Plugging Into the Energy Space

 | Aug 26, 2013 | 1:00 PM EDT  | Comments
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Stock quotes in this article:

arp

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memp

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line

I would like revisit a theme I have already hit upon a few times in the last month or so. Some of the high yield sectors that have been negatively impacted by the rapid rise in interest rates over the past three months are offering attractive entry points at current price levels. I have allocated a good portion of my new capital to these sectors over the last few weeks.

I particularly like some of values in the energy master limited partnership (MLP) and limited partnership (LP) space. I think interest rates are at or near their short-term plateaus because the current rate of job and economic growth can't support them. I also like the energy space because the U.S. is in the early innings of an energy infrastructure and production build out that could have the country mostly energy independent in the next decade or so.

Here are two picks in the sector that are offering good value and high yield right now.

Memorial Development Properties (MEMP) is well diversified oil-and-gas producer with assets including producing acreage in California, Texas and California. Its properties consist of operated and non-operated interests and the entity is organized as a limited partnership. The company has grown rapidly via acquisition making over a half dozen acquisitions and associated dropdowns since it first came public late in 2011.

The company has consistently and incrementally raised its distribution payout since coming public and the stock now yields just below 10%. Memorial caught my eye this weekend due to its recent insider activity. A couple of directors have bought more than $600,000 in new shares over the last few weeks. In addition, the company's latest and largest acquisition to date is significantly boosting earnings expectations. The consensus earnings estimates have the company making around $1.60 a share this year and more than $2 a share in 2014.

Atlas Resource Partners (ARP) is a limited partnership active in oil-and-gas production in the Barnett Shale in Texas, the Appalachian Basin and in the Mississippi Lime in Oklahoma. ARP owns an interest in over 8,600 producing natural gas and oil wells. I took a stake in this entity after its stock was unfairly punished of being in the same category as Linn Energy (LINE), which has had numerous questions about its accounting practices.

Like Memorial, this entity is fairly new (its IPO was in February 2012) and it also pays out a distribution that yields approximately 10% annually. In addition, a couple of insiders added to their stakes in June at slightly higher levels than the current stock price. This limited partnership made a large acquisition in June that should be immediately accretive to distributable cash flow. ARP is a favorite of famed value investor Leon Cooperman and Robert W. Baird also upgraded the stock to Outperform in July.

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