[Type text] The Wealth Effects Of Oil And Gas Property Sell Offs To E&P MLP Buyers. Andy Saporoschenko * David L. Stowe ABSTRACT

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1 The Wealth Effects Of Oil And Gas Property Sell Offs To E&P MLP Buyers Andy Saporoschenko * David L. Stowe ABSTRACT The announcement wealth effects of sell offs of mostly proven oil and gas properties to Exploration and Production (E&P) Master Limited Partnerships (MLPs) are examined for both the sellers of the properties and the MLP Buyers of the properties. The MLP Buyers experience large, positive day ( 1,0) wealth effects larger than for previous studies dealing with corporate buyers. This result can be explained by the taxadvantaged structure of an MLP and the superior contractual control over the payout of free cash flows for most MLPs. The sellers of the oil and gas properties experience zero announcement wealth effects, which is contrary to many previous findings of significant positive wealth effects for sellers where both the buyers and sellers are corporations. These finding are difficult to explain as the sellers initiate the sell offs and are not in financial distress as indicated by their ROEs and by rising oil prices. Thus, the sellers should only initiate positive NPV sales, as would be indicated by positive announcement effects. JEL classification: G34 Key Words: Mergers; Acquisitions; Restructuring; Corporate Governance INTRODUCTION We examine the wealth effects (abnormal returns) around a sample of announcements of recent mostly proven oil and/or gas property sell offs to U.S. Exploration and Production (E&P) Master Limited Partnerships (MLPs), a different form of firm organization than a corporation. If the sales of these oil and gas properties to the E&P MLPs result in a more tax efficient and more legally specific distribution of free cash flow to the MLP investors, then the announcement of these acquisitions will result in positive abnormal returns. Moreover, the overall, combined wealth effect for buyers and sellers should be larger when the sale is from an oil and gas corporation, which is taxed at the firm level, to the MLP, which, is not primarily not taxed at the firm level. We also test the wealth effects for the sellers of these oil and gas properties to further the existing literature which deals specifically with sell offs between corporations. * Contact author asaporo@gmail.com. Saporoschenko, was a Visiting Finance Professor at St. Louis University while this study was completed, and Stowe is a PhD candidate at University of Missouri Columbia. Stowe s is: dlsa44@mail.mizzou.edu.

2 A recent wave of U. S. E&P MLP IPOs occurred around the time of the recent large increase in oil prices. Also, around this time, oil companies were conducting record high share repurchases to disgorge the high level of cash generated by the record high oil prices. As pass through tax investment vehicles with a required cash payout to unit holders of 95% of net income for tax favored treatment, these E&P MLPs were likely introduced propitiously as a more efficient form of business organization to pay out the large positive cash flows resulting from these high oil prices in a more tax efficient manner. So, we examine a further feature, acquisition wealth effects, of an alternative form of firm organization, the MLP. MLPs are an emerging asset class for both institutional and individual investors. Further research on MLPs offers a better understanding of their structure and performance. The MLP form of organization offers tax benefits and possible cash control rights benefits while allowing less corporate governance rights for investors. We examine if acquisitions by MLP Buyers of oil and gas properties overall reflect the benefits over the costs of this alternative form of firm organization. Our findings provide evidence that the benefits outweigh the costs of the MLP form of firm organization for energy firms, as MLPs are rewarded by the market with large positive announcement wealth effects when making acquisitions. The terminology for large sales of assets by one firm to another, where there are no changes in corporate (firm) control has not been standardized. The terms divestures, sell offs, acquisitions, and asset sales are all used. Also, acquiring firm, bidding firm and acquirer for the buyer; and selling firm and divestors for sellers are typically used synonymously. We use the term sell offs; and the terms sellers and buyers (who are all MLP Buyers) in this study. Our three major findings, given the caveat of our small sample size, differ economically from the literature that examines strictly corporate sell offs. First, the MLP Buyers exhibit larger positive announcement wealth effects than in previous studies for corporate buyers in sell offs. This wealth effect is higher for MLP Buyers with higher ROEs. Second and surprisingly, unlike previous sell off studies, the sellers to MLPs have overall announcement wealth effects insignificantly different from zero. Third, we are unable to differentiate the wealth effects of sell offs for the two cases of a) sell offs from MLP Sellers to MLP Buyers and b) sell offs from non MLP Sellers to MLP Buyers. MLPs offer a more tax efficient structure for paying out cash to unit holders (residual cash flow claimant investors) and tend to exhibit strong, contractual control over the payout of free cash flows, for instance, see (Ciccotello and Muscarella, 2001). If oil and gas properties have the same in place value to both MLP and non MLPs, before the tax efficiency and cash flow control of MLPs are considered, than the transfer of these properties (assets) to MLPs should result in net wealth gains. Most of these wealth gains should accrue to the sellers, unless they are financially distressed, as they have the final say in whether the deal goes through. On the other hand, informational asymmetry effects (release of information upon announcement of a selloff) are unlikely to apply in these sell offs since the assets involved, mostly proven oil and natural gas properties, are fairly uniform in nature and do not require extensive monitoring of going concern value such as management quality and intangibles value management. Increased focus is an unlikely motivator as the sell offs are unlikely to increase the focus of the sellers substantially as many of their assets are invested in E&P activities.

