Glenn Pool Oil Pic Oklahoma Wiki

An oil pump in Oklahoma. Courtesy of Wikipedia Commons

If you follow upstream master limited partnerships, or MLPs, then you know that these names have been rallying as of the last few months. For example, Vanguard Natural Resources (NASDAQ:VNR), a staple upstream MLP name among retail investors, is yielding below 8%, and its unit price now sits at highs not seen since 2011. Linn Energy (NASDAQ:LINE), the largest of upstream MLPs, is above $30 for the first time since March.

One name that is still cheap, and undeservedly so, is Mid-Con Energy Partners (NASDAQ:MCEP), a $470 million partnership operating almost exclusively in Oklahoma. Unlike most other upstream MLPs, Mid-Con is actually down on the year. 

This little partnership is unique for a few reasons. First, Mid-Con has the highest per barrel of oil equivalent margin in the upstream MLP industry. Second, Mid-Con has among the highest distribution coverage ratios in the industry. Finally, Mid-Con has the lowest cost-base among its peers. If anything, Mid-Con should trade at a premium to upstream MLPs, not a discount. Yet, Mid-Con now yields a generous 9.3%, well above that of Vanguard, Linn, or BreitBurn.

Advantage through concentration
Mid-Con's unique advantage comes from concentration on waterflooding, which is an enhanced oil recovery method used on older oil fields. Because these fields are mature, well-mapped and have infrastructure already in place, operations here tend to yield the highest margins.

While the company's overall reserve to production ratio is fifteen years, which is about in the middle of the upstream MLP peer group, this estimate does not account for alternative recovery methods after waterflooding techniques have exhausted their usefulness. In other words, although these fields are old, they will still be in operation for several more decades at least.

As a small partnership, and a 'captive' one with a parent company from which it receives most asset drop downs, Mid-Con can concentrate its operations while larger MLPs must diversify. Many MLPs have some enhanced oil recovery exposure as part of a broader portfolio. Mid-Con, however, is concentrated almost entirely on waterflooding, and this is precisely why Mid-Con's cost base is unusually low.

In fact, Mid-Con probably has the lowest cost base in the country thanks the partnership's unique concentration: Total, average cost per barrel is below $30. The only company that rivals Mid-Con's low cost base is another enhanced oil recovery-focused name, Denbury Resources (NYSE:DNR)

A safe distribution
Here's another aspect of Mid-Con I believe is being overlooked: Last year Mid-Con's distributable cash flow was 1.2 times distributions, a ratio which management is on-track to continue through 2014 and probably beyond 2014. This coverage ratio is easily the highest among its peers. These days, most upstream MLPs are lucky to offer a coverage ratio of 1.1 times. This high coverage ratio means that the price of domestic oil could drop significantly and Mid-Con's 9.3% distribution would still be safe. 

A worthy buy
If you like income from your investments and have some room in your portfolio for an MLP, Mid-Con Energy Partners is the best choice right now. Its yield outstrips that of its peers, yet its distribution coverage ratio is the highest in class. Also, the partnership's unique concentration on enhanced oil recovery means that it has the highest margins and the lowest cost base. 

Casey Hoerth owns shares of Linn Energy, LLC and Vanguard Natural Resources. The Motley Fool owns shares of Denbury Resources. 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.