Memorial Heightens Its Guidance

 | Feb 19, 2014 | 1:00 PM EST  | Comments
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Memorial Production Partners (MEMP) is an upstream master limited partnership, or MLP, and is the primary recipient of drop-down acreage from its privately-held parent company, Memorial Resource Development, and its private equity parent company, Natural Gas Partners. Right now, at just over 10%, Memorial's yield is the highest in the upstream MLP space.

Much of this low valuation and high yield is because Memorial is still a fairly young partnership. Yet, despite its youth, Memorial's its dividend is stable and sustainable.

In fact, management expects Memorial to cover its generous distribution by at least 1.1x in 2013. This year will be even better. Thanks to a flurry of accretive drop-down acquisitions in 2013, Memorial has come out with strong guidance for 2014. This includes higher production, and, even more important, higher distribution coverage. This higher coverage, coupled with Memorial's extensive hedging policy, make the partnership's 10% distribution yield among the safest in this space. Not only that, it also has one of the lowest valuations. At this particular moment, I believe that Memorial is the best overall value in the upstream MLP space.

 Last year was a very active one for Memorial. The partnership made three big acquisitions for over 400 billion cubic feet of proven reserves, the vast majority of which was from drop downs and acquisitions from the parent entities. These acquisitions were mostly of the parents' core acreage located in East Texas, the Permian and the Rockies. Although a majority of Memorial's production is still natural gas, these acquisitions have provided some much needed diversification. About 41% of all production is now either oil or natural gas liquids.

Memorial earned $130 million in distributable cash flow, or DCF, which is the metric most people use to measure a partnership's ability to pay its distributions. At $130 million in DCF, Memorial covered its distribution by a healthy 1.1 times, a ratio roughly equal to that of Vanguard Natural Resources, greater than that of Linn Energy, but less than that of Mid-Con Energy partners.

In 2014, management expects to grow production to 62 billions of cubic feet equivalent (bcfe), up from 48 bcfe last year, excluding any acquisitions the company may do in 2014. Distributable cash flow is expected to grow to $158 million, which is a big boost from last year's $130 million. Best of all, distribution coverage is expected to increase to at least 1.15x distributions, which should be one of the highest coverage ratios among upstream MLPs in 2014. In addition, Memorial's extensive hedging strategy should make the partnership's high distribution yield a sure thing for at least the next couple years.

Consider Memorial's hedging strategy for a moment. An average of 64% of the company's production is hedged out for the next five years, more than all other upstream MLPs but two. An impressive 72% of 2017 production is hedged, with that ratio rising to 87% for this year: Even oil, which is usually more expensive to lock in, is hedged very well with Memorial. Sixty-three percent of 2018 production is hedged, with that number rising to 82% for this year. Although many investors regard a 10% distribution yield as a red flag of sorts, applying this rule to Memorial would be quite a mistake. In fact, Memorial's distribution is more secure than that of most, if not all, other upstream MLPs this year.

Memorial's high distribution yield is not a mirage, nor is it in any danger of being cut. The partnership's solid production growth and extensive prospects for drop down acquisitions over the next few years will provide an opportunity for reliable distributions and distribution growth for multiple years. And, with perhaps the lowest valuation in this space, investors may want to pick up the shares right now.

(Note: The Source for the facts used in this article can be found by clicking here.)

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