Protected Principal Retirement Strategy: Paddling Upstream

Includes: MCEP, MEMP
by: Akaralph

In our most recent article, we discussed how each of the master limited partnerships [MLPs] in the Protected Principal Retirement portfolio performed relative to the declaration of distributions for the current quarter.

Overall, about half of our positions increased their distributions while distributions for the other half remained consistent with the prior quarter's distributions. A satisfying performance from my standpoint.

While I continue to overwhelmingly favor the midstream MLPs going forward, I continue to peruse upstream candidates that have effective hedging programs in place for possible inclusion in the Mid-Rangers portfolio. Two current prospects are Memorial Production Partners (NASDAQ:MEMP) and Mid-Con Energy Partners (NASDAQ:MCEP). Both are smaller cap partnerships (< $500 million market capitalization), and both are attractive at today's prices.

Let's take a look at each.

Memorial Production Partners

MEMP is engaged in the acquisition, development and production of oil and natural gas properties in southern and eastern Texas and northeastern Louisiana. The production is approximately 79 percent natural gas, and it has recently completed the acquisition of additional properties from Goodrich Petroleum.

The stock began trading publicly in December 2011, and since early July of this year, the stock price has gone from the $16 level to its current 52-week high of $20.50. In February 2012, MEMP paid a partial distribution of $.093. The distribution for August was for a full quarter and was $.48. The recently declared distribution, payable November 12, has an Ex-Div date of today (10/30), so the last day to own the stock in order to receive the distribution was yesterday (10/29). At the most recent price of $20.50, MEMP has a yield of 9.66 percent.

It remains to be seen how these last two dates might change since the markets will not re-open until Wednesday (10/31) at the earliest.

During the trailing twelve month period, MEMP generated revenue of $71 million, and according to Yahoo Finance, the compound annual growth rate for the next five years is 2 percent per annum. This is low, but not entirely unusual for upstream MLPs.

Recently, MEMP released guidance for 2012 that forecast distributable cash flow (DCF) in the range of $56 - $58 million and a distribution coverage ratio in the range of 1.25x - 1.35x.

Hedging is in place through 2017 at $4.21 for natural gas and $89 per barrel for oil.

Mid-Con Energy Partners

MCEP has also only been trading publicly since December 2011, and is in the same business of acquisition, development and production of oil and natural gas resources. Its properties are primarily located within the Hugoton Basin of Oklahoma, and Colorado.

MCEP produces approximately 98 percent oil, using a secondary recovery technology. This technology is named "Waterflood" and consists of injecting water into reservoirs where pressures have previously been depleted. This process replaces the lost pressure, enabling recovery of oil. I am not entirely familiar with Waterflood Projects, so I will leave the discussion at this point.

Since the inception of trading, MCEP's stock price has reached a high of almost $25 in March of this year and currently trades at the $22 level. Since July however, the stock price has increased from the mid-$18s. In February it paid a partial distribution of $.057. The first full-quarter distribution was in May and was $.475. The distribution remained at this level in August, and was just raised to $.485 for the quarter. The latest distribution is payable November 14, with an Ex-Div date of November 5. Therefore, in order to receive the distribution, one must own the stock on November 2. At the current price of $21.95 MCEP yields 8.84 percent.

Revenue for the trailing twelve month period was $51 million, and the five-year CAGR is 3 percent.

Earlier this month MCEP had a stock offering of $4 million units that apparently was oversubscribed.

Approximately 50 percent of production is hedged through 2014 at $94 per barrel. The distribution coverage ratios going forward are estimated at 1.18x - 1.20x.


Both MEMP and MCEP are similar in many aspects, both from an operations standpoint and from a financial standpoint. Both share the top position on my upstream MLP watchlist.

Prior to deciding if I wish to initiate a position(s) in our portfolio, I am interested in seeing how Hurricane Sandy affects oil and natural gas prices in the short run.

I do however believe that natural gas prices are more depressed than oil, so my gut feeling is that MEMP might produce the higher total return over the coming year.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

Additional disclosure: The information provided in this article is not meant to constitute a recommendation to buy or sell any stock. Readers are directed to further research any stock mention before making their decisions.

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