3 Energy MLP IPOs exhibited a hot market during this time period and MLPs are mostly owned by retail investors though institutional investors started entering the market extensively during the period of this study. A behavioral irrational exuberance argument, similar to the Internet Bubble, is an alternative explanation for high MLP announcement returns for sell offs, as the sell offs signal a growth strategy for these E&P MLPs. A more prosaic explanation especially for sell offs between MLP Sellers and MLP Buyers is more incremental improvements in operational efficiencies such as a reshuffling of the geographic proximity of oil and gas properties so as to provide more efficient portfolios of oil and gas properties. However, this explanation does not account well for the exceptionally large announcement returns found for the MLP Buyers only. BACKGROUND Oil prices rose dramatically in the period of our study with oil going from $62.26 a barrel (spot, West Texas Intermediate oil) in August, 2005 to $72.39 per barrel at the end of our data period of August, 2007; and a continued rise to monthly peak of $ per barrel in June, Consumer concern over high oil price probably peaked over the Memorial Day weekend of On the other hand, the vast majority of oil reserves are held by sovereign governmental oil companies, which results in less cash needed to engage in positive NPV exploration by private oil firms. Also, oil exploration is risky with long lead times to production and oil prices are volatile, so what are positive NVP projects at the time of high oil prices can quickly become negative NPV projects. However, the E&P MLPs asset base is heavily concentrated in the U. S., and typically exploits mostly long time producing sites. Thus, overall high oil prices typically result in large amounts of free cash flow for American oil and gas properties which should be paid out to investors. Jensen (1986) singles out oil companies as particularly egregious in wasting cash on negative NPV oil exploration during a previous period of high oil prices. He suggests the LBO form of corporate structure would force oil companies to pay out the cash flows as interest, rather than waste the cash flows internally. Most oil companies have taken the lesson to heart using other positive NPV financial techniques. More specifically, share repurchases and dividends by oil corporations reached dramatically high levels during the period of high oil prices under consideration most likely as a means of efficiently disgorging of excess cash. Five of the ten existing E&P MLPs, as of January, 2008, conducted their IPOs between September, 2006 and January, 2007, while Linn Energy, LLC conducted its IPO in January, E&P MLPs are a type of upstream oil firm, which produces from existing wells and does limited exploration for new wells, as opposed to the more numerous mid stream infrastructure oil & gas MLPs which own pipelines and terminals. MLP DESCRIPTION

4 A Master Limited Partnership (MLP) is a publicly traded partnership where the shares of the organization are traded in the secondary market. MLP unit holders are limited partners and are similar to equity holders in publicly traded corporations both serve as residual cash flow claimants, even though the distribution of residual cash flow are more complex and more contractually specific for MLPs. The MLP organizational form has been around since the early 1980s, but found renewed popularity in the mid 2000s. Because of the limited partnership organizational form, the MLP is able to avoid the double taxation of corporations corporate income taxation, and then personal taxation of dividends paid out by the corporation. This is obviously an attractive business form affording all the benefits of a typical corporation, limited liability being a primary one, but also including the ability to avoid most firm level taxes. In 1987, the law changed for MLPs and required all newly formed MLPs to pay taxes as if they were corporations unless they operated in a line of business typical of a partnership structure. Essentially, after the change in law, the tax benefits of the MLP organizational form could only be recognized by partnerships in the real estate, natural resources, and financial services field (with few exceptions). MLPs are required to generate in excess of 90% of their income from qualified sources (basically real estate, natural resources, and financial services). And, MLPs must pay out in excess of 95% of their net income to their unit holders as cash distributions to receive the favorable tax treatment. Typically these distributions exceed net income. This is primarily due to non cash expenses (such as depreciation and depletion) that are deducted from the income statement, but do not affect cash flows. Thus, unit holders typically are not immediately taxed on about 80 90% of their cash distributions received in a given year. In other words, unit holders typically only pay personal income tax on 10 20% of the cash they receive from an MLP (Siegel, Blum, and Lui, 2005). The rest of the cash flow distributions are taxdeferred return of capital, taxed only as a capital gain when the unit holder sells units. The general partner manages the day to day operations of the partnership. For E&P MLPs, the general partner is often the oil corporation that spun off an MLP. The unit holders receive distributions from the partnership. Typically, the general partner holds a 2% interest in the firm. Although distributions to the unit holders are divvied out in proportion to their interest in the partnership, the general partner often has a different payment stream. Typically the general partner s share of the cash flows increases as the positive cash flows of the business increases. There is no board of directors in an MLP, limiting unit holders control over management, but the direct alignment of cash flow interests between the limited partners and the general partners is often considered a sufficient replacement for good firm governance. The risk to the solvency of the MLP is highly dependent on the variation in the cash flows and income of the organization. Whatever risk the limited partners bear in their partnership units is intensified in the general partner s interest. Businesses that benefit most from the MLP structure are those with high and stable cash flow, high profitability but with large depreciation and depletion expenses, and possibly low reinvestment opportunities. MLPs are mostly sold to high net worth individuals through private wealth management divisions of investment bankers, due to their personal tax advantages and high yields but complicated tax filing

