Mid-Con: A Stress-Tested 9.5% Yield

 | Dec 18, 2013 | 10:00 AM EST  | Comments
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mcep

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bbep

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vnr

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line

Mid-Con Energy Partners (MCEP), a small-cap partnership operating in Oklahoma, could very well be the best value right now among the energy master limited partnerships. Unlike most other upstream MLP names which look to strike a balance between oil and gas production, Mid-Con is unabashedly in one camp: oil. If you're looking for a name with insider buying and a good yield that is amply covered, I believe Mid-Con is an ideal choice.

Remember the saying "oil and water don't mix?" That is the idea behind an enhanced recovery technique called water flooding. Mid-Con gets nearly all of its oil from this method, in which old oil reservoirs are brought back to life by water injection. The process forces much of an old reservoir's remaining oil to migrate into adjacent acreage where it can be extracted.

Mid-Con's sole focus of reviving mature Oklahoma oil fields with this time-tested technique has resulted in this partnership having the highest earnings before interest, taxes, depreciation and amortization margins in its class.

There are two reasons for such high margins. First, a barrel of oil sells for much more than does a barrel equivalent of dry gas. Mid-Con's sole focus on oil maximizes its margin in this pricing environment. Operating in one of the most mature fields in the country, Mid-Con enjoys a substantial cost advantage. Mid-Con's total cost of production is low; in the mid to low $20 range.

Mid-Con expects to finish the year with a distributable cash-flow-to-distribution coverage ratio of 1.26x, give or take a few basis points. This is the highest coverage ratio among upstream MLPs. Assuming that next year's capital expenditures, interest expenses and production costs remain the same, Mid-Con will be able to pay its 9.5% yield with WTI as low as $73. WTI is at $97 right now. That's a pretty safe bet.

Mid-Con has the lowest price-to-discounted-cash-flow ratio among its larger peers. As of today it trades at only 8.75x expected 2013 DCF. Bigger names such as Linn (LINE), BreitBurn (BBEP) and Vanguard (VNR) sit in the 10s or high 9s at least. The upstream MLP scene is still fairly young and hard to gauge. I believe, however, that Mid-Con's exceptionally low value means that investors think that WTI will be going lower in the intermediate future and that Mid-Con may therefore come under some pressure.

Scared investors may indeed be right about the direction of oil. Mid-Con, however, has some of the most economical acreage in the country and a cushy coverage ratio. That will enable Mid-Con to weather even a substantial decline in WTI and still be able to pay its distribution without much fuss. It is also possible that Mid-Con is relatively cheap because the market is simply overlooking this small partnership. Either way, Mid-Con's 9.5% yield is both sustainable and safe. In fact, management's plan is to increase the dividend by mid single-digits next year. Finally, one of the partnership's directors, Robert Berry, added over $65,000 worth of units this month.

 With good value and insider buying, it's a good time to get on board

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