Guide to Oil and Gas MLPs

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Despite the Federal Reserve's moves to start easing its economic stimulus, interest rates are still at record lows. This means investors continue to have no choice but to look for better yields in the stock market. One place that has really caught investors' attention are oil and gas master limited partnerships, where the top four offer an average distribution yield of 9%.

The business of an oil and gas MLP is pretty straightforward. These companies acquire mature oil and gas wells, hedge to lock in the cash flows associated with those wells,Seems like need a bit more explanation of this middle part, but this could be just because I don't know the topic and then return nearly all of the excess cash flow to investors. That said, not all of these companies are that straightforward. This can make it difficult for investors to choose which one would fit best within their portfolio.

Some investors might want the security of owning top-dog LINN Energy (NASDAQ: LINE) or its affiliate LinnCo (NASDAQ: LNCO). The acquisition machine now owns an interest in 19,000 producing wells throughout the U.S. Not only that, but thanks to its most recent acquisition, LINN Energy's production is quite balanced and its distribution is now rock solid.

Still, other investors are more interested in upside that can be offered by smaller operations like BreitBurn Energy Partners (NASDAQ: BBEP), Vanguard Natural Resources (NASDAQ: VNR) , or EV Energy Partners (NASDAQ: EVEP). However, while all three are relatively the same size, there are major differences between each company. For example, BreitBurn Energy Partners' production is heavy on oil, while Vanguard Natural Resources and EV Energy Partners lean heavily toward natural gas.

These are just some of the differences between these top four companies. To take an even deeper look I've created the slideshow below to help investors decide which of these massive distributions belong in their portfolio.

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  • Photo credit: http://www.linnenergy.com/newsRoom/media.htm
  • http://files.shareholder.com/downloads/LINE/2506788784x0x718263/9E6EF96A-7997-4669-A5F8-3C07397F644A/UBS_Park_Cities_FINAL.pdf
  • Sources: http://files.shareholder.com/downloads/LINE/2506788784x0x714259/26ec37bc-86df-4dbc-ada5-5bd55806aea4/Merger_Overview_Presentation.pdf
  • Photo credit: http://www.flickr.com/photos/90536753@N00/8862336101/in/photolist-ev8MLi-8Etxbw
  • http://files.shareholder.com/downloads/BBEP/2931780786x0x711499/e62eb880-ec48-48e3-8516-cdf895966142/BBEP%20Investor%20Presentation%2012.13_JJ.pdf
  • Sources: http://files.shareholder.com/downloads/BBEP/2931780786x0x711499/e62eb880-ec48-48e3-8516-cdf895966142/BBEP%20Investor%20Presentation%2012.13_JJ.pdf
  • Photo credit: http://www.flickr.com/photos/51986662@N05/5716434206/in/photolist-9H9dJs-btJNtX-dQbDBn-dyQMu4-dyWfzb-dyQNh8-dyWgi9-dyCu66-dyHXbG-dyCkne-dyHWef-dyHQgh-dyCsAK-dz164D-8kyFDQ-8kvpBR-8kyANb-8kyAEf-8kvpxn-8kyAAj-8kyFCw-8kyFGA-8kyAt9-8kyFyo-8kvuwz-8kyFBq-8kyAC3-8kvuvZ-8jYvMV-8jYvHF-8jYvKn-8kvuo2-8kyAvd-bSf8VF-8vBVL8-8vEXmG-8vBVXt-8vEXyW-8vEXGf-8vEXd9-8vBVPR-8vEXiu-8vBVYM-8vEXtU-8vBVWt-8vBW22-8vEXwC-8vEXHS-8vBVTe-8vBVUB-8vBWaH
  • http://ir.vnrllc.com/External.File?item=UGFyZW50SUQ9NTk4ODB8Q2hpbGRJRD0tMXxUeXBlPTM=&t=1
  • Sources: http://ir.vnrllc.com/External.File?item=UGFyZW50SUQ9NTk4ODB8Q2hpbGRJRD0tMXxUeXBlPTM=&t=1
  • Photo credit: http://www.flickr.com/photos/36521980095@N01/3686620751/in/photolist-6BLTUK
  • http://files.shareholder.com/downloads/EVEP/2931875368x0x712544/c0c0c332-9a85-4f07-ad23-e7aca5b8938d/EVEP%20-%20Wells%20Fargo%20Energy%20Symposium%20-%20Print%20Version%20120913.pdf
  • Sources: http://files.shareholder.com/downloads/EVEP/2931875368x0x712544/c0c0c332-9a85-4f07-ad23-e7aca5b8938d/EVEP%20-%20Wells%20Fargo%20Energy%20Symposium%20-%20Print%20Version%20120913.pdf
  • Sources: Investor presentations
  • Sources: Investor presentations
  • Sources: Investor presentations
  • Sources: Investor presentations
  • Sources: Investor presentations
  • Guide to Oil and Gas MLPs

