The energy market has taken investors on a wild ride in the past month, and many are predicting a drop in the price of West Texas Intermediate (WTI) to the mid to lower $80s. Clearly, with that kind of decline, the large energy and production companies could see a large decline in share prices. One good place to consider for investors looking to keep an energy allocation is one of the high-yielding upstream master limited partnerships (MLPs).
A new research report from RBC offers a synopsis of the firm’s attendance at the recent Independent Petroleum Association of America (IPAA) Conference in San Francisco. While weather and operational setbacks plagued some of the upstream companies in the first half of this year, the RBC team reports that executives were cautiously optimistic for a much better second half of 2014. One thing is for sure, with financing options still plentiful, the pace of acquisitions is expected to remain robust. RBC met with three top companies at the conference, and are extremely bullish on two of them.
Legacy Reserves L.P. (NASDAQ: LGCY) is ranked as a Top Pick at RBC, and with good reason. The company is an oil and gas upstream MLP that has extensive properties in the liquids-rich Permian Basin, Mid-Continent and the Rocky Mountains. Legacy Reserves has a very strong hedging strategy in place to mitigate cash flow volatility. The company has 92% of its expected oil production and 67% of its natural gas production hedged through 2014 at favorable prices.
Legacy Reserves investors are paid a very strong 8.4% distribution. The RBC price target is posted at $36, and the consensus target is much lower at $33.14. Shares closed Friday at $28.20.
Linn Energy LLC (NASDAQ: LINE) is a somewhat controversial name rated Outperform, that could bring investors big returns. The second large asset swap with Exxon-Mobil will bring an additional 300 drilling locations and bolsters the company’s existing inventory and attractive production results experienced during the first half of the year. Also, this summer the Linn acquired of $2.3 billion worth of natural gas heavy assets from Oklahoma-based energy producer Devon Energy. The deal included the acquisition of five U.S. operating areas and is very significant.
Investors in Linn Energy are paid a massive 9.7% distribution. RBC has a solid $38 price target, and the consensus target is $33.75. The stock closed Friday at $29.81 a share.
LRR Energy L.P. (NYSE: LRE) is rated Sector Perform at RBC, but from the discussions the analysts held with management everything looks on track for the company not only for the balance of this year, but well into 2015. The company was formed in April 2011 by affiliates of Lime Rock Resources to operate, acquire, exploit and develop producing oil and natural gas properties in North America. LRR Energy’s properties are located in the Permian Basin region in West Texas and Southeast New Mexico, the Mid-Continent region in Oklahoma and East Texas and the Gulf Coast region in Texas.
Investors are paid a gigantic 11.2% distribution. The RBC price target for LRR Energy is $18, and the consensus target is higher at $19.56. Shares closed Friday trading up smartly at $17.69.
Investors looking for a solid growth and income vehicle can do extremely well with these high-yielding MLPs. It is important to remember that MLP distributions can contain return of principal.