lichtenfeld says that at one point his net worth was 1.5% of the GDP of the United States. By way of comparison, in case you’re curious, you’d have to add together the fortunes of Bill Gates, Warren Buffett and Larry Ellison to get to 1% of US GDP today. Of course, if it weren’t for the Antitrust Act and the Supreme Court, his family or foundation might still effectively control 90% of oil and gasoline production in the United States, and his fortune could be multitudes larger.
Does that mean anything? Not really. You’re not angling to be the next Rockefeller, and if you were you wouldn’t be starting out by buying a few shares in a publicly traded company (if you really want to be him, start out with a hardscrabble existence, a righteous mother, a con man father, take some accounting classes, and start building your own small businesses and partnerships… and never stop looking for an angle to trade up on everything you own or control)…
… but is there a remnant of the old Rockefeller fortune that can still work for us and perhaps generate some above-average returns? We are simple folk, that will have to be enough.
Let’s see what the investment idea hiding under this history lesson might be — the basic idea is that the breakup of Standard Oil a little over 100 years ago created some of the richest companies in the world, like ConocoPhillips, Chevron and ExxonMobil, but that there’s also a “secret” fourth company we can add to that list that is way more enticing…
“… there’s a fourth company that, much to John D. Rockefeller’s delight, continued Standard Oil’s tradition of controlling all stages of production… and paying out massive amounts of income to shareholders.
“In the archives we’ve studied, we found that this fourth company has actually paid out MORE per share than Exxon Mobil every single year that we have data.
“It’s not BP, Marathon Petroleum, Pennzoil or any popular company you think he may have owned…
“But this hidden Rockefeller gem – Standard Oil’s Last Great Royalty Stream – has NEVER decreased payments.”
So that’s what we’re looking for today — what’s the “hidden Rockefeller gem?” What are we told about this one?
More from the ad:
“A Rising Juggernaut…
“The company I’m talking about here has changed names several times over the course of 129 years, and I can’t reveal the modern name yet, for reasons you’ll soon understand.
“What I can tell you is that Rockefeller founded this company (I’ll call it ‘Rockefeller’s Original Company,’ or ‘ROC’ for short) in the late 1800s to supply Northeastern refineries with crude from local sources.
“In short, it was one of the pipelines Rockefeller used to transport his oil….
“What Rockefeller essentially wanted this company to do was control all flows of petroleum around the country.
“Oil would pass through its pipelines, and Rockefeller and his fellow shareholders would collect a fee along the way.
“The company wouldn’t have to produce any oil. It wouldn’t have to pay for exploration costs, drilling expenses, thousands of workers or any of the other usual expenses that drain oil company expense accounts.
“Instead, the company just collected the fees and handed over the cash to shareholders.
“And it continued to do this long after Standard Oil broke up.”
So, no surprise to most of you, we’re talking about one of the pipeline companies that owns and operates the pipes that move oil and gas around the country. And since we’ve also got the “royalty stream” language and the bit about being tax advantaged, it’s almost certainly one of the Master Limited Partnerships (MLPs) who dominate the pipeline business today. Clues about which one it might be?
“It now owns more than 6,000 miles of U.S. pipeline….
“… during the recent bear market turn for energy stocks, this company actually increased both its profits and its payouts….
- More than 100 terminals (in many major metropolitan areas, including New York City)
- Petroleum storage facilities that can handle 63 million barrels (worth nearly $3 billion)
- And natural gas storage facilities that can manage 40 billion cubic feet of natural gas capacity (worth more than $102.8 million). ROC also…
- Develops, constructs, operates and maintains third-party assets (including an additional 2,700 miles of pipelines)
- Is a wholesale distributor of refined petroleum.
“In total, ROC accounts for well over $3.1 billion in economic activity per day!”
So… we toss all that into the Mighty, Mighty Thinkolator and, despite some minor discrepancies in the clues, get an almost certain answer: This is Buckeye Partners (BPL)
Which was indeed one of the original parts of Standard Oil, building pipelines to serve Rockefeller’s hub near Cleveland, the onetime heart of US oil country. They bought up lots of other pipelines and terminals over the years, and now they do own more than 100 terminals, they do own more than 6,000 miles of pipeline, and those storage number are pretty close but are not really accurate anymore (they’ve sold some storage facilities recently, and they’re always making deals of one sort or another).
A few of the “recent” items and hints in the ad are several years old, though, so that shouldn’t be a surprise — including the talk about the “ideally located crown jewel” of their international oil operations, which was bought “just recently” for a bit over $1.3 billion… but by “just recently” they apparently mean “five years ago.” That’s a reference to Buckeye’s purchase of the large BORCO facility in the Bahamas, which actually ended up costing them about $1.7 million when they took full control in the end (the first purchase was just 80% of the business, a deal they made in 2010, they bought out the 20% partner a little later).
Buckeye has continued to expand their portfolio of terminals along the East Coast and in the Caribbean with their more recent acquisitions from Hess (another $800 million or so), and that is one of the things that differentiates them from some other MLPs, they have a huge number of terminals and refined product/blending facilities to help distribute gasoline and other products to end customers, and they also have the big Caribbean presence that gets them some international trading optionality.
Buckeye Partners is not the biggest MLP by a long shot, but they are in the top ten with a market cap of over $8 billion… they’re dwarfed by Enterprise Products Partners (EPD) at $55 billion, but are similar in size to partnerships like Sunoco Logistics (SXL) or OneOK (OKS). They’re also kind of in the middle of the road when it comes to distribution yield, which is currently just under 7% for BPL (the big pipeline MLPs range from 5-9%, for the most part). Like many large MLPs, they try to raise their distribution every single quarter by at least a wee bit, and they’ve raised the payout at least once a year for a dozen years — their distribution per share is now 60% or so higher than it was ten years ago, which is lovely but nowhere near the growth rate of some MLPs (a few of them have doubled their payouts over that time, or more). So they’re growing at a middling pace as well.
