As part of a series on upstream MLPs, I'm taking readers on a journey through one of my favorite industries. Oil and gas MLPs are one of the best ways for income investors to earn high, safe yields, often paid monthly. The best upstream MLPs also offer strong capital gain potential as is the case with the two partnerships highlighted here -- Atlas Resource Partners (NYSE: ARP) and Memorial Production Partners (NASDAQ: MEMP).
A quick word on investing in this industry. There are four key metrics investors need to consider: yield, distribution growth, distribution coverage, and valuation.
Yield + distribution growth is a good rule of thumb for long-term total returns. Distribution coverage allows you to see how safe a partnership's payout is and how likely it is to grow in the future. Finally, valuation, in the form of the EV/EBITDA ratio lets you compare prices of upstream MLPs while taking into account cash on hand, debt, and cash flows.
With that out of the way, lets take a look at two of the best upstream MLPs in America and why you should consider owning them.
|MLP||Yield||10 year Projected Distribution Growth Rate||Coverage Ratio||EV/EBITDA||Projected 10 Year Annual Total Return|
|Atlas Resource Partners||11.50%||19.34%||1.05||14.8||30.84%|
|Memorial Production Partners||9.10%||11.22%||0.97||11.61||20.32%|
Memorial Production Partners seems perfect in every way: high yield, strong distribution growth, undervalued, and a projected total return to make you drool. However, the coverage ratio being under 1 is a cause for concern, right? Not really, and here's why.
Since its IPO in December 2011, Memorial Production Partners has successfully executed 12 accretive acquisitions.
In the process it's grown its reserves, production, and adjusted EBITDA by 69%, 73%, and 101% CAGR, respectively. Memorial Production Partners has a total reserve of 1.574 trillion cubic feet of gas equivalent, 61% of that in higher-margin liquids. With 1,836 net wells and 20 years' worth of production at current rates, Memorial Production Partners represents one of the best ways to play the prolific Permian, Eagle Ford, and Barnett shales.
However, what really excites me about Memorial Production Partners and why I am not worried about its recent lack of distribution coverage, is the $1.1 billion in acquisitions completed thus far in 2014:
- 15.4 billion cubic feet of gas reserves in east Texas for $34 million.
- 7.4 million barrels of oil reserves in the Eagle Ford shale for $173 million.
- 83 million barrels of CO2 injected oil in Wyoming for $935 million.