Snap Up This MLP

 | Jul 16, 2014 | 11:00 AM EDT  | Comments
  • Comment
  • Print Print
  • Print
Stock quotes in this article:

memp

,

line

,

bbep

Last Wednesday Memorial Production Partners (MEMP), an upstream master limited partnership, announced that it would offer 8.3 million additional units of common equity, bringing the partnership's total common-share count to about 64.2 million. Total proceeds for the deal will amount to $222.5 million -- quite a significant offering for a company whose market capitalization is only $1.4 billion.

As is the case with many upstream MLPs, units of Memorial tumbled significantly after the news of this secondary offering. As of Thursday, shares were down nearly 8%. While the price has recovered somewhat since then, Memorial is still down more than 4% from its Wednesday level, and the partnership currently has a dividend yield of 9.5%. That compares favorably with dividends at peers such as Linn Energy (LINE) and BreitBurn (BBEP).

Memorial implemented this offering to pay for its recent acquisition of carbon dioxide-aided oilfields in Wyoming, which it agreed to buy for some $935 million. The Bairoil fields have been producing since the 1920s, and Memorial estimates that they can produce for another 39 years at current rates of production. The best part about the acquisition is that it costs only $20 to produce a barrel of oil at Bairoil, meaning production extremely profitable there.

Before it acquired the Bairoil properties, Memorial was a partnership that produced mostly natural gas, and it did so at the lowest cost base in the industry. Memorial's cost advantage stems from its flagship acreage position in the Cotton Valley in East Texas. Cotton Valley is one of the oldest producing gas fields, and the play has been yielding dry gas since the early 1900s.

Memorial's portfolio is rounded out by man-made drilling islands off the coast of California, as well as strong gas-producing acreage in South Texas and the Permian, and some in the Rockies. Although it is a small partnership, Memorial's Bairoil and Cotton Valley holdings are some of the longest-lived, lowest-cost base assets in the industry.

Worst Is Over

Although dilutive unit offerings are never ideal for investors, the worst is over for now. That's because, earlier this week, Memorial also announced a $500 million senior note offering. Together with the unit offering, proceeds will come close to the $935 million that the partnership shelled out for Bairoil.

The midpoint of Memorial's 2014 discounted cash flow (DCF) guidance is $193 million. That gives us DCF of $2.94 per unit, considering the new common-share count of 65.5 million -- making its price-to-DCF ratio just 7.8 at Tuesday's closing price of $23. Considering its very strong assets, Memorial is a good deal at these levels.

Historically, the aftermath of a unit offering has been a good time to buy Memorial Production Partners, and I believe that now is a good time to buy as well. The partnership's premier assets in Wyoming and the Cotton Valley are something of which even the top-tier MLPs should be envious.

Columnist Conversations

HP
Multiple downside targets have been met in HP....either trail stops down or book some profits or BOTH. ...
What an ugly short session for oil and energy related stocks. Think we get some sort of bounce on Monday when...
I saw a comment on JC's piece asking about a tariff on crude oil to protect the American industry and a respon...
Lang:
i was double-delighted to see Stephanie Link bullish on LULU but also a recent piece by Ed Ponsi reflecting th...

BEST IDEAS

REAL MONEY'S BEST IDEAS

Columnist Tweets

BROKERAGE PARTNERS

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data provided by Interactive Data. Company fundamental data provided by Morningstar. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by Interactive Data Managed Solutions.


TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

IDC calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.