5 requirements, where tax forms must be filed by the individual in each state in which an MLP owns properties. Institutions were, before 2004, heavily discouraged from investing in MLPs since MLP cash distributions and income allocation had been considered non qualifying income restricting regulated investment companies (RICs) from investing in MLPs. Also, MLPs are typically not held by non taxable or tax deferred institutional entities. Institutions, including hedge funds, have recently begun purchasing MLP units as speculative investments due to the oil price spikes starting in 2005, but with the resultant instability of ownership. (Siegel, Blum, and Lui, 2005) provide more specific estimates of ownership distribution of MLPs, circa Their ownership statistics for MLPs are 55.3% retail investors, 21.3% general partner ownership, 19.2% institutional ownership, and 4.1% insider ownership. Since MLPs were mostly owned by high net worth individuals, they tend to be less liquid than stocks or even REITs. MLPs have become more liquid recently as more institutional investors have begun purchasing MLP units and as MLP closed end funds and ETFs have recently been introduced to allow individual investors diversified investment in MLPs. MLPs and REITs are both alternative forms of firm organization, but they do differ in several aspects. Generally, MLPs are partnerships while REITs are organized as trusts. Both are pass through vehicles for tax purposes, where 95% of net income must be distributed yearly to avoid the double taxation of income. Both can pay out a return of capital as part of the dividend. The return of capital is not taxed until units are sold and the return of capital reduces the cost basis of an investment. MLPs can pass on losses while REITS cannot. However, REIT unit holders receive the standard IRS tax form 1099, while MLP unit holders receive the complicated IRS Schedule K 1. Also, MLP unit holders must file state tax forms in all states in which the MLP owns properties. In terms of corporate governance, REIT unit holders elect the board of directors which include independent directors. MLPs have no board of directors and are controlled by the general partner. The lack of direct corporate governance by MLP unit holders is somewhat mitigated by strict contractual agreements on the pay out percentages of free cash flow between the general partner and the limited partners (the unit holders). Given the similarity of the favorable tax treatment of both REITs and MLPs reorganizing as a REIT should have similar wealth effects to reorganizing as an MLP. (Wang and Erickson, 1997) imply this conclusion given the lack of a wealth effect when firms reorganize between the MLP and REIT structure. (Rutherford and Nourse, 1988) find that firms that form separate units for real estate management realize large positive abnormal returns especially when the unit spun off is an MLP or a separate publicly traded subsidiary. Spun off REIT also result in wealth gains. The new structure thus creates some benefit, such as a tax saving or increased transparency that accrues to the shareholders. (Christensen and Levi, 1992), however, find that parent firms forming real estate MLPs do not experience positive returns. MLP LITERATURE REVIEW MLPs, relative to other organizational forms, have been thinly studied, especially in the recent literature. This is most likely due to the constraints put on a firm s ability to organize under this structure after the

6 Revenue Act of 1987 and some early over hyping of oil and gas MLPs in the 1980s. (Collins and Bey, 1986) anticipated the coming 1987 legislation and outlined how the government would stand to lose significant amounts of tax revenue if certain corporations were allowed to reorganize as an MLP. Specifically, the organizations with the largest tax obligations and highest cash flow and distributions would be the ones most likely to reorganize. This was true for many of the reorganizations prior to 1986, as according to (Terando and Omer, 1993), MLPs prior to 1986 were formed for the resulting tax savings. High business risk and the unlimited liability of the general partner seem to be the driving factors behind the lower debt levels for MLPs, according to (Omer and Terando, 1999). (Guenther, 1992) examines corporations and MLPs and concludes that capital structure does not seem to be independent of tax status and levels. Essentially, the lower tax liability of MLPs lowers their debt level. (Gentry, 1994) finds that MLPs are less levered and pay higher dividend yields than similar corporations. Two possible sources of value creation for firms that choose to reorganize as an MLP are suggested by (Moore, Christensen, and Roenfeldt, 1989). They find positive abnormal returns to the announcement of MLP formations and propose a tax savings argument and an agency cost reduction argument for their findings. The first and most obvious is the tax savings associated with MLP formations. This reduction in taxes owed should create immediate value for the firm and should be reflected as a positive and sustained price effect due to the higher cash flows expected from a lower tax burden. Secondly, the transparency of the MLP structure and the public nature of the partnership agreement should reduce agency costs, and thus increase value. This is consistent with the agency theory supported in (Jensen, 1986) for firms in general. A reduction in the agency costs associated with uncertainty should result in a lower required return for the transparent MLP compared to the more opaque firm before the reorganization. This should also result in an immediate and sustained value increase. Ciccotello and Muscarella (2001) find that the level of insider ownership and contractual investor protection in the partnership agreement are inversely related, thus they are governance substitutes. This is particularly important in the governance of MLPs, given the lack of a board of directors. They find a large number of the MLPs in their study contain specific cash flow distribution targets and also a large number contain incentives for general partners (management) to increase cash flows paid out to investors. (Ciccotello and Muscarella) also find that MLPs with limited scope, like the ones in our sample, experience superior operating performance. In a follow up paper, (Ciccotello and Muscarella, 2003) reinforce the idea of the agency cost savings in the provisions of an MLP partnership agreement and show how these cost savings work in the specific case. Moore, Christensen, and Roenfeldt (1989) find positive announcement effects on the formation, total conversion, and spin off of assets into an MLP structure. They find an overall 4.61% positive valuation effect for MLP formations between 1982 and (Denning and Shastri, 1993) also find support for the idea that conversion from the corporate form to the partnership form creates positive stock price effects. (Christensen and Levi, 1992) find that parent firms creating non real estate MLPs experience a positive and sustained share price reaction when the partnership is formed. However, this is not true when the company is a real estate MLP. (Wang and Erickson, 1997) also find that real estate MLPs do not have superior long term stock performance when compared with other real estate holding

7 companies such as REITs. Their finding lends support to the idea that increased transparency may be a significant factor explaining the abnormal announcement returns experienced by MLP formation. Shaw (1991A) finds that MLP units (shares) have unexpected excess return patterns around the exdividend day. They experience significant positive returns prior to the ex dividend day and significant negative returns on the ex dividend day. Given that these dividends are mostly tax free to the unitholder, this result is puzzling. (Shaw, 1991B) finds that although announced dividend decreases have a significant negative price effect on the security of the MLP making the announcement, there is no significant industry wide effect. MLP IPO mispricing is examined by (Muscarella, 1988) and he finds that MLP IPOs tend to be fairly priced. This is surprising when compared to the relative underpricing of corporate IPOs, which has been substantially documented and studied. SELL OFF LITERATURE REVIEW In general, previous sell off studies indicate positive wealth gains are found for sellers and these are larger than wealth gains for buyers. While these studies tend to not indicate whether only corporations are contained within their samples, the implicit assumption underlying these studies is that most, if not all, the firms in the studies are corporations. Unless the seller is in dire need of cash, (higher) positive wealth effects make sense, as the seller normally initiates the sell off transaction and has the final say as to the completion of the transaction. Boudreaux (1975), Alexander, Benson, and Kampmeyer (1984); (Hearth and Zaima (1984), Rosenfeld (1984) and Lang, Poulsen, and Stulz (1995) find positive wealth effects for sellers. Several studies investigate the wealth effects for both sellers and buyers. Rosenfeld (1984), Jain (1985), Klein (1986), Hite, Owers, and Rogers (1987), Hirschey and Zaima (1989), Sicherman and Pettway (1992) and Kiymaz (2006) find positive wealth effects for both sellers and buyers in the same transaction. Zaima and Hearth (1985) and Datta, Iskandar Datta, and Raman (2003) find positive wealth effects for sellers but no significant wealth effects for buyers. Alexandrou and Sudarsanam (2001) also find only seller wealth gains for UK sell offs. Hanson and Song (2000) and Mulherin and Boone (2000) find net positive abnormal returns for the seller buyer combination in a transaction. Kiymaz (2006) finds that wealth effects for sellers and buyers differ by industry classification. For his corporate chemical/petroleum subsample of sell offs, he finds insignificant day ( 30, 2), ( 1,0), and (+1,+30) CARs for both sellers and buyers except for the buyers in the day ( 1,0) window, where he finds a 1.05% CAR, significant at the.10 level, while the sellers have positive but not significant day ( 1,0) CARs. Campbell, Petrova, and Sirmans (2006) examine the wealth effects for REIT Sellers of real estate assets. Sellers are not overly concerned with tax issues, as REITs are not taxed at the firm level, similarly to MLPs. They associate their high positive wealth effect for REIT Sellers with improved operational efficiencies a finding which is bolstered by the fact that the wealth effects are inversely related to the firm s operating performance prior to the sell off announcement.

8 A number of motives have been provided previously to account for sell offs. The more prominent motives include a) to sell assets to firms that can use or operate them more efficiently, b) to reduce the degree of non diversification of a seller and thus increase focus, c) to meet debt covenants or other constraints on lending, and d) to generate cash that might generate a higher return on capital when applied to another part of a firm. Another, related motive would be to payout the cash from the sell off that cannot be profitability reinvested to shareholders, as in Jensen (1986). Since the previous studies implicitly assume transactions between corporations, the tax efficiency motive has not been proposed by these studies. Chen and Guo (2005) provide evidence that firms with high financial leverage and low cash flows are more likely to conduct sell offs. However, they find that firms tend to use sell offs to divest smaller units operating in the same main industry as the parent. Hillier, McColgan, and Weremac (2009) find that sell offs by UK non financial firms follow periods of declining operating performance and are more likely to occur for diversified firms with high levels of financial leverage. Furthermore, the decision to sell the assets is strongly determined by explicit threats to management control. Gadad, Stark, and Thomas (2009), also for UK firms, find that net seller buyer operating performance increases by 3.2% per year for the three years after a sell off, with the operating performance gains almost the same for the seller and buyer. METHOD AND DATA The data for the E&P MLP sell offs (acquisitions) are obtained from (Toon, 2007) while the daily firm returns and CRSP market returns are obtained from the CRSP database. Toon lists thirty five sell offs from July, 2005 to August, 2007 where the buyer (acquirer) of the oil and/or natural gas assets is an MLP. The Toon data contain the announcement date, the MLP Buyer, the seller, the deal value (in $ millions), the percent of the sold off assets which are natural gas, the percent of the sold off assets which are proven reserves and three valuation measures: dollars paid per proved million cubic feet (mcfe), dollars paid per mcfe/day, and reserves to annual production. We determine which of the sellers are also MLPs (or the very similar organizational structure of the E&P Limited Liability Corporation (LLC)). Deal value ranges from $5M to $2.05B, with a mean and median of $281M and $100M, respectively. Of the 30 acquisitions with available MLP Buyer CRSP data, 22 acquisitions had enough CRSP return data to estimate the benchmark models and CARs. Of the 13 acquisition with available seller CRSP data, 13 acquisitions had enough CRSP return data to estimate the benchmark models and CARs. The deal sizes for the sellers with available data are fairly large with a mean and median of $595M and $400M, respectively. Since, most of the E&P MLPs had IPOs very recent to the study, benchmark models are estimated with a maximum and typical 100 days total and a minimum of 50 days using an equal number of both pre and post event date returns. The estimation periods begin at 40 days before the announcement and 40 days after the announcement. The event period consists of 63 days, +/ 31 days around the announcement date. Visual inspection of the event days indicates no substantial event clustering. The market model using the CRSP Equally Weighted Index with the Scholes Williamson