And to further the “middling” appearance of BPL, they also have, it seems to me, about an average amount of debt — almost all MLPs carry quite a bit of debt or preferred equity to help finance their growth, since they can’t pay big cash distributions and grow their assets without somehow getting growth capital (they’re pass-through entities for tax purposes, which means they can’t retain earnings to reinvest in the business… not that most of them could anyway, given their low “taxable” earnings after depreciation and their commitment to high distribution payments). That debt is an issue of concern for many investors now with some early fears about how MLPs will do if capital is less accessible or more expensive and investors demand higher distribution payments in a potential rising rate environment… if that comes along at the same time that volumes or pricing in their business hits a hiccup, like, say, with lower oil production thanks to falling prices, then high leverage means they can get hurt very quickly. Investors primarily own MLPs because of the high current distribution yields, so if those distributions have to be cut the shares almost invariably collapse. Those are the macro concerns about MLPs, oversimplified — not specific concerns about Buckeye Partners.
When I look at BPL I do see that growth potential, primarily because of their valuable terminals near important East Coast and Midwest markets and in the Caribbean, but they are, of course, also having to pay for that growth with acquisitions and capital investments. And the per-share distributions look lovely, and have helped investors to do very well with MLPs over the past couple decades… but there’s something about the model that just makes me a little nervous over time — I guess it’s probably the debt and the worry that I don’t really know how much of the depreciation that’s effectively paid out to shareholders is really needed for long-term growth and maintenance and is effectively just recycled through capital and equity raises that are then used to cover those growth and maintenance needs.
That shows up to some degree in the numbers, with the share count rising 30% or so in the last three years even as revenue has fallen by 10% or so (so revenue per share has fallen more than 30%)… EBITDA is up 50%+ over three years, but EBITDA per share is up only 17%, to say nothing of any concerns about how substantial the I and D parts of that (interest and depreciation) might be in the years to come.
And yes, some people don’t like the small extra headache that comes from MLPs at tax time — these are publicly traded partnerships, so owners (that would be you) will receive a K-1 form and have to file your income from the partnership as part of your tax prep work… and sometimes the final numbers for these come late in the game, often in March, so you might have to file your taxes on the late side or get an extension if time is of the essence for you or your accountant as April 15 approaches.
For those who are unfamiliar with MLPs, they exist in their current form because the government gave them a tax incentive to encourage investment in energy infrastructure — so they don’t pay taxes, and they pass their tax obligations on to unitholders like you… in that way they’re a bit like REITs, but the tax advantages of MLPs are actually quite a bit more dramatic. Most of these MLPs have huge depreciation charges on their plants and pipelines, and that therefore wouldn’t be taxable income anyway… but their spending on new replacement investments or renovations is typically much lower than their depreciation charges (and most of their real growth investments are funded by new capital and debt, not by retained depreciation “savings”), so they can pay out far more in distributions than they actually earn in “income.” That’s why they use terms like “distributable cash flow” instead of “income.”
All of the payments that MLPs distribute to you in excess of the taxable income are considered “return of capital” — so that’s not taxable income for you, it just lowers your cost basis in the shares you own. When you sell, your capital gains will account for the lower cost basis so you will eventually owe taxes… but until then, you pay far less in taxes on your MLP distributions than you would on a similar income stream from a bond, regular stock or REIT (though occasionally other stocks or REITs do pay some return of capital as well), so you basically get cash up front but deferral of much of the tax obligation until you sell your shares, a rare tax-deferral option that doesn’t rely on a special kind of account (like a 401k or IRA… and as an aside, most folks will tell you to keep your MLPs out of your tax-deferred retirement accounts). And as a kicker, last time I checked your MLP cost basis resets upon your demise… so it’s possible not to pay taxes at all (except on the small portion of the distribution that’s actually passed-through income) if you just pass your MLP units on to your heirs and they get a fresh new cost basis. I’m not an accountant or a tax expert, so make sure to check with such folks before making a commitment to these kinds of investments.
Those concerns and benefits apply to pretty much all MLPs I’ve looked at, and Buckeye is actually one of the more appealing ones insofar as their business is small enough to be somewhat understandable, their balance sheet is better than many MLPs and they do have a good investment-graded credit rating, they also do have that nice Caribbean “jewel” that’s got real international growth potential, their distribution yield is high enough to be appealing for current income, and I think the weakness in recent results, blamed largely on their marketing division, is probably not a long-term concern. If you’re looking for MLP exposure and income, it might be worth taking a look and drilling down into their numbers (I haven’t, really) to see if it appeals to you. The quick overview investor fact sheet is here to give you a little kick start. My first-look guesstimate is that it’s pretty reasonably valued, it’s not particularly cheap or in possession of big upcoming catalysts that will change the business quickly and make it dramatically more or less valuable in the near term… and it’s already trading ex-dividend for the current quarterly payment, so you can probably take your time in evaluating this one. If you find something of interest, or have other favorite MLPs to share with your fellow readers, feel free to share with a comment below.
P.S. I always like to pull out the numbers they use in the ads to entice you, and apply those to a real-world scenario — so remember Frederick White, that person in the ad who collected a $155,237 payout on August 6? In order to receive that huge payout at the $1.16 BPL paid per share on that day he would have had to be the owner of 133,479 MLP units. So his Buckeye Partners position was valued at about $9 million. Scale your expectations accordingly.