    1. 1. An Investor’s Guide to Oil & Gas MLPs (Part I) Photo credit: LINN Energy
    2. 2. Part I Will Look Closer at the Top 4 • • • • Represent ~75% segment’s value Most aggressive acquirers Geographically diverse Secure and growing distributions
    3. 3. LINN Energy LLC and LinnCo LLC Ticker: LINE/LNCO (All data LINE) • $7.8 billion market cap • 8.8% yield • Coverage ratio last quarter: 1.0x • Distribution paid monthly Photo credit: LINN Energy
    4. 4. Part I Will Look Closer at the Top 4 Source: LINN Energy Investor Presentation
    5. 5. The Information that Matters • • • • • Total Proved Reserves: 1.1 Billion BOE Liquids production: 54% Reserve life-index: ~17 years General Partner: None Areas to watch: Recently completed Berry Petroleum acquisition, natural gas prices and the Permian Basin development
    6. 6. BreitBurn Energy Partners L.P. Ticker: BBEP • $2.4 Billion market cap • 9.6% yield • Coverage ratio last quarter: 1.3x • Distribution paid monthly Photo credit: Flickr/Robert Ashworth
    7. 7. Part I Will Look Closer at the Top 4 Source: BreitBurn Energy Investor Presentation
    8. 8. The Information that Matters • • • • • Total Proved Reserves: 190.8 million BOE Liquids production: 62% Reserve life-index: ~15 years General Partner: None Areas to watch: Oil prices and debt levels
    9. 9. Vanguard Natural Resources, LLC Ticker: VNR • $2.4 billion market cap • 8.3% yield • Coverage ratio last quarter: 1.09x • Distribution paid monthly Photo credit: Flickr/USFWS Mountain Prairie
    10. 10. Part I Will Look Closer at the Top 4 Source: Vanguard Investor Presentation
    11. 11. The Information that Matters • • • • • Total Proved Reserves: 316 million BOE Liquids production: 33% Reserve life index: ~13 years General Partner: None Areas to watch: Natural gas prices and strategy shift organically grow production
    12. 12. EV Energy Partners, L.P. Ticker: EVEP • $1.9 billion market cap • 8.6% yield • Coverage ratio last quarter: 0.7x • Distribution paid quarterly Photo credit: Flickr/Daniel X. O’Neil
    13. 13. Part I Will Look Closer at the Top 4 Source: EV Energy Investor Presentation
    14. 14. The Information that Matters • • • • • Total Proved Reserves: 160.5 million BOE/d Liquids production: 31% Reserve life index: ~14 years General Partner: EnerVest Areas to watch: Utica Shale and natural gas prices, distribution coverage ratio and midstream growth
    15. 15. Now Let’s See How Each Compares • • • • Scale Reserves Production Hedging
    16. 16. Enterprise Value
    17. 17. Total Proved Reserves Sources: Company investor presentations, SEC filings and author’s calculations
    18. 18. Where is the Cash Flowing From? Sources: Company investor presentations, SEC filings and author’s calculations
    19. 19. How Secure is the Cash Flow? Sources: Company investor presentations, SEC filings and author’s calculations
    20. 20. How Secure is the Cash Flow? Sources: Company investor presentations, SEC filings and author’s calculations
    21. 21. Key Takeaways LINN Energy – Top-dog, balanced production and very secure cash flows BreitBurn – Oil heavy with less secure cash flow Vanguard – Natural gas focused with secure gas cash flow EV Energy – Natural gas heavy with less secure cash flow
    22. 22. Our Special Free report on nine rock-solid dividend stocks.
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