1 Company Using More Carbon Dioxide to Fuel Dividend Growth

Legacy Reserves LP picks up enhanced oil recovery assets to fuel future distribution growth.

Mar 27, 2014 at 1:05PM

Legacy Reserves LP (NASDAQ:LGCY) announced yesterday that it was paying $112 million to make two bolt-on acquisitions. The MLP is picking up oil properties in New Mexico and Montana with an aim to grow its already enormous distribution to unit holders. Let's take a look at the deals and the role carbon dioxide is playing to fuel future income growth for investors.

Details of the deal
Combined, the two separate deals add 890 barrels of oil equivalent production per day along with about nine million barrels of oil equivalent proved reserves to Legacy Reserves. The two assets are very oil heavy as 95% of the reserves are oil. As the following asset map shows, the assets are a solid strategic fit within the company's portfolio.

Legacy Reserves Asset Map

Source: Legacy Reserves Investor Presentation (Link opens a PDF)

In the first deal Legacy Reserves is picking up high-volume, low-decline oil wells in Montana. The properties are in close proximity to the company's existing properties. Legacy sees these properties offering it attractive low-risk development opportunities, which should keep its production flowing and its distribution growing.

The other asset the company is acquiring is an active carbon dioxide flood project in New Mexico. So far the asset has shown a strong response to the carbon flooding and has significant potential for increased response from continued investment in carbon dioxide. The company already has the carbon dioxide it needs to accomplish this through a long-term supply agreement with Kinder Morgan (NYSE:KMI). It sees the inclining production fitting in nicely within its portfolio as it will help offset declines elsewhere.

Adding some more fizz
We're seeing a growing number of companies using carbon dioxide to fuel increased payouts to investors. Last year fellow MLP BreitBurn Energy Partners (NASDAQ:BBEP) made a big splash after it paid more than $900 million for an enhanced oil recovery project in Oklahoma. Meanwhile, Denbury Resources (NYSE:DNR) is building its entire business around enhanced oil recovery. Denbury Resources just recently paid its first carbon fueled dividend to investors, while BreitBurn sees its acquisition fueling future distribution growth.

The key to these projects is having a ready supply of carbon dioxide. Denbury owns a vast majority of its carbon dioxide resources while BreitBurn Energy owns the critical carbon dioxide pipelines to fuel its operations as the following slide shows.

Breitburn Carbon

Source: BreitBurn Energy Partners Investor Presentation (link opens a PDF)

Legacy, however, isn't acquiring any carbon dioxide midstream assets as part of the deal. Instead, it will rely on Kinder Morgan to provide it with carbon dioxide. As the leading transporter of carbon dioxide in the U.S., Kinder Morgan is about the best partner it can ask for as it adds these carbon assets into its portfolio. As the following map shows, Kinder Morgan has substantial access to carbon dioxide source fields as well as the associated pipelines to transport the gas.

Kinder Morgan Carbon Map

Source: Kinder Morgan website 

As a leading producer of oil from carbon dioxide in its own right, Kinder Morgan certainly knows what it's doing. That makes the company a great partner to supply carbon dioxide to Legacy's latest addition. As that partnership strengthens in the future it could enable Legacy to more easily add additional bolt-on properties.

Investor takeaway
We're likely to continue seeing MLPs like Legacy Reserves and BreitBurn Energy Partners or income focused producers like Denbury Resources pick up enhanced oil recovery projects that are fueled by carbon dioxide. These low-decline assets offer a great base of production that will keep the overall decline rate low, which will really help keep income production stable. So, while this might be a small deal for Legacy, carbon dioxide is likely to be a big part of its future and the future of MLPs in general.

9 rock-solid dividend stocks you can buy today
One of the dirty secrets that few finance professionals will openly admit is the fact that dividend stocks as a group handily outperform their non-dividend paying brethren. The reasons for this are too numerous to list here, but you can rest assured that it's true. However, knowing this is only half the battle. The other half is identifying which dividend stocks in particular are the best. With this in mind, our top analysts put together a free list of nine high-yielding stocks that should be in every income investor's portfolio. To learn the identity of these stocks instantly and for free, all you have to do is click here now.

Matt DiLallo owns shares of Denbury Resources. Matt DiLallo has the following options: short January 2016 $32.5 puts on Kinder Morgan and long January 2016 $32.5 calls on Kinder Morgan. The Motley Fool recommends BreitBurn Energy Partners L.P. and Kinder Morgan. The Motley Fool owns shares of Denbury Resources and Kinder Morgan. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers