One of the parts of the business model for energy limited and master limited partnerships involve secondary offerings. These entities use the vast majority of their cash flow to provide distribution payouts to their shareholders. Therefore, in order to continue to expand their portfolio they need to raise additional capital. Real Estate Investment Trusts (REITs) operate in a similar manner.
When these secondary announcements are announced the stock in the issuing entity usually sells off. I have found these events as good entry points as usually the funds are spent on accretive assets and/or to reduce higher cost debt. Both of which actually improve the prospects for future distribution payout growth.
Two energy partnerships recently announced secondary offerings and are down in early trading on Tuesday. Both are offering attractive entry points after these declines.
Memorial Production Partners LP (MEMP) is a publicly traded partnership engaged in the acquisition, production and development of oil and natural gas properties in the United States. Memorial's properties consist of mature, legacy oil and natural gas fields. Memorial recently announced a ~7mm secondary offering.
Wunderlich started MEMP as a "Buy" in late October. The analyst firm cited Memorial's "strong acquisition track record, high reserve to production ratio, affiliation with a drop-down sponsor and a solid coverage ratio providing headroom to improve future distributions" as reasons for the positive initiation.
The shares provide one of the higher distribution yields in the space with a payout of just under eleven percent (10.7%). Earnings estimates for FY2014 have gone up nicely over the last two months and insiders purchased over $500K of new shares at higher prices in August. Revenue growth should clock in with better than a 90% gain in FY2013 and analysts expect a ~50% increase in FY2014. MEMP goes for under 9.5x forward earnings estimates.
Tesoro Logistics LP (TLLP) assets consist of a crude oil gathering system in the Bakken Shale/Williston Basin area of North Dakota and Montana; eight refined products terminals in the Midwestern and western United States; a crude oil and refined products storage facility; and five related short-haul pipelines. It was recently spun off from Tesoro (TSO) in 2011 and it still receives drop down assets from its parent.
The company announced it is doing a secondary offering of 6.3mm new shares to raise proceeds to purchase additional energy terminals & assets from Tesoro . One bright sign for the entity was that Citigroup recently reiterated its "Buy" rating on the energy logistical limited partnership and it also raised its price target a buck a share to $60.
The shares yield just over four percent and the Tesoro Logistics has raised its payout by better than 50% since coming public. Two insiders bought over $75,000 of shares in August at slightly higher prices. Revenues are tracking to better than a 90% gain this fiscal year. Analysts expect over 50% sales growth in FY2014 and that was before the just announced acquisitions of new assets from Tesoro.