Editor's Note: This article was originally published at 11 a.m. EDT on Real Money on July 16. Sign up for a free trial of Real Money.
Last Wednesday Memorial Production Partners (MEMP), an upstream master limited partnership, announced that it would offer 8.3 million additional units of common equity, bringing the partnership's total common-share count to about 64.2 million. Total proceeds for the deal will amount to $222.5 million -- quite a significant offering for a company whose market capitalization is only $1.4 billion.
As is the case with many upstream MLPs, units of Memorial tumbled significantly after the news of this secondary offering. As of Thursday, shares were down nearly 8%. While the price has recovered somewhat since then, Memorial is still down more than 4% from its Wednesday level, and the partnership currently has a dividend yield of 9.5%. That compares favorably with dividends at peers such as Linn Energy (LINE) and BreitBurn (BBEP).
Memorial implemented this offering to pay for its recent acquisition of carbon dioxide-aided oilfields in Wyoming, which it agreed to buy for some $935 million. The Bairoil fields have been producing since the 1920s, and Memorial estimates that they can produce for another 39 years at current rates of production. The best part about the acquisition is that it costs only $20 to produce a barrel of oil at Bairoil, meaning production extremely profitable there.
Before it acquired the Bairoil properties, Memorial was a partnership that produced mostly natural gas, and it did so at the lowest cost base in the industry. Memorial's cost advantage stems from its flagship acreage position in the Cotton Valley in East Texas. Cotton Valley is one of the oldest producing gas fields, and the play has been yielding dry gas since the early 1900s.
Memorial's portfolio is rounded out by man-made drilling islands off the coast of California, as well as strong gas-producing acreage in South Texas and the Permian, and some in the Rockies. Although it is a small partnership, Memorial's Bairoil and Cotton Valley holdings are some of the longest-lived, lowest-cost base assets in the industry.
Worst Is Over
Although dilutive unit offerings are never ideal for investors, the worst is over for now. That's because, earlier this week, Memorial also announced a $500 million senior note offering. Together with the unit offering, proceeds will come close to the $935 million that the partnership shelled out for Bairoil.
The midpoint of Memorial's 2014 discounted cash flow (DCF) guidance is $193 million. That gives us DCF of $2.94 per unit, considering the new common-share count of 65.5 million -- making its price-to-DCF ratio just 7.8 at Tuesday's closing price of $23. Considering its very strong assets, Memorial is a good deal at these levels.
Historically, the aftermath of a unit offering has been a good time to buy Memorial Production Partners, and I believe that now is a good time to buy as well. The partnership's premier assets in Wyoming and the Cotton Valley are something of which even the top-tier MLPs should be envious.