While most investors these days are familiar with midstream MLPs and the generous distributions paid, far fewer are familiar with the growing number of upstream oil and gas MLPs. These companies pay the same large distributions but, instead of transporting oil and gas around the country, they're taking it out of the ground.
Traditional exploration and production companies still do most of the heavy lifting. An upstream MLP simply buys up mature producing wells to squeeze out every last drop of oil and gas from them while distributing virtually all of the profits to investors. To help you better determine which upstream MLP you might want to buy, I've compiled the top reason why you'd want each company in your portfolio.
If you want to own the top dog
LINN Energy (LINE +0.00%), and by association LinnCo (NASDAQ: LNCO), is by far and away the top dog in the upstream MLP segment. Though, as some might point out, LINN's not exactly an MLP as its true structure is that of an LLC. That aside, LINN is not only the largest company in the space that it created, but it is bigger than every one of its peers combined:
Source: LINN Energy investor presentation
LINN's not just big, but it's also the most hedged operator in the energy industry. It has hedged its natural gas output until 2017 and its oil production is hedged through 2016. This enables LINN and LinnCo to lock in cash flow to investors, allowing both companies to pay an 8% distribution. Bottom line here, if you want to earn income from oil and gas production, LINN's could be the safest way to play.
If you want to be paid monthly
If you want a slightly larger yield hitting your brokerage account a bit more often Vanguard Natural Resources' (NYSE: VNR) monthly distribution might be for you. Like its upstream peers, Vanguard's lifeblood is its ability to acquire mature, long-life production. Just last week the company announced a $275 million deal to acquire oil and gas properties in the Permian Basin from Range Resources (RRC +1.85%). The deal added 136 billion cubic feet equivalent of liquid-rich reserves and has an estimated reserve life of nearly 20 years. It's a great MLP-type asset that should help Vanguard to keep its growing distribution flowing to investors.
If you want a bit more growth
While both LINN Energy and Vanguard are known for slower growth and rising distributions, EV Energy Partners (NASDAQ: EVEP) is more of a faster growth story. The company operates in less mature plays like the Barnett Shale and the Utica Shale. It also has a growing midstream business in the fast-growing Utica. Because of the focus on growth, its distribution has been relatively flat over the first few years.
With this growth comes a lot of upside. The company is currently marketing its 100,000 acres in the Utica which could be worth upwards of $10,000 an acre if it falls in line with other recent sales in the play. The company plans to reinvest those proceeds to buy assets that are a better fit for the company's MLP profile. Because of its gas-heavy production and more growth-oriented portfolio, EV only pays a 5% distribution. While that's not too shabby, it is a bit short of its peers. However, the upside is quite enticing.
My Foolish take
Of the three, LINN Energy and its sibling LinnCo are by far my favorite in the space. There's just something to be said about owning the top dog in the space that it created and continues to dominate. The company continues to make the right moves and shows no signs of slowing down.