9 adjustment for non trading (SW model) and Market Adjusted Model using the CRSP Equally Weighted Index (MAdj Model) are the benchmark models used to estimate the event cumulative abnormal returns (CARs). Table 1 Panel A provides descriptive deal statistics. Acquisition values differ greatly in size. For the MLP Buyers, the deal size varies from a minimum of $13 million to a maximum of $2.05 billion, with a median deal size of $94M. For the sellers, the deal size varies from a minimum of $27 million to a maximum of $2.05 billion, with a median deal size of $400M. Table 1 Panel B provides select accounting data for the MLP Buyers and the sellers. The MLP Buyers are a lot smaller with a median total assets of $707 million compared to the sellers with a median total assets of $31.4 billion. Also, the MLP Buyers have distinctly lower ROEs than the sellers with a median of and for the MLP Buyers and the sellers, respectively. The lower ROEs for MLPs are in part due to the concentration of MLP management on creating high current depreciation and depletion expenses, so as to delay personal taxes for the unit holders. RESULTS For day ( 1,0) around the acquisition announcements, Table 2 Panel A indicates the mean MLP Buyer CARs are highly significant at 4.33% and 4.46%, respectively for the SW and MAdj Models. For both models, 21 out of 22 day ( 1,0) CARs are positive and highly significant. Due to the small sample size, these non parametric results merit more attention. The mean CARs are much higher than the results for buyers in previous corporate sell off studies. For day( 1,0) around the acquisition announcements, Table 2 Panel B indicates the mean seller CARs are not significantly different from zero at 0.03% and 0.04%, respectively for the SW and MAdj Models. For both models, five CARs are positive and eight negative without non parametric significance. The mean CARs are unexpectedly much lower than the results for sellers in previous corporation sell off studies. For corporate sellers, (Jain, 1985); (Hearth and Zaima, 1984); (Hirschey and Zaima, 1989); (Sicherman and Pettway, 1992); and (Kiymaz, 2006) report significant mean gains of 0.44%, 1.64%, 0.92%, 2.15%, and 3.07%, respectively. We separate the MLP Buyer sample into the five largest and five smallest acquisitions. For the five largest acquisitions, data were only available for two observations while for the five smaller acquisitions, data were only available for three observations. Table 3 presents the results for the large and small deals. The results are interesting as the two large acquisition exhibit very large day ( 1,0) CARs of 14.72% and 14.55% for the SW and MAdj Models, respectively, while the three small deals exhibit small and insignificant day ( 1,0) CARs of 1.34% and 1.08% for the SW and MAdj Models. The results for the two largest acquisitions are not driven by one large observation both observations have similar results. We also provide wealth effect data for the top five deals for sellers. The top five deal sellers do exhibit a positive though insignificant day 0 announcement effect for the top five deal sellers of 0.91% using the SW Model. The other windows also result in positive but non significant parametric and non parametric results. The five largest deals have a median value of $1.413 billion, so these are not small deals, yet we still find insignificant CARs for these deals. Perhaps the other deals may be too small to affect the sellers

10 stock prices, and thus the finding of zero mean CAR for the entire seller sample. However, this finding does not explain why the MLP Buyers are able to extract much larger value from the sell offs. Also, the thirteen seller observations were all larger than $90M except for one $27M deal. Only, one observation out of the thirteen smallest deals for the sellers had available data, so no results are presented for the five smallest deals for sellers. Given static operational efficiencies, sales of oil and gas properties from non MLP Sellers to MLP Buyers should result in an increase of positive cash flow due to the non taxed status of the MLP or if stronger control of cash flows to investors are in force for MLPs. Assuming capable management (not engaged in hubris acquisitions), the sale of these properties from non MLP Sellers to MLP Buyers should result in higher announcement returns for the MLP Buyers when compared to sales of these properties from MLP Sellers to MLP Buyers. The evidence in Table 4 provides no support for this premise. Both sales from MLP Sellers to MLP Buyers and Non MLP Sellers to MLP Buyers have similarlysized, significant CARs. Thus, no support can be claimed for our tax efficiency/cash control hypothesis from these tests. Analogously, since MLPs can extract additional tax avoidance value from the same inplace oil and gas properties, we expect non MLP Sellers to receive a higher price for the in place oil and gas properties sell offs than MLP Sellers. Unfortunately, data for only one MLP Seller was available, so we were not able to test the proposition. We conduct several robustness tests. The use of the CRSP Value Weight Index for the Scholes Williamson adjusted market model and the market adjusted model do not substantially affect the results of the study. The wealth effects for the entire sample of MLP Buyers and sellers, separately, are not substantially changed by using only pre event returns for the estimation period, though the sample size is reduced to fifteen and thirteen, respectively, for the MLP Buyers and sellers. Linn MLP was a buyer in eight observations with valid data, leaving fourteen observations with valid data where Linn was not an MLP Buyer. The CAR results with a Linn Only sample and a Without Linn sample are almost identical. Andarko was a non MLP Seller for five of the thirteen seller observations. The mean day ( 1,0) CARs are insignificantly different from zero for both Andarko Only and Without Andarko samples. We regress the day ( 1,0) CARs for the MLP Buyers as the dependent variable on various combinations of deal size, one of the three valuation measures (the three valuation measures are highly correlated, creating multicollinearity problems if more than one valuation measure is included in a specific regression), the percent of the sold off assets which are natural gas, and the percent of the sold off assets which are proven reserves. The only consistent significant result is that deal size is significantly related to the day ( 1,0) CARs but with economically meaningless parameter size the parameter estimates are in the order of 10 6 with deal size measured in millions of dollars. Finally, we divide the MLP Buyer and seller samples by median values for both leverage (Long Term Debt/Total Assets) and profitability (ROE), separately, to test for differences in CARs. We find no significant differences in CARs, using non parametric statistics, for both MLP Buyers and sellers, when the sample is divided by median leverage and for sellers when the sample is divided by median profitability. However, as indicated in Table 5, we find MLP Buyers with ROEs greater than the median to have significantly and economically greater CARs than MLP Buyers with lower than median ROEs. Since

11 the ROE measurements are near concurrent with the acquisitions, the above median ROE MLP Buyer results indicate that these buyers are more efficient in their acquisitions, either because their more profitable acquisitions are reflected in their ROEs or because they have made more efficient acquisitions in the past; and thus the market rewards their efficiency by higher CARs for their acquisitions. Reasons for the higher efficiency of the high ROE MLP Buyers include better valuation skills and better negotiation skills. CONCLUSIONS MLPs tend to exhibit stronger and contractually specific provisions concerning the pay out of cash to investors; and offer a more tax efficient means of paying out cash flow to investors. With high oil prices and the lack of many new potential oil and gas discoveries in the U. S., the potential for free cash flow abuse was high during the period of this study and is most likely in the future. Investors should view MLPs as a more efficient form of organization to limit free cash flow abuse and offer tax savings, and we provide evidence that investors do reward the transfer of proven oil and gas assets from corporations to MLPs, as exhibited by the large announcement wealth effects for the MLP Buyers. Overall, the evidence suggests that investors, who own E&P MLP units, should view growth through acquisitions as a valuecreating activity, especially if their MLP units have above the median ROEs, because of the special features of the MLP form of firm organization. Energy MLPs are typically owned by retail investors and the period of this study was a time of quickly rising oil prices. A behavioral explanation of irrational exuberance by retail MLP investors, induced by the rising oil prices, causing the retail investors to view expansion through acquisitions (sell offs) quite positively is offered as an alternative explanation for the high positive CARs experience by the MLP Buyers. We lack a strong economic rationale for the finding of zero wealth effects for the sellers of proven oil and gas properties, while MLP Buyers achieve large wealth effects for these same sell offs. Since, sellers typically initiate and have the final say on sell offs of their assets, why they would do a deal with no or low positive wealth effects for their shareholders/unit holders is difficult to rationalize. With high oil prices and typically high ROEs (all ROEs for sellers were positive), it is unlikely that sellers are suffering from strong credit constraints. With the potential for few new oil and gas finds within the U. S. and high oil prices, a dire need for cash for exploration by the sellers is difficult to rationalize. The finding of zero or small announcement wealth effects of sellers to E&P MLP Buyers certainly merits further study.

12 Table 1 Descriptive Statistics for MLP Acquisitions Panel A Acquisition Data Deal Value (in $M) $/Proved* $/mcfe/d* R/P* %Gas* % Proved Developed* Buyers Mean , Median , Maximum 2, , Minimum , N Sellers Mean , Median , Maximum 2, , Minimum , N Panel B Select Accounting Data (two years of data from 2006 to 2007; data is included only once for each MLP for each year that an MLP makes at least one acquisition) Buyers Total Assets (in Total L T Debt/TA ROE

13 $M) Liabs/TA Mean 1, Median Maximum 3, Minimum N Sellers Mean 44, Median 31, Maximum 164, Minimum 5, N * Variables are described in the main body of the text.

14 Table 2 Mean Full Sample CARs Panel A Mean CARs for All Buyers* ( 1, 0) (0, 0) ( 1, +1) Scholes Williams Market Model, Equally Weighted Index Model, (N = 22) 4.33%*** (9.709) 3.62%*** (10.926) 4.84%*** Positive : Negative 21:1*** 19:3*** 20:2*** Market Adjusted Returns, Equally Weighted Index Model, (N = 22) 4.46%*** (10.030) 3.64%*** (11.085) 5.03%*** (9.245) Positive : Negative 21:1*** 19:3*** 20:2*** Panel B Mean CARs for All Sellers ( 1, 0) (0, 0) ( 1, +1) Scholes Williams Market Model, Equally Weighted Index Model, (N = 13) 0.03% ( 0.001) 0.00% ( 0.122) 0.07% ( 0.206) Positive : Negative 5:8 7:6 7:6 Market Adjusted Returns, Equally Weighted Index Model, (N = 13) 0.04% ( 0.027) 0.09% ( 0.428) 0.01% ( 0.170) Positive : Negative 5:8 6:7 6:7 Z values, in parenthesis, calculated according to Patell (1976). The symbols *,**,*** show the one tail significance at 0.05, 0.01 and levels, respectively. * All Buyers are E&P MLPs.

