Memorial Lowers LOE, Raises Production in Q1
Memorial Production Partners (ticker: MEMP) announced its first quarter results last week, highlighting increases in production and Adjusted EBITDA while simultaneously lowering lease operating expenses (LOE) compared to the first quarter 2014.
“Despite severely reduced commodity prices throughout the quarter, MEMP had several positives,” said John Weinzierl, Chairman and CEO of Memorial. “Production growth quarter over quarter that exceeded our plan [and] meaningful operating and capital cost reductions across all of our basins.”
Average daily production increased 35% to 252.2 MMcfe in the first quarter, compared to 186.8 MMcfe in Q1’14, and increased 1% compared to 250.9 MMcfe from the fourth quarter of last year. Adjusted EBITDA increased 39% to $86.4 million in the first quarter, compared to $62 million in the same quarter last year and a decrease of 8% compared to $93.8 million in Q4’14.
Despite the quarter over quarter decrease in adjusted EBITDA, MEMP was able to maintain a first quarter cash distribution of $0.55 per unit, or $2.20 annualized, a 16% increase over the annualized minimum quarterly distribution of $1.90 per unit. The company was able to maintain its dividend by lowering LOE by 1% to $1.78 per Mcfe, compared to $1.79 per Mcfe in Q1’14, and a 7% decrease from the previous quarter.
Memorial’s Assets
The company also completed a drop down of its Terryville Field properties in North Louisiana with its partner Memorial Resource Development (ticker: MRD) for MRD’s producing East Texas assets. Along with the Terryville Field assets, MRD also received an additional $85 million as a part of the deal.
Memorial’s assets are located in Texas, Louisiana, Colorado, Wyoming, New Mexico and offshore Southern California. The company has 3,279 gross wells (1,950 net), with 318 drilling and recompletion opportunities, according to the company.
Strengthening position for M&A opportunities?
The M&A market has been heating up lately with the MLP market seeing some of the action as well. Cypress Energy (ticker: CELP) announced that it purchased a 51% controlling interest in Brown Integrity LLC, which owns Pipeline Services International LLC. Vanguard Natural Resources acquired LRR Energy for $539 million, and JP Energy Partners (ticker: JPEP) acquired Southern Propane for $14.9 million.
Several analysts have conjectured that Memorial may try to join the M&A market, but it will likely need to strengthen its position first. Abhishek Sinha from Wunderlich suspects that MEMP will have to cut its distributions by 20%-30% in order to become more competitive. This cut “should boost its [dividend] coverage to well above 1.2x and lower its cost of capital,” according to Sinha. Boosting coverage will help the company’s position, according to the analyst.
“MEMP is trading at a 14.3% yield, a steep discount to its peer average of 11.2% because of its low coverage,” the note says. Despite this, the company still maintains a strong liquidity position. “MEMP’s credit facility was decreased in March by 10% from $1.44 billion to $1.30 billion. However, the company has $613 million in revolver debt, leaving $682 million of availability that could be used to take advantage of the M&A market.”
Raymond James believes the company will be able to maintain its distributions, but agreed with Wunderlich in saying the company needed to boost its coverage. The Raymond James note expects that MEMP will look to cut costs in order to meet that goal.
The company was able to realize a 10% sequential decline in per unit lease operating expenses, as well as a 3% sequential decline in G&A cost per unit of production, according to WKRB. Raymond James expects both costs to decline by a further 10% and 20% respectively through the remainder of the year.
According to EnerCom’s Weekly MLP Scorecard for the week ended May 8, 2015, the company’s dividend coverage ratio is 0.8x, well above the group median of 0.4x, but still not as strong as analysts expect the company will target moving forward. Memorial’s current yield is also strong at 13.5% (as of May 8, 2015), with the group median reaching just 9.4%.
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