Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



It's Time to Lock in This High-Yielding MLP

Drilling in the Rockies. Source: Wiki Commons

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.

Premier assets
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. 

The Permian Basin at night. Source: Wiki Commons

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. 

Foolish takeaway
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. 

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.

Read/Post Comments (0) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 3025119, ~/Articles/ArticleHandler.aspx, 8/30/2015 4:18:10 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Casey Hoerth

Casey is Fool contributor covering Energy companies, and sometimes dividend payers, in general. Follow me at

Today's Market

updated 1 day ago Sponsored by:
DOW 16,643.01 -11.76 -0.07%
S&P 500 1,988.87 1.21 0.06%
NASD 4,828.33 15.62 0.32%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

8/28/2015 4:00 PM
MEMP $7.21 Up +0.60 +9.08%
Memorial Productio… CAPS Rating: **
VNR $9.62 Up +0.47 +5.11%
Vanguard Natural R… CAPS Rating: ***