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

After a secondary offering, this upstream MLP is trading at a very reasonable valuation. I believe that now is a good time to buy.

Jul 13, 2014 at 9:49AM

Rockies Drilling Pic Tony Bynum

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. 

Permian Flickr

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.

Casey Hoerth owns shares of Vanguard Natural Resources. 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.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

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.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

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. The show is also heard weekly on dozens of 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. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers