High-Yielding Upstream Energy MLPs Solid Buys Despite Oil Drop

The huge drop in oil is really starting to show up at the pump for consumers, and right before the holidays that is a blessing. It is also showing up in energy-related stocks and master limited partnerships (MLPs). This may prove to be a blessing for patient, long-term aggressive energy growth and income investors. A new report from UBS documents that the fall in oil prices has certainly made investors nervous, and specific company by company thesis may need to be reviewed.

The UBS team thinks that the upstream MLPs need to continue to execute accretive acquisitions to offset naturally declining reserves and production. They point out the industry catch-22, as many energy and production companies may be sellers of assets, while the MLPs are constrained by cash shortages to make deals.

While UBS lowered price targets on the entire upstream universe, they maintained buy ratings on four of the highest yield-equivalent companies (via distributions) in the group. As always, it is important to note that MLP distributions can — and almost always do– include a rather large return of principal along with income in each distribution.

Breitburn Energy Partners L.P. (NASDAQ: BBEP) remains a top new stock (unit) to buy at UBS. Half of Breitburn’s production output is natural gas, which bodes well for investors. Management plans to focus future acquisitions on oil-intensive energy fields, and it expects that 60% of its output will come from oil in 2015. Any pick-up in pricing could prove to be beneficial. A key virtue: Breitburn is known for the industry’s most accretive acquisitions, which means that each deal generates above-average returns.

Breitburn investors are paid an outstanding 13.6% distribution. The UBS price target for the stock drops to $18. The Thomson/First Call consensus target is $20.39. The shares closed Friday at $15.57.

ALSO READ: UBS’s Top Tech Stocks to Buy for 2015

Memorial Production Partners L.P. (NASDAQ: MEMP) is a newer name to the game, having gone public in 2011. With a strong acquisition track record, high reserve-to-production ratio, affiliation with a drop-down sponsor and a solid coverage ratio providing headroom to improve future distributions, the UBS analysts believe the trading multiple should move in line with the sector, resulting in attractive returns from near-term potential upside.

The UBS price objective for the stock $19, down from $23, and the consensus is posted at $23.36. Investors receive a gigantic 14% distribution. Memorial closed Friday at $16.32.

Legacy Reserves L.P. (NASDAQ: LGCY) is an oil and gas upstream MLP headquartered in Midland, Texas, having properties in the liquids-rich Permian Basin, Mid-Continent and the Rocky Mountains. Legacy 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 year-end at favorable prices.

Legacy investors are paid a massive 12.6% distribution. The UBS price target for this top name drops to $22 from a sky-high $31, while the consensus is at $27.29. Legacy closed Friday at $20.77.

Linn Energy LLC (NASDAQ: LINE) announced the acquisition of $2.3 billion worth of natural gas heavy assets from Oklahoma-based energy producer Devon Energy this past summer. The deal includes the acquisition of five U.S. operating areas and is very significant. The company fully covered its distribution and generated excess of net cash provided by operating activities after distributions to unitholders and discretionary adjustments of approximately $88 million for the third quarter 2014, compared to an excess of net cash of approximately $2 million for the third quarter 2013. Solid news for unitholders.

Linn investors are paid a gigantic 14.20% distribution. UBS has a $24 price target, and the consensus is much higher at $30.64. The shares closed Friday at $21.50.

READ ALSO: Why Analysts and Investors Love Intel Again (and Should in 2015)

The huge yields on these companies have spiked as shares have fallen dramatically since the summer. While it remains possible that distributions could be cut, any firming in oil prices, which many see for 2015, and these MLPs could prove to be a steal at these levels for patient investors.