Mid-Continental Energy: An 8%-Plus Yield Currently Selling At A Discount

Sep.27.12 | About: Mid-Con Energy (MCEP)

One of my newest MLP holdings is Mid-Continental Energy (NASDAQ:MCEP). I like it for its high yield (8+%), its adequate coverage on distributions (currently 1.18, but please note that it will be dropping to 1.12 as I show below). Lastly. this MLP is particularly attractive because 99% of its production is oil. Most MLPs produce both natural gas and oil and the low price of natural gas makes revenues much lower. MCEP is almost entirely oil and I find this a strong selling point.

MCEP is down more than 2% as I write this, and I bought some more this morning. As is often the case, this drop in price reflects a notice that a large number of units will be for sale in the next few days or weeks. In this case, 3 million units will be sold from current insiders to the general public. The other million units will be sold directly from the company to the public and will dilute the value of existing units.

When a large number of units are sold the unit price is normally depressed for some time. That time may be days, but it is sometimes only a few hours. On the other hand, there are times when the unit price takes weeks or even longer to recover.

When I buy an MLP I am always most interest in the amount of distribution, and I am second most interested in the coverage ratio, which is a short hand way of measuring how well the distribution is secured. Coverage ratios above 1.1 are usually thought of as secure. Coverage ratios above 1.25 or so often lead to distribution increases.

The 3 million units sold by the insiders should not effect the coverage ratio. That is, current unit holders will sell their units to other unit holders, but the coverage ratio will stay the same.

The other million units will dilute existing unit holders. On page 25 of a recent presentation, MCEP developed an estimated coverage ratio of 1.18 using existing units of 18,559,000. If units are increased to 19,559,000 the coverage ratio drops to 1.12, which is still acceptable.

Thus, I was comfortable adding to my position. As always, I add slowly as I see what else develops. Building a position this way sometimes keeps me from making a killing on a very temporary dip, but it also allows me to sleep better at night. I do not like to have a large position in a company before I know it well, and I don't know MCEP that well yet. Thus, if I built my position too quickly this investment might keep I me up at night, and no investment should do that.

Disclosure: I am long MCEP. 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.