Memorial Production Partners: No More General Partner

| About: Memorial Production (MEMP)

Summary

MEMP purchased its general partner from MRD for $0.75 million a few weeks back.

This was a very odd move and hard to explain at the time.

Subsequently, MRD gets bought out by Range Resources.

It is likely Range did not want to deal with the hassle of being MEMP’s general partner.

It was rather odd when Memorial Production Partners (NASDAQ:MEMP) acquired its general partner "Memorial Production Partners GP LLC" for $0.75 million from Memorial Resource Development Corp. (NASDAQ:MRD) a few weeks ago.

Keep in mind that this followed the CEO change. John Weinzierl, who was CEO of both MEMP and MRD, had resigned as CEO of MRD back in January to focus on MEMP. While the company cited a simplified corporate and organizational structure as its rationale for this purchase, something more was clearly up, and now we know.

Memorial Resource Development gets bought out

On Monday, Range Resources (NYSE:RRC) announced that it would be acquiring MRD in a $4.4 billion merger. This deal is technically unrelated to MEMP - no changes to the economics. But, from its prior actions, it appears RRC simply did not want to have to deal with being the general partner of MEMP.

MLPs are complicated structures. While MEMP is one of the better-hedged names in its sector, this is not saying much. MEMP has a lot of debt and will be in trouble down the road in oil prices stay low. A general partner may be liable for an MLP's debt if it fails. The largest two of its peers, by EV, were Breitburn (BBEP) and Linn Energy (LINE) (LNCO), both are which are now in bankruptcy court.

In addition, general partners are responsible for the administration of the MLP's asset base, but the MLPs do reimburse the costs. RRC, as a growth energy stock, is not used to handling the "mature" assets such as those owned by MEMP, which was basically where MRD jettison older assets.

As a result, it is understandable if RRC did not want to be the general partner of MEMP and hence compelled MRD to make these various transactions and personnel moves. Though, this hardly means it is not important.

Conclusion

What MEMP losses from not having MRD (or RRC) as its general partner is backup. Say if MEMP needed some cash to help with a short-term funding issue. A general partner has an economic incentive to help out its MLP and have it avoid bankruptcy. Now, MEMP is totally on its own.

While MEMP is nowhere near as bad in financial shape as LINE or BBEP, it has roughly $100 million in excess cash after distribution in 2016, it did see its borrowing base cut by 21% last month, leaving it with just $131 million of capacity. The secured lenders also forced MEMP to limit cash distribution to unitholders to a maximum of $4.15 million per quarter, resulting in the 3rd distribution cut in just under a year.

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Disclosure: I am/we are long MEMP.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.