15 Table 3 Mean CARs for Largest and Smallest Deals ( 1, 0) (0, 0) ( 1, +1) Panel A Buyers: Two Largest Deals with Available Data. The five largest deals were chosen and then the estimates run with the available data. Scholes Williams Market Model, Equally Weighted Index Model, (N = 2) 14.72%*** (11.268) 13.56%*** (14.769) 13.05%*** (8.168) Positive : Negative 2:0 2:0 2:0 Market Adjusted Returns, Equally Weighted Index Model, (N = 2) 14.55%*** (10.656) 13.38%*** (13.848) 12.83%*** (7.674) Positive : Negative 2:0 2:0 2:0 Panel B Buyers: Three Smallest Deals with Available Data, The five smallest deals were chosen and then the estimates run with the available data. Scholes Williams Market Model, Equally Weighted Index Model, (N = 3) 1.34% (0.847) 1.24% (1.117) 0.63% (0.333) Positive : Negative 3:0* 3:0* 2:1 Market Adjusted Returns, Equally Weighted Index Model, (N = 3) 1.08% (0.708) 0.97% (0.911) 0.44% (0.231) Positive : Negative 3:0* 3:0* 2:1 Panel C Sellers: Five Largest Deals with Available Data. The five largest deals were chosen and then the estimates run with the available data. Scholes Williams Market Model, Equally Weighted Index Model, (N = 5)

16 0.77% (0.741) 0.91% (1.282) 0.81% (0.552) Positive : Negative 3:2 4:1 4:1 Market Adjusted Returns, Equally Weighted Index Model, (N = 5) 0.79% (0.692) 0.84% (1.059) 0.96% (0.614) Positive : Negative 3:2 3:2 3:2 Z values, in parenthesis, calculated according to Patell (1976). The symbols *,**,*** show the one tail significance at 0.05, 0.01 and levels, respectively.

17 Table 4 Mean CARs for MLP Buyers, Separated by MLP and non MLP Sellers ( 1, 0) (0, 0) ( 1, +1) Panel A Results for MLP Buyers Buying from MLP Sellers Scholes Williams Market Model, Equally Weighted Index Model, (N = 6) 3.96%*** (4.208) 3.67%*** (5.347) 5.84*** (5.108) Positive : Negative 6:0** 5:1* 6:0** Market Adjusted Returns, Equally Weighted Index Model, (N = 6) 4.48%*** (4.609) 3.95%*** (5.587) 6.51%*** (5.568) Positive : Negative 6:0* 5:1 6:0* Panel B Results for MLP Buyers Buying from Non MLP Sellers Scholes Williams Market Model, Equally Weighted Index Model, (N = 16) 4.47%*** (9.437) 3.60%*** (10.310) 4.46%*** (7.793) Positive : Negative 15:1*** 14:2** 14:2** Market Adjusted Returns, Equally Weighted Index Model, (N = 16) 4.45%*** (8.939) 3.52%*** (9.577) 4.48%*** (7.430) Positive : Negative 15:1*** 14:2** 14:2** Z values, in parenthesis, calculated according to Patell (1976). The symbols *,**,*** show the one tail significance at 0.05, 0.01 and levels, respectively.\

18 Table 5 Differences in CARs by ROE median for MLP Buyers CARs are for the ( 1,+1) window. Below Median ROE Above Median ROE Scholes Williams Market Model, Equally Weighted Index Model 3.41% 6.82% Median Cumulative Abnormal Return 2.92% 6.32% N 9 10 Wilcoxon Rank Sum Test Statistic Median Two Sample Test Statistic 60 (0.0134)* 1 (0.0017)** Market Adjusted Returns, Equally Weighted Index Model 3.47% 7.17% Median Cumulative Abnormal Return 3.35% 6.77% N 9 10 Wilcoxon Rank Sum Test Statistic Median Two Sample Test Statistic 57 (0.0080)* 1 (0.0017)** * one sided p value using the t approximation. ** one sided p value for Z test

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