We place a priority on answering questions about portfolio holdings and recommendations during the chat, but often we get questions about companies we don’t currently recommend. Or, we may get questions that require an extended answer. For the most recent chat there were two MLP questions remaining at the end.

Q: Please comment on LRE and MEMP

LRR Energy (NYSE: LRE) is an upstream MLP focused on acquiring and developing oil and natural gas properties in the Permian Basin, the Mid-Continent region, and the Gulf Coast region in Texas. Total proved reserves at the end of 2012 were 31.7 million barrels of oil equivalent (BOE), of which 50 percent were liquids. The partnership is ~85 percent hedged through 2017 at average prices of $92.73/barrel for oil, $37.04/bbl for NGLs, and $5.06 per MMBtu for natural gas.

LRE went public in November 2011, and units have declined 16 percent since. This has pushed the yield to 12.3 percent, and the partnership has increased the distribution for four straight quarters. More importantly, distributable cash flow (DCF) was sufficient to cover 111 percent of the Q2 distribution. Given the overall picture, LRE looks pretty undervalued.

Memorial Production Partners (Nasdaq: MEMP) is another upstream MLP, but the majority of its reserves are natural gas. The partnership operates in east Texas, northern Louisiana, south Texas and offshore Southern California. In July, it acquired additional assets in the Permian Basin and in the Rockies. Total proved reserves are just over 1 trillion cubic feet of natural gas equivalent.

One of Memorial’s advantages is the lowest total cost of production among peers. (Note that some of the higher cost producers extract a higher percentage of higher-value liquids.) Memorial’s debt level is comparable to upstream competitors like BreitBurn Energy Partners (Nasdaq: BBEP). Like LRR Energy, Memorial is significantly hedged, with extensive hedging protecting significant cash flow through 2019.

Source: Memorial Production Partners Investor Presentation

For the full year, Memorial expects DCF of $129 to $133 million, which would provide distribution coverage of 110 to 120 percent. Because I believe natural gas prices will steadily creep higher over the next three to five years, MEMP could make an excellent portfolio addition with some upside appreciation potential. The one caveat is that it trades at a premium to competitors like BreitBurn and Linn Energy (Nasdaq: LINE). This is understandable in the case of Linn, which is dealing with an SEC issue, but I would take a good look at BreitBurn as a lower-cost alternative.

Q: Can you comment on some of the more promising 2013 MLP offerings?

In next week’s MLP Investing Insider, I am going to provide a brief overview of this year’s MLP offerings, including those that are upcoming. But today let’s talk about a couple of notable initial public offerings.

USA Compression Partners (NYSE: USAC) was the first MLP IPO of 2013, debuting on Jan. 15, and advancing 36 percent since. USAC is unique in the MLP space in providing compression services for the oil and gas industry. The way this works is that a natural gas producer, for example, will contract with USAC on a long-term fixed-fee basis to compress the natural gas so that it can be delivered via pipeline to customers. USAC installs compression equipment to move the gas from the well to its destination. Its customer base is scattered across the important natural gas-bearing shales like the Barnett and the Marcellus. At the current price, units yield 7.3 percent. Coverage for the second quarter distribution was 90 percent[1] , but the partnership expects full year DCF coverage of 110 percent.

One of the most anticipated IPOs this year was that of Phillips 66 Partners (NYSE: PSXP). PSXP owns some of the midstream logistics assets of its sponsor, the refiner Phillips 66 (NYSE: PSX), and the IPO was initially intended to be 15 million shares at an indicated range of $19 to $21. But demand proved to be so strong that the offering was seriously oversubscribed, so the deal was upsized to 16.4 million shares and the price increased to $23 a unit.

Despite this, units opened on July 23 at nearly $29, and traded as high as $36 in subsequent days before finally settling down in a range of $30 to $31. PSXP has yet to declare its first quarterly distribution, but given the huge surge in the unit price since the IPO, don’t be surprised to find the current yield disappointing.

(Follow Robert Rapier on Twitter, LinkedIn, or Facebook.)

Portfolio Update

MLPs Get Fed Boost, ETE Keeps Chugging

Barring some last-minute shenanigans, the Alerian MLP Index is on pace to end September with a 1 percent gain. Which doesn’t sound like much, but in fact represents a much needed stabilization after the late summer slide, the price finding support along the still rising 200-day moving average.

Even this modest improvement required a two-day surge of more than 4 percent in the wake of the Federal Reserve’s surprise decision not to start tapering its bond purchases just yet. The ensuing dip in interest rates at least shelved the always shaky notion that rising yield represent a mortal threat to MLPs.

And while Kinder Morgan (NYSE: KMI) affiliates have had a September to forget, failing to recover to this point despite a thorough debunking of the hyperbolic attack by Hedgeye, a more recent portfolio addition has fared better.

Energy Transfer Equity (NYSE: ETE) has now returned a pleasing 14 percent since it was added to the Growth Portfolio on June 7 in the first recommendation by this editorial team. Investors have warmed to the general partner’s long-term potential as it pockets an increasing share of the distribution growth from affiliated partnerships significantly expanded via a series of acquisitions in recent years.

In an interview with Bloomberