On Wednesday, Memorial Production Partners (NASDAQ: MEMP ) , an upstream master limited partnership, or MLP, announced that it would offer 8.3 million additional units of common equity, bringing the partnership's unit count from 55.9 million to about 64.2 million. The total proceeds will come out to approximately $193.5 million.
Memorial is offering these shares to finance a $935 million acquisition of oil-producing acreage in Wyoming, which the partnership announced in May of this year.
The market's reaction was a violent but predictable one: Units were down some 7%. Considering that Memorial was (and is) an upstream MLP with a market cap below $1 billion, the market had to know that a $935 million acquisition had to come with at least one secondary offering. Before Wednesday's 7% sell-off, Memorial was already a pretty good deal, but right now, the partnership represents great value.
Prior to its May acquisition of oil fields around Bairoil, Wyoming, Memorial was a mostly gas-producing partnership. Memorial also had among the lowest overall production costs in the industry, thanks to its flagship assets in one of the most mature gas fields in America, Cotton Valley. Before the acquisition, Memorial's closest peer, in terms of production of oil versus gas, was Vanguard Natural Resources (NASDAQ: VNR ) , but even Vanguard's cost of production was significantly higher than that of Memorial.
With the partnership's recent oil acquisition, however, Memorial's production costs have gravitated toward the mean because oil usually costs more to extract than does gas. However, in today's pricing environment, oil also provides a much higher return than does gas, so looking only at production costs misses the big picture. For an oil field, the cost of production in Baroil is quite low: Only $20 per barrel on average. In addition, the Bairoil field should be able to produce 5,900 barrels equivalent per day for the next 39 years.
So, the key takeaway is this: Memorial has premier legacy assets in Cotton Valley, an area which provides among the cheapest dry gas in the country. Memorial's newest and biggest asset, the Bairoil fields, will provide oil at industry-leading profitability levels for almost four more decades.
Outside of these two tremendous assets, Memorial also owns two man-made drilling islands 11 miles off the shore of southern California. These islands were constructed by Shell in the 1980s, and 100% of their production is oil. Memorial also has strong oil-producing assets in the Permian, and solid gas-producing acreage in the Rockies and South Texas. Although it is a small partnership, Memorial has some of the longest-lived, lowest-cost assets in its Bairoil and Cotton Valley acreage.
A great deal
Let's do a little math. The midpoint of Memorial's 2014 distributable cash flow guidance, or DCF guidance, is $193 million. After the secondary offering, Memorial will have 64.2 million units outstanding. That leaves about $3 in distributable cash flow per share. With a current unit price of $22.20, Memorial trades at just 7.4 times distributable cash flow.
This might change if Memorial decides to offer more units at some point a few months down the line. Considering that Bairoil was a $930+ million transaction, and that the unit offering was only for $193.5 million, management may decide to go to the well again. For now, however, Memorial represents a great value, especially considering the strength of the partnership's assets.
Those looking for income who don't mind exposure to energy and have room for a master limited partnership should, right now, look no further than Memorial Production Partners. Memorial's Bairoil assets and Cotton Valley gas assets, in particular, are something even a top-tier partnership would be envious of.
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