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.

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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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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.

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