Here at InvestorPlace, we’re big fans of master limited partnerships (MLPs). The lucrative tax structure can provide some pretty big benefits for sponsoring firms as well as investors. One of the chief advantages being dividends in the 5% to 7% range.
But not all MLPs are the same. There are plenty of choices outside the traditional midstream or energy logistics space, including firms that physically drill for oil.
Upstream MLPs build, operate and own wells for various energy sources. However, unlike their E&P twins with C-corp structures, the MLP tax structure requires them to pay out the bulk of their earnings back to investors. That prevents them for saving any cash for a rainy day. This also requires the vast bulk of upstream MLPs to focus on developed acreage with mature production profiles to keep the cash flows going.
The unfortunate thing is that the upstream MLPs thrive on higher oil and natural gas prices. It’s what makes their cash flows and dividends so high. With oil tanking over the last few weeks, the upstream MLPs have fallen hard. But oil won’t stay down forever, which makes the upstream MLPs interesting bargains to play the rebound in prices — all while collecting some fat dividends.
Here are three upstream MLPs to buy today.
Upstream MLP To Buy #1: Linn Energy, LLC (LINE)
Dividend Yield: 26%
Going public in 2006, Linn Energy, LLC (LINE) was the first E&P firm to use the MLP structure. LINE’s “firsts” continued with its creation of the HoldCo. LinnCo, LLC (LNCO) has provided a cheap way for LINE to raise cash and expand its portfolio of mature wells. The MLP spent nearly $5 billion since 2013 on acquisitions.
The rub is that those acquisitions burdened LINE with a relatively heavy debt load. And as oil has plunged, so have shares of Linn Energy. And with LINE stock currently yielding a monster 26%, investors are living in fear of a substantial distribution cut.
However, that cut may not happen.
LINE’s strength has always been its focus on high-quality oil fields with very long lives that have low, but stable rates of production. It’s about cash generation. And that cash will be generated even at lower oil prices — especially considering that the firm recently announced sales of two properties. LINE will plow those proceeds into its debt load and reduce it by 16%. Add in its announcement to put new CAPEX spending on hold, and you have much brighter outlook for LINE shares.
It’s still a risky and volatile play. But if oil prices rise by mid-2015 as predicted, investors in LINE or LNCO shares will be happy they took the risk.
Upstream MLP To Buy #2: Memorial Production Partners LP (MEMP)
Dividend yield: 15%
Like LINE, Memorial Production Partners LP (MEMP) has been taken to the woodshed lately as investors have been fearing a huge distribution cut among oil’s rout. Shares of MEMP are down about 32% this year and the stock now yields an eye-popping 15%.
However, the drop is unjustified and I see no dividend cut in MEMP stock’s future.
First, MEMP continues to see rising production across it acreage. Even if you’re producing at low prices, higher production does net more cash flow, which is important when it comes to upstream MLPs.
Secondly, MEMP is one of the more conservatively managed upstream MLPs and features relatively low debt loads. More importantly, only a fraction of that debt is due in the near term — 2018 to be exact. It has roughly $1 billion in current liquidity available and hedges its production against wild price swings. As such, Memorial should have ample cushion to protect its hefty distribution through 2015 as well as 2016, if the low-price oil environment persists.
Management certainly thinks MEMP shares are a bargain. The upstream MLP recently authorized a new $150 million buyback program.
Upstream MLP To Buy #3: BreitBurn Energy Partners L.P (BBEP)
Dividend yield: 28%
Fresh off its November buyout of upstream MLP rival QRE, BreitBurn Energy Partners L.P (BBEP) actually raised its dividend by 3.5%. The combination of a falling share price and that dividend raise has given BBEP an insane dividend yield of 28%. While that monster yield doesn’t come with zero risk, it’s still worth betting on — even for risk-averse investors.
To start with, BBEP receives more than half of its production and cash flows from natural gas. Remember, while oil has continued to plunge, natural gas has been holding up just fine. So BBEP’s natural gas properties are kicking out cash flows without a problem. And those cash flows are helping pay for dividends as well as acquisitions like the QRE deal.
And speaking of those asset buys, BBEP has been one of the best in the space. The upstream MLP has made a name in buying some of the most instantly accreditive properties to add to its umbrella. And with management pledging to make oil production around 60% of its total by the end of 2015, BBEP is most likely on the hunt for assets on the cheap.
Don’t expect BBEP shares to remain at bargain prices for much longer.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
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