Photo credit: Flickr/Robert Ashworth.
Memorial Production Partners (NASDAQ: MEMP) announced earlier today that it was spending $935 million to buy oil producing properties in Wyoming. What's unique about these properties is that it's an established enhanced oil recovery field that uses carbon dioxide to unlock additional quantities of oil. It's really the perfect type of asset for an MLP like Memorial Production Partners to acquire.
Carbon dioxide is a big dividend fuel
We've seen a flurry of deals over the past year involving oil and gas MLPs acquiring enhanced oil recovery properties that use carbon dioxide flooding. BreitBurn Energy Partners (BBEPQ) spent roughly $900 million to buy a field in Oklahoma last year, while Legacy Reserves (LGCY) spent just over $100 million to buy two oil fields, including a carbon dioxide flood project in New Mexico. The reason these assets are so popular with oil and gas MLPs is the low-decline nature of these projects.
In Memorial Production Partners' acquisition it's buying a field with a decline rate of just 5%. That's an exceptionally low decline rate these days when we're seeing shale oil wells decline as much as 90% after the first year. That makes it tough to grow production, let alone simply maintain it, which is always a big problem for oil and gas MLPs.
Because of that low decline rate, these fields provide a nice base of production. Further, it saves companies like BreitBurn Energy Partners and Legacy Reserves from needing to spend a lot of money to maintain production. This is important, because the less money spent to maintain production, the more cash flow these companies have left over to pay an increasing distribution.
A closer look at what Memorial Production Partners is buying
The Bairoil Complex in Wyoming that Memorial Production Partners is buying has a long history of oil production. The field was discovered in the early 1900s and has been carbon flooded since the late 1980s to recover oil that didn't come out during the primary and secondary recovery phases. Despite a century of oil production, there's still plenty of oil left, as proven reserves are estimated to be 83 million barrels of oil equivalent. Given the current production pace, the company should continue to produce oil out of the field for the next 39 years.
As the following slide notes, these assets are a good strategic fit, as the properties are located in an area where Memorial Production Partners already owns assets.
Source: Memorial Production Partners investor presentation. (Link opens a PDF.)
The other important note on that slide is the oil-rich nature of these properties, as the reserves are 75% oil, with the rest of the reserves being high-margin natural gas liquids. That will push Memorial Production Partners' total proven reserves up to 61% liquids, up from just 41% earlier in the year.
The other really important aspect of the deal is it helps boost the company's distribution coverage ratio. While Memorial Production Partners pays an enormous distribution to investors, its coverage ratio earlier this year was a really weak 0.67. For comparison's sake, peers like Legacy Reserves and BreitBurn Energy Partners had their coverage ratio twice as high over that same quarter. The good news, however, is that Memorial Production Partners now estimates that its ratio will be a much more comfortable 1.10 to 1.20. That is right in the range it needs to be for the company to be comfortable growing its payout to investors.
Investor takeaway
This looks like a really solid deal for Memorial Production Partners. While it's one of the company's biggest acquisitions since going public, the low-decline, long-lived, liquids-rich nature of the assets makes it a much less risky buy.
