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November 18, 2011

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Next up in MLP IPO Queue: Memorial Production Partners


Memorial Production Partners LP ($MEMP) filed its 4th amended IPO prospectus on November 9th, which included its expected pricing range.  At some point in the next few weeks, MEMP is going to hit the road to market 10.0 million units in its initial public offering, hoping to price between $19.00 and $21.00 per unit, and raising around $200 million in gross proceeds.  It will be the 10th MLP IPO so far in 2010, the most since there were 13 in 2007.  MEMP will also be the 11th pure-pay publicly traded upstream oil and natural gas MLP, up from 8 that existed a year ago.


MEMP is an upstream MLP, very similar to the two other upstream MLPs that have gone public in the past 12 months, QR Energy LP in December last year and LRR Energy, LP just a few weeks ago.  Both QRE (Quantum) and LRE (Lime Rock) were sponsored by private equity companies, and MEMP is no different there, backed by Natural Gas Partners.  At least MEMP got more creative with its name, and there are a few other differences as well.

Natural Gas Partners (NGP) has over $9 billion in committed capital under managemnt, and has experience serving as sponsor of an MLP, having invested in ETE and EROC pre-IPO (read my post on MLP Makers here).  NGP will retain 50% of the incentive distribution rights of MEMP,  3 NGP funds collectively own 100% of Memorial Resource, MEMP’s general partner.


Business Overview

MEMP has 324.7 bcfe of proved reserves in South Texas and East Texas, with predictable decline rates of around 9%, long reserve lives and modest capital requirements.  In other words, the assets are mature and have the characteristics that work well in the MLP format.  With 88% of its reserves in natural gas, MEMP will be the most heavily natural gas weighted MLP. Management has indicated that it will have a hedging program that targets 65% to 85% of estimated production from proved develop producing (PDP) reserve over a 3-5 year period.

MEMP appears to have a larger pool of potential assets that it can purchase from its parent company than QRE and LRE.  The table below from the prospectus highlights very specifically the pool of assets that MEMP will likely be able to purchase from its GP (Memorial Resource) over time.   The sponsor-retained assets are clearly less developed (34% proved developed, vs. 81% for MEMP reserves), so the plan is clearly going to be for Memorial Resource to develop those reserves more fully, then sell them down to MEMP.


Use of Proceeds / Structure

IPO proceeds, along with $130 million of borrowings, will go to purchase the properties from Memorial Resource.  Just like QRE and LRE, the proceeds and some borrowings go to the sponsor.  MEMP will have a $1.0 billion credit facility at IPO, with just the above mentioned $130 million drawn, resulting in 2.5x debt to LTM EBITDA, which is on par with most other upstream MLPs.

MEMP will have incentive distributions rights (IDRs) that go up to 24.9%, similar to LRE and EVEP.  Memorial Resource will retain 53.4% L.P. ownership after the IPO, and will retain 50% of the IDRs.

Management Forecast

In the prospectus, management gives a detailed next 12 months forecast.   Management is projecting production to remain flat at 49.4 mmcfe/d, compared with 49.5 mmcfe/d for the last 12 months ended 9/30.   MEMP expects to spend $9.2 million on maintenance capex on the 7 gross wells is needs to maintain its current production level.
Management is targeting a 1.2x coverage ratio, but MEMP will issue new units if the investment banks exercise their over-allotment option, and that will reduce distribution coverage to 1.12x, which is less than you would typically prefer for an upstream MLP.

The chart below highlights what happens to MEMP’s cash flow, all else being equal, if production or prices change in both directions.  There seems to be a fair amount of upside if natural gas prices somehow move sustainably higher.


(click to embiggen)


Comparable MLPs: At a 9.5% yield, MEMP will be attractive relative to most other upstream MLPs, especially factoring in the option value of drop down acquisitions. See below for some comparable stats on MEMP compared with the rest of the upstream MLPs out there.


MEMP has a strong management team, well capitalized and experienced sponsor, stable assets, and visibility into growth from drop down acquisitions.  Its heavy natural gas weighting is unique and may eventually become an relative selling point for people seeking natural gas exposure, but given the depressed nature of natural gas prices, right now that appears to be the main negative feature of this IPO.  Valuation seems maybe a bit rich for the partnership’s current assets, but I’ll wait to get more details from management on the roadshow with regards to drop down plans, because visibility there could make this IPO attractive.
Disclosure: The information in this article is not meant to be financial advice, we are not your financial advisor and I am posting my comments for informational purposes only.  

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