Why These 2 Oil and Gas MLPs Need to Be on Your Radar

Upstream MLPs are a great way for regular investors to profit from America's energy boom. This article highlights 2 exceptionally well run oil and gas MLPs that are poised for mega-growth and likely to make income investors very rich.

Jul 7, 2014 at 3:46PM

As part of a series on upstream MLPs, I'm taking readers on a journey through one of my favorite industries. Oil and gas MLPs are one of the best ways for income investors to earn high, safe yields, often paid monthly. The best upstream MLPs also offer strong capital gain potential as is the case with the two partnerships highlighted here -- Atlas Resource Partners (NYSE:ARP) and Memorial Production Partners (NASDAQ:MEMP)

A quick word on investing in this industry. There are four key metrics investors need to consider: yield, distribution growth, distribution coverage, and valuation. 

Yield + distribution growth is a good rule of thumb for long-term total returns. Distribution coverage allows you to see how safe a partnership's payout is and how likely it is to grow in the future. Finally, valuation, in the form of the EV/EBITDA ratio lets you compare prices of upstream MLPs while taking into account cash on hand, debt, and cash flows. 

With that out of the way, lets take a look at two of the best upstream MLPs in America and why you should consider owning them. 

MLP Yield 10 year Projected Distribution Growth Rate Coverage Ratio EV/EBITDA Projected 10 Year Annual Total Return
Atlas Resource Partners 11.50% 19.34% 1.05 14.8 30.84%
Memorial Production Partners 9.10% 11.22% 0.97 11.61 20.32%
IND AVG 9.65% 7.79% 1.01 12.17 17.44%

Sources: S&P Capital IQ, Yahoo Finance, MLPdata.com

Memorial Production Partners seems perfect in every way: high yield, strong distribution growth, undervalued, and a projected total return to make you drool. However, the coverage ratio being under 1 is a cause for concern, right? Not really, and here's why. 

Since its IPO in December 2011, Memorial Production Partners has successfully executed 12 accretive acquisitions. 

In the process it's grown its reserves, production, and adjusted EBITDA by 69%, 73%, and 101% CAGR, respectively. Memorial Production Partners has a total reserve of 1.574 trillion cubic feet of gas equivalent, 61% of that in higher-margin liquids. With 1,836 net wells and 20 years' worth of production at current rates, Memorial Production Partners represents one of the best ways to play the prolific Permian, Eagle Ford, and Barnett shales.

However, what really excites me about Memorial Production Partners and why I am not worried about its recent lack of distribution coverage, is the $1.1 billion in acquisitions completed thus far in 2014:

  • 15.4 billion cubic feet of gas reserves in east Texas for $34 million.
  • 7.4 million barrels of oil reserves in the Eagle Ford shale for $173 million.
  • 83 million barrels of CO2 injected oil in Wyoming for $935 million.
What is most exciting about this last purchase, is that it's all high-margin liquid, 75% oil, 25% natural gas liquids. In addition the production decline rate, thanks to the CO2 injection maintaining well pressure, is just 5% annually. Shale oil is notorious for catastrophic decline rates as high as 90% a year and this field has 39 years of production remaining.
 
Thanks to these acquisitions Memorial Production Partners is guiding for a 2014 distribution coverage ratio of 1.1 to 1.2, high enough to not only guarantee the generous yield but to ensure growth in the decade to come.
 
Atlas Resource Partners: the king of high-quality yield
Atlas Resource Partners has the distinction of being the highest-yielding quality MLP in the industry. It also sports one of the fastest growth rates with a stunning 614% increase in production in just the last two years, sending its distributions soaring by 45%, or 20.4% annually. What is the key to this stupendous success? Seven acquisitions worth $2 billion, but like Memorial Production Partners, Atlas Resource Partners is focusing on low-decline assets. In fact, Atlas Resource Partners' recent acquisitions have averaged an annual decline rate of just 8%. 
 
Back in February Atlas Resource Partners purchased 70 billion cubic feet of natural gas in West Virginia and Virginia for $107 million. These assets not only produce 22 million cubic feet/day of gas, worth $36.1 million annually at today's prices, but have a decline rate of just 11%.
 
However, even that purchase pails in comparison to Atlas Resource's Rangely Field acquisition in which Atlas bought 47 million barrels of oil assets in Colorado with an nearly unheard of decline rate of just 3%-4% over the last 15 years. Atlas Resource plans on expanding CO2 injection into the field to preserve that decline rate and enjoy 2,900 barrels of oil/day over the 44 years production is expected to last. At today's oil prices this field will break even in just four years and produce $4.5 billion over its lifetime, paying for itself nearly 11 times over.

Foolish takeaway
When it comes to high-quality yield, few industries deliver like upstream MLPs, and few do it better than Memorial Production Partners and Atlas Resource Partners. These oil and gas producers provide long-term income investors with the trifecta of investing: high-yield, strong distribution growth, and shocking capital gain potential.
 

Top dividend stocks for the next decade
The smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That's beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.

Adam Galas has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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