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In the industry of upstream MLPs, one of the cheapest, yet still high-quality partnerships available is Mid-Con Energy Partners (NASDAQ: MCEP ) . Among upstream MLPs Mid-Con is unique because not only is it a pure-play on oil, but it also operates only in 'waterflooding,' an enhanced recovery technique typically used in traditional oil basins. Perhaps due to the double-digit pullback in shares of Linn Energy (NASDAQ: LINE ) over the past two weeks, shares of Mid-Con are down substantially as well. This article will explain why I think Mid-Con is a compelling buy right here.
Because this is an industry where most other partnerships have varying exposure to natural gas, Mid-Con is the most profitable of the partnerships on a per-BOE basis. In this environment, a barrel of oil fetches a much higher price than does a barrel of dry gas or natural gas liquids. For example, in 2012 the partnership earned over $68 in EBITDA margin per barrel, compared with a peer average in the high $30s in that same year.
Mid-Con's per-barrel cost of operations is a very low $25.60 in 2014, again among the very lowest in the industry. This is thanks largely to operating in the basins of one of America's most well-mapped oil geographies, Oklahoma. Compare this cost with the $50-$65 range typically found in the best shale plays, or the $35-$45 range found in most CO2-flooding operations, and you can see just how much of an advantage Mid-Con has over its peers.
Mid-Con's distribution coverage ratio, measured by price to distributable cash flow, or DCF, is also a cut above the rest. For example, while in 2013 most upstream MLPs were lucky to have distribution coverage ratios at 1.1 times, Mid-Con finished the year with distributable cash flow at 1.22 times distributions. Based on 2014 guidance, Mid-Con is expected to have a coverage ratio of about 1.2 times this year -- not bad at all.
Modest distribution and production growth
Mid-Con expects to grow distributions at a modest rate. Management's goal is to increase distributions by 4% this year. This year Mid-Con's capital budget is a fairly modest $30 million. Continuing a process it began last year, Mid-Con is focusing not on drilling but on increasing the water pressure of its operations by converting oil wells into injectors. The end result should be better production from waterflood operations.
This year, distributable cash flow per share is expected to be stagnant, largely because of a higher unit count. Oil production will increase from 907,000 barrels last year to just over a million barrels this year, thanks largely to a drop-down acquisition paid for by additional units.
The said drop-down, made on February 28, for acreage on both the Oklahoma and Texas panhandles, went for $34 million. Despite the fact that most of the transaction was paid for in additional units, this deal is immediately accretive and went for only 5.5 times estimated twelve-month trailing cash flows. At estimated production levels, reserves will last for 12.6 years. This is one of the better acquisitions I have personally seen in this space, and despite the high cost of equity in the form of a high distribution yield, I believe this transaction will end up being a very good deal for Mid-Con.
Valuation and conclusion
Units of Mid-Con are down, for reasons unrelated to the company's performance or financials, by 7% over just the last two weeks. Linn Energy, by far the largest of the upstream MLPs, reported a lukewarm quarter in late February, and since then units of Linn have fallen, taking several other upstream MLP names down with it. This includes Mid-Con. At just 9 times 2014 distributable cash flow, I believe Mid-Con is a nice bargain here. In buying units of Mid-Con, you will be getting one of the lowest-cost producers in the country, along with one of the most secure distributions among upstream MLPs. In fact, Mid-Con's distribution may even be the most secure in this industry. In my opinion, this means Mid-Con should be worthy of investors' consideration.
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