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%
IND AVG 9.65% 7.79% 1.01 12.17 17.44%

Sources: S&P Capital IQ, Yahoo Finance, MLPdata.com

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.
What is most exciting about this last purchase, is that it's all high-margin liquid, 75% oil, 25% natural gas liquids. In addition the production decline rate, thanks to the CO2 injection maintaining well pressure, is just 5% annually. Shale oil is notorious for catastrophic decline rates as high as 90% a year and this field has 39 years of production remaining.
 
Thanks to these acquisitions Memorial Production Partners is guiding for a 2014 distribution coverage ratio of 1.1 to 1.2, high enough to not only guarantee the generous yield but to ensure growth in the decade to come.
 
Atlas Resource Partners: the king of high-quality yield
Atlas Resource Partners has the distinction of being the highest-yielding quality MLP in the industry. It also sports one of the fastest growth rates with a stunning 614% increase in production in just the last two years, sending its distributions soaring by 45%, or 20.4% annually. What is the key to this stupendous success? Seven acquisitions worth $2 billion, but like Memorial Production Partners, Atlas Resource Partners is focusing on low-decline assets. In fact, Atlas Resource Partners' recent acquisitions have averaged an annual decline rate of just 8%. 
 
Back in February Atlas Resource Partners purchased 70 billion cubic feet of natural gas in West Virginia and Virginia for $107 million. These assets not only produce 22 million cubic feet/day of gas, worth $36.1 million annually at today's prices, but have a decline rate of just 11%.
 
However, even that purchase pails in comparison to Atlas Resource's Rangely Field acquisition in which Atlas bought 47 million barrels of oil assets in Colorado with an nearly unheard of decline rate of just 3%-4% over the last 15 years. Atlas Resource plans on expanding CO2 injection into the field to preserve that decline rate and enjoy 2,900 barrels of oil/day over the 44 years production is expected to last. At today's oil prices this field will break even in just four years and produce $4.5 billion over its lifetime, paying for itself nearly 11 times over.

Foolish takeaway
When it comes to high-quality yield, few industries deliver like upstream MLPs, and few do it better than Memorial Production Partners and Atlas Resource Partners. These oil and gas producers provide long-term income investors with the trifecta of investing: high-yield, strong distribution growth, and shocking capital gain potential.