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Summary

  • LRR Energy has demonstrated steady distribution behavior over the past two years.
  • Recent coverage ratios signal long-term distribution sustainability.
  • Recent trend behavior signals a buying mode for most long-term investors.

As an income-driven investor who happens to be attracted to a number of higher-yielding income oriented plays, I've decided to shift my focus to the oil and gas sector and highlight a number of reasons behind my decision to remain bullish on units of LRR Energy, LP (NYSE:LRE).

Company Overview

Based in Houston, Texas LRR Energy, L.P., through its subsidiary, LRE Operating, LLC, engages in the acquisition, exploitation, development, and operation of oil and natural gas properties in North America. The company also holds interests in various properties located in the Permian Basin region in west Texas and southeast New Mexico, the Mid-Continent region in Oklahoma and east Texas, and the Gulf Coast region in Texas.

Recent Performance & Trend Behavior

On Friday, shares of LRE, which currently possess a market cap of $452.46 million, a forward P/E ratio of 17.73, and an annual distribution yield of 11.34% ($1.96), settled at a price of $17.29/unit.

(click to enlarge)

(Source: Finviz.com)

Based on their closing price of $17.29/unit, units of LRE are trading 0.11% below their 20-day simple moving average, 1.04% above their 50-day simple moving average, and 10.99% above their 200-day simple moving average. It should be noted that these numbers indicate a moderate short-term downtrend and a solid mid-to-long term uptrend for the stock, which generally translates into a holding pattern for most near-term traders and a buying mode for most long-term investors.

Comparative Forward P/E Ratios Set LRE Apart From Its Peers

Although the above referenced numbers indicate a long-term uptrend for the partnership's stock, I actually think its unit price of $17.29/share offers investors a considerable point of entry. Why? Well, I think that shares are trading at a much better forward P/E ratio than one of its sector-based peers which could translate into a great buying opportunity for many investors.

As of Friday's close, LRE's forward P/E ratio of 17.73 was much lower than the forward P/E ratio of New Source Energy Partners, LP (NYSE:NSLP) (forward P/E ratio of 23.57 as of 3/28) which signals a much greater level of affordability for those who may be interested in establishing a position LRR Energy, LP.

Recent Dividend Growth

Since January 27, 2012, the company has increased its quarterly distribution seven times over the last two years (including the company's most recent payout that took place on January 29). From an income perspective, the partnership's forward yield of 11.34% ($1.96) coupled with its 24-month dividend behavior certainly make this particular stock a very viable income option for long-term investors in search of a higher-yielding MLP play.

(Source: Yahoo! Finance)

If the partnership's distribution behavior over the next 12 months continues to grow at or above the 1.65% increase that the partnership demonstrated over the past 12 months, I strongly believe that investors could see April's payout fall into a range of $0.494/unit on the low side or as much as $0.50/unit on the high side.

Recent Coverage Ratios Signal Distribution Sustainability

According to the partnerships most recent earnings announcement which took place on March 5, LRR Energy demonstrated distributable coverage ratios of 1.34 for the fourth quarter and 1.31 for FY 2013. If the company can continue to maintain coverage ratios that are at or above the 1.3 benchmark, I see no reason why my above mentioned estimates can't be met and/or exceeded moving forward.

(Source: LRE Energy Quarterly Earnings Press Release)

Conclusion

For those of you who may be considering a position in LRR Energy LP, I strongly recommend keeping a close eye on the firm's recent trend performance, the continued improvement of the partnership's quarterly distribution, and its ability to enhance shareholder value over the next 12-24 months, as each of these factors could play a role in the partnership's long-term growth.

Source: Several Reasons Why I'm Staying Bullish On Units Of LRR Energy