Is There Still A Place for Upstream MLPs?

by Deon Daugherty, Senior Editor

Even weeks after exploration and production (E&P) master limited partnerships began to see their units trading at epic lows, some in the space still believe there’s a place for them in the energy sector.

During a conference call with investors on Aug. 10, EV Energy Partners (Nasdaq: EVEP) touted its position as having the best balance sheet of the upstream MLPs. Nick Bobrowski, EV Energy Partners’ CFO, was clear during the call that he believed EVEP is so well positioned that it can take on the role of leading the upstream MLP pack.

“I know there’s been some controversy on [whether] the upstream MLP [is] a viable industry,” he said. “We very much believe so. If we didn’t have EVEP right now, we would re-create it.”

And other upstream MLPs have mojo at the moment, too, noted Kevin Smith, senior vice president and analyst at Raymond James & Associates in an Aug. 14 note.

“We continue to view [Black Stone Minerals LP (NYSE: BSM)] as one of the safest E&P master limited partnership yield play in the current challenging environment,” Smith said. “Given BSM’s ample distribution coverage … paired with the partnership’s subordination structure (50 percent of the total outstanding units are subordinated), we support the notion that Black Stone flaunts one of if not the most secure distributions in the E&P space.”

And Ethan Bellamy, senior analyst at Robert W. Baird & Co., told Rigzone that if a sponsor and its management can control “their inner demons” – leverage, paying too much to expand, and fixed payouts relative to a cyclical top line – then “you can actually get an upstream-focused MLP to work.”

Bellamy said a good example of that philosophy is Viper Energy Partners LP, which Wexford Capital LP and Diamondback Energy Inc. built on a solid foundation to last.

“However, an E&P company cannot outlast the cycle by cloaking itself in the revenue visibility of a midstream MLP. That sheep’s clothing won’t work as a disguise anymore,” Bellamy said. “A year or more ago, the world looked a lot different. I don’t think I’m going out on a limb to say that if you sat down with a blank sheet of paper in the current environment an upstream MLP would not be your starting point for a new venture.”


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