Low Rates Make Upstream MLPs Attractive

 | Nov 06, 2013 | 10:00 AM EST  | Comments
  • Comment
  • Print Print
  • Print
Stock quotes in this article:

line

,

vnr

With the 10-year treasury yield coming down from its 2013 high of 3% in September to 2.6% today, dividend paying "bond equivalent" stocks have seen some relief. One exception has been upstream master limited partnerships, or MLPs, many of which have seen only limited upside from the recovery in bonds.

Low rates are good for upstream MLPs on two levels. Because upstream MLPs distribute nearly all of their respective free cash flow, these names usually come with high yields. These partnerships tend to be income-oriented investments and therefore must compete with bonds. Low rates make these names more attractive.

Upstream MLPs also must acquire acreage in order to grow production. They generally do not explore. This means these names depend on a benign credit market to replenish depleting assets. The market for acquisitions right now is extremely active, with many large names quick to sell mature acreage in order to fund development in the shale.

In the early part of this year, however, many bears cited rising interest rates as something that could put an end to this acquisition bonanza. With interest rate trends now reversing, acquisitions will continue and upstream MLPs will benefit.

Many upstream MLP names can be bought now. Most of these partnerships are yielding at least 9%, and those distributions are indeed sustainable. The most obvious name to start with is Linn Energy (LINE). Linn is fresh out of its informal inquiry with the Securities and Exchange Commission -- and after only semantic changes were made.  As a result, Linn is again focusing on its core strength of renovating mature properties.
Once Linn closes on its Berry Petroleum acquisition, which is looking increasingly likely, the company will have enviable positions in two of America's oldest and most prolific geographies: California and the Permian. Both of these will have considerable enhanced recovery and/or horizontal drilling potential, which will lengthen considerably their respective reserve lives.

Linn is rather aggressive for an MLP. Its relative debt levels are among the highest and its relevant distribution coverage ratio among the lowest at only 1.01 times for the year. A more risk-averse choice might be Vanguard Natural Resources (VNR), which yields just under 9% but has a slightly better distribution coverage ratio of 1.05 times. Its debt (both targeted and actual relative debt) a good bit lower than Linn's. Vanguard's overall capital expenditure to earnings before interest, taxes, depreciation and amortization is also the lowest in its class, offering a secure stream of cash flow.

There are quite a few other names at which to look. But the real bull case for these names lies in the mature properties which they are acquiring. Most upstream MLPs report a reserve life of between 15 and 20 years at current production. But that usually only considers primary oil recovery methods. Were these partnerships to employ techniques such as water flooding and CO2 flooding, their reserves would be producing for much longer.

Places such as Oklahoma, the Permian and California should be producing for much longer than 15 years, and will do so more economically than the newer shale plays. With interest rates looking to stay low for awhile, the acquisition of these valuable properties will continue.

Columnist Conversations

Under Armour has been fading since the opening bell. The stock is off just shy of 1.6% as it extends Frid...
I wrote on RMP last week that I thought CVS Health (CVS) was too pricey. Today independent research firm Trefi...
Shares of Lockheed Martin are pushing further into new all time high ground. LMT is up just shy of 2% a...
We are feeling the pain today with our long GILD calls, these things happen and is why we A. Do not oversize ...

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.