An Undiscovered MLP for High-Yield Investors

by Bryan Perry | February 14, 2013 9:10 am

After such a nice, broad move higher for the major averages over the last six weeks, the business of making money is becoming a stock-picker’s rally. Leadership is narrower, and less cream is rising with every new advance.

But then again, it’s always been a stock-picker’s market. It just so happens that even the garbage gets a bid when buyer euphoria takes hold. We’re at a point where that free lunch is about to end, so I’ve set my sights on high-yielding names that won’t collapse once the rally is over.

Opportunities Abound

A lot of the trash of the high-yield universe has risen for no other reason that I can see but money chasing yield without proper due diligence. Assets that appreciated on the back of the bull without sound fundamentals will round-trip their gains in the first formidable pullback.

It’s important not to get caught up in the hype of missing out on the rally if one’s capital isn’t fully deployed. Opportunities and undiscovered assets that haven’t caught the eye of big money just yet are always available, which is why I’ve been scooping up some of the smaller-cap energy master limited partnerships (MLPs) such as BreitBurn Energy Partners (NASDAQ:BBEP[1]) and LRR Energy Partners L.P (NYSE:LRE[2]) over the past couple of months.

It’s where I believe steady accumulation will be present for months to come as fund managers seek big yields that are inflation-sensitive and outside the conventional box of fixed income.

An Energy MLP to Scoop Up Now

Another MLP that fits that description is Memorial Production Partners LP (NASDAQ:MEMP[3]), which has mature, legacy oil and natural gas reservoir properties, in Texas, Louisiana and California. The main draw I see here is the company’s strong growth prospects from acquisitions of additional properties.

MEMP is a relatively young company that went public late in 2011, but it has hit the ground running, having completed five acquisitions in its first year of operation. Most recently, MEMP announced that it had signed a definitive agreement to acquire oil- and gas-producing properties off the shore of Southern California from Rise Energy Partners. This field has an estimated production reserve life of about 25 years, about 14% of MEMP’s total reserves, and is immediately accretive to distributable cash flow.

The stock is still recovering from some weakness in December 2012 due to a secondary offering of 10 million shares at $17, which increased the stock float by 40%. That was considerably more than I or anyone that follows the MLP would have estimated, and it presents an attractive opportunity to go long the stock.

MEMP obviously has big plans to acquire new properties in the next year. At its current price, I believe the 11.36% distribution yield will provide plenty of support for the units. The weakness is a near-term situation, and with future news of accretive purchases, the shares will recover back to $20.

By Bryan Perry[4], Editor, Cash Machine

Bryan Perry is editor of Cash Machine[5], a newsletter focused on dividends and income investing. As of this writing, he did not own a position in any of the aforementioned securities.


  1. BBEP:
  2. LRE:
  3. MEMP:
  4. Bryan Perry:
  5. Cash Machine:

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