Provident Energy Trust’s (TSX: PVE-U, NYSE: PVX) months of strategic deliberations have come to a head. Management announced today a transaction to spin off its remaining oil and gas production operations and combine them with Midnight Oil Exploration (TSX: MOX, OTC: MDOEF) into a new intermediate oil and gas producer.

Provident will continue as a pure-play natural gas liquids (NGL) infrastructure and services business. Distributions going forward will be paid solely on profits from these operations, which depend on fees that fluctuate with commodity prices to some extent. Management plans to hold the payout at the current rate of CAD0.06 per share per month at least through the end of 2010.

The deal will require a two-thirds affirmative vote from current Provident unitholders and Midnight shareholders. Meetings will be held in May, with a closing of the arrangement expected on or about Jun. 30, 2010.

Provident’s move is yet another step in its multi-year transformation from a combination energy producer and midstream company with assets in both the US and Canada to a much more conservative, dividend-paying entity.

Management still hasn’t set a post-conversion distribution, citing the impact of commodity prices on the bottom line. It has, however, set the stage for paying generous dividends going forward, as cash flows from midstream energy are far steadier than those from production.

As for the upstream business, Provident unitholders will receive 0.12225 shares of the new company, giving us 81 percent of the total equity. That percentage will likely fall in coming months, as funds and other large institutions sell to reinvest in dividend-paying equities. That’s because the stated purpose of the new company is growth, making it unlikely to pay dividends.

Ultimately, however, this piece of the company is likely to prove quite valuable. Midnight’s management, which will run the new enterprise, starts out with 13,000 barrels of oil equivalent per day production (34 percent liquids) with significant new development opportunities including 334,000 acres of undeveloped land in key areas.

These long-life assets, weighted toward oil, exhibit low decline rates. This combination should do well on its own going forward, as energy prices trend higher on rising global demand and as the US economy inches its way back to health.

But it may not stay independent long, given its promise and profitability. The same actually goes for the remainder of Provident, which will be one of the largest pure plays in North America on NGL.

Judging from the ups and downs in Provident today, the market’s initial reaction to this deal seems to be confusion. Ultimately, however, this should be a value-creating deal, in which current unitholders continue to get a big income stream as well as a play in a growth company.

My view has long been that Provident has been undervalued as a combined midstream/production company, mainly because of the market’s love of pure plays. This deal creates two solid ones with the potential to produce big profits either independently or through takeovers.

I’ll have more on the company in the May issue, as well as following its May 13 earnings announcement. I’ll be swapping it to the Energy Infrastructure group in How They Rate following the completion of the spinoff.

In the meantime, Provident Energy Trust is still a buy up to USD8.