NEW YORK (TheStreet) -- LRR Energy (LRE - Get Report) is a small-cap upstream limited partnership, formed by Lime Rock Management in late 2011. It acquires and develops oil and natural gas properties in North America. The business, which gives an attractive yield of more than 11%, has properties at the Permian Basin, the Mid-Continent region and the Gulf Coast, with more than 30 million barrels of proven reserves.
LRR's shares are trading at around $17, which is 32 times its trailing earnings and 4.7 times its trailing sales.
LRR has a lot of promise. The firm offers attractive dividends and has the potential for long term growth from the Permian Basin, particularly from Red Lake fields. The business has spent nearly all of its capital expenditure on its oil-weighted acreage and therefore will likely increase its oil output for 2014. Moreover, the business can also grow its reserve base due to more drop-downs from its predecessor, Lime Rock Resources.
On the other hand, LRR Energy has little to show in terms of execution. Investors would normally expect double digit growth from a newly established small-cap upstream MLP. But for LRR, so far, there has been no meaningful growth in terms of revenue, income or production. Its fuel sales have increased by just 2% from last year, while its adjusted earnings have dropped in the corresponding period.
For these reasons, and despite the above-average yield, I believe that investors should adopt a wait-and-see approach. LRR Energy could become an investment option when the business shows clear signs of improvement, particularly in terms of higher oil production.
LRR Energy has recently increased its quarterly cash distribution to $0.4875 per outstanding unit. This was the fifth consecutive quarterly increase, which translates into a yield of 11.45%.
There is no shortage of MLPs operating at the Permian Basin. Some are much bigger and better-established than LRR Energy, like Legacy Reserves (LGCY), or EV Energy Partners (EVEP). But there are very few firms that offer yield of more than 11%. QR Energy (QRE) is one of the few other MLPs with exposure to the Permian Basin and with a yield of more than 11%.
During a recent energy conference in December, LRR Energy revealed that it has amassed 31.7 million barrels of oil equivalent as reserves. Of these, nearly 54%, or 17 million barrels, are located at the Permian Basin. These reserves are 71% liquid and have a proven reserve life of 13.1 years.
Outside the Permian Basin, LRR's other reserves at the Mid-Continent and Gulf Coast are more than 70% natural gas. The MLP gets nearly 29% of its average daily production from the Mid-Continent and nearly 17% from the Gulf Coast. Overall, LRR Energy's total reserves are 50% liquid and have a reserve life of 13.2 years.
At the Permian Basin, LRR's focus has been on the development of its oil-weighted properties at Red Lake. While its total Permian Basin acreage, including its properties at Pecos Slope and Corral Canyon, is 55% oil, the Red lake field is 62% oil.