Transition should be simple, with no effect on cash flow
Viper Energy Partners (ticker: VNOM) announced today it is changing structure, from a pass-through partnership to a taxable corporation.
A subsidiary of Diamondback Energy (ticker: FANG), Viper expects this change will be a simple process, via a “check the box” election that will not be taxable to the company or its unitholders. Viper’s business model will not change, as the company intends to distribute all its operating cash flow to unitholders as before. Viper believes this election will allow it to significantly expand its investor base, both in the United States and internationally, as well as simplify its tax structure and reporting.
Several companies have shifted away from MLP architecture
This continues a recent trend away from pass-through partnership corporate structures, as MLPs are considering becoming standard corporations. Most recently, Tallgrass Energy announced it would acquire its MLP subsidiary Tallgrass Energy Partners, becoming a simpler taxable corporation. Pipeline MLPs received a blow from FERC in mid-March, when the Commission ruled companies were not allowed to charge for corporate income taxes in pipeline rates.
While most MLPs operate pipelines, as the corporate structure is particularly suited to such a relatively static asset, Viper was not. The company instead reports it began considering this change after evaluating the effects of the new U.S. tax law.
The specific transaction will be rather complex, including the exchange by Diamondback of all its Viper common units for an equal number of newly-issued Viper Class B units, which will have voting rights identical to Viper common units but will have no rights to distributions from Viper and an equal number of newly-issued units of Viper Energy Partners LLC, which will have no voting rights but will be entitled to distributions.
Diamondback CEO Travis Stice commented “Viper’s tax status election will expand our investor universe to a broader range of investors, both domestic and international, who are looking for exposure to an oil and gas company that can grow at industry leading rates without spending any capital and maintaining 90% margins. This decision was made after months of market and tax analysis, and we are very pleased that the relationship between Diamondback and Viper yet again allows Viper to differentiate itself from its peer group, both public and private. Viper will continue to grow its distributions organically via the significant undeveloped resource in its portfolio today and will also continue to be selective in acquiring high growth mineral assets in oil-weighted basins as opportunities present themselves. We feel there is significant opportunity ahead for Viper in the highly fragmented private mineral market because of the amount of private equity capital that has been deployed in the space over the last five years that will at some point require an exit.”
