Heading into its earnings release early next month, shares of Memorial Production Partners (NASDAQ:MEMP) have still remained depressed due to fears concerning the oil industry, sending them to a new 52-week low. In this piece, since earnings are so near, I figured I would lay out two key things investors should be expecting from the firm this quarter and what it could mean for investors in the business down the road.
Look for asset sales
Last month, the management team at Memorial announced that it agreed to sell two non-core properties in exchange for $56.5 million (subject to closing adjustments) this year. The larger of these was a piece of their Permian property, which was sold in exchange for $37.4 million, taking with it 238 net producing wells and output of around 1,200 boe (barrels of oil equivalent) per day. The smaller propery was in the Rockies and it was sold for $19.1 million. In a prior piece on the company, I talked about these sales in greater detail and recommend that you look over that article as well.
These asset sales came about after some people who've been eyeballing the company have said that it doesn't appear as though management is worried about the company's prospects due to its hefty hedge portfolio. Though this could be a positive sign, it could also be a sign that management isn't taking the proper steps to ensure the company survives for the long run. However, this sale disproved this notion and indicates that management is, indeed, serious about focusing on reducing its debt, which stands at an aggregate $1.90 billion today.
Personally, I believe more asset sales are on the horizon and if management does not disclose that asset sales have taken place, they will likely indicate that they are pursuing such opportunities. Although it's always unappealing to sell off assets when those could be developed when oil prices are higher down the road, we've seen time and again, such as in the cases of Breitburn Energy Partners (OTCPK:BBEPQ) and Linn Energy (LINEQ) that not pursuing action early can be devastating. In the case of Memorial, the firm paid down some of its credit facility, which should stand (after factoring in the impacts associated with the sales) at $735.5 million, allowing the firm wiggle room of $187.5 million.
Cost reduction should be more meaningful in my view
The second major thing that I believe is probable is that management will probably be focusing more heavily on lowering costs elsewhere. In the first quarter of this year, for instance, total lease operating expenses, plus gathering, processing, and transportation costs, averaged $12.18 per boe (barrel of oil equivalent), a drop of only 6% from the $12.96 million the firm reported the same quarter a year earlier. On top of this, its total general and administrative costs for the first quarter came out to $3.66 per boe, down only 4.7% from the prior year's period, when the cost averaged $3.84 per boe.
While any sort of improvement on the cost side is a net positive in my book, the sad truth is that these decreases on a year-over-year basis are miserable. Other firms, like Legacy Reserves (NASDAQ:LGCY) and Whiting Petroleum (NYSE:WLL) have been far better at addressing their cost structures and I'd like to see management focus a great deal here. Given the debt reduction from the asset sale, combined with the fact that excess cash flow this quarter should be between $35 million and $40 million (allowing potentially more debt reduction), I believe there's a good basis for anticipating some year-over-year improvements on the cost side.
One thing I'd like to see but probably won't
Besides the two items above, which I believe there's a good chance we'll see progress on, or at least hints that progress is coming, there is one other category that I'd love to see management address but I'd be surprised if they did this quarter; the distribution. As it stands right now, Memorial's annual distribution should be about $16.60 million. If a company has no other good things to allocate capital toward, I don't have a huge problem with distributions but when the credit facility could pose a problem this Fall (depending on a variety of factors) and when (if they are making good progress on the credit facility and can make those lenders comfortable with it) they can be buying back debt on the open market for as low as $0.465 on the dollar, I don't like seeing the equivalent of $1.16 per boe flying out the door each year. Given the energy space's attitude toward distributions, however, I would be shocked to see this number fall.
All-in-all, the picture for Memorial is pretty good near-term but the company does have some things that it needs to work on. While I do think any potential distribution cut is going to occur later this year or sometime early or mid next year (absent oil prices soaring), I do believe that investors should keep a watchful eye out in this quarterly release for asset sales (or hints of them on the way) and for cost cutting initiatives to come into play. If these do come to fruition, the prospects for Memorial and its shareholders should be better in the future than they currently are.
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.