The Top 5 Upstream MLPs by First Quarter Performance

All upstream master limited partnerships, or MLPs, have now reported their first quarter earnings. As usual, investors are concerned about a few things: Quality of acquisitions, balance sheet management, and most of all the safety of their distributions. So let's rank the five highest-quality upstream MLPs by coverage ratios, while also considering guidance, hedging, and any special circumstances. 

Pinedale-Jonah gas field, a key operating area for several upstream MLPs. Courtesy of World Resources Institute.


5. A high hurdle to jump
When based solely on distribution coverage, Memorial Production Partners (NASDAQ: MEMP  )  had a tough quarter thanks to distributable cash flow, or DCF, being only 0.70 times distributions. As was a common thread with many other upstream MLPs, Memorial faced unusually cold weather in its producing areas, which significantly hindered production.

In addition, a gas plant in South Texas was offline and unable to receive natural gas liquids production. Management explicitly said that it still planned on hitting guidance of 1.1 to 1.2 times distributions this year. But considering how high a hurdle Memorial has to jump to hit that mark, the partnership has some work to do to get there.

4. In over their heads?
The next lowest coverage ratio last quarter was Vanguard Natural Resources (NASDAQ: VNR  )  at only 0.8 times DCF to distributions. On this mishap, I am a bit less forgiving. Yes, unusually cold weather in the partnership's Pinedale acreage was part of the shortfall, but there were other factors. Vanguard's two operating partners in the Pinedale experienced delays in well drilling unrelated to those in which Vanguard has a working interest. However, those delays have pushed back the partners' drilling of wells where Vanguard does have an interest.

In addition, those same partners shifted drilling operations on several other wells. Vanguard is not the operating partner here, and so the partnership has no say on when wells get drilled. Vanguard still expects full-year distribution coverage to come in at 1.1 times. We'll see. 

3. Meh, good enough
Linn Energy  (NASDAQ: LINE  )  is still trying to digest its huge acquisition of Berry Petroleum. Last quarter, Linn's coverage ratio came in at 0.99 times; a bit concerning, but good enough. Management is banking on a few things to improve the bottom line: Movement of capital to lower-decline areas (thereby reducing needed maintenance spending), a sale of horizontal-drilling locations, which could reduce interest costs, and steady organic growth in the Permian, California, and Utah. Linn still expects to fully fund its generous 10% distribution this year.

2. Getting it right
BreitBurn Energy Partners (NASDAQ: BBEP  )  was a bright spot last quarter. BreitBurn covered its distribution by 1.0 and expects a stronger coverage ratio as the year goes on. BreitBurn's operations in the Permian and Wyoming should deliver modest organic growth throughout the year. The partnership will also have more acquisition opportunities in the low-decline oilfields of California as one of the major operators prepares to split off and leave that state. Unfortunately, BreitBurn does not provide full year guidance. 

1. Winner is... the waterboys
Although Mid-Con Energy Partners  (NASDAQ: MCEP  )  finished the quarter at only 0.93 times distributions, this shortfall was due to the timing of an acquisition done late in the quarter. Additional units were issued to fund this accretive deal, but the partnership did not benefit from additional production until the last month. Eschewing that factor, Mid-Con's guidance should have come in at above one. Management is still confident about meeting 1.2 times coverage this year.

I think Mid-Con has a few very notable advantages that set it apart from the others. First, it is an oil pure-play. Second, it is an enhanced recovery pure-play, with the preferred method being waterflooding. Mid-Con's waterflood focus and concentration in mature, Oklahoma fields have led to industry-leading margins. 

Bottom line
I believe that all of these companies, even the ones which came up a bit short, deserve the benefit of the doubt. However, Mid-Con and BreitBurn have set themselves apart from the pack this quarter, and I believe these two are worth a closer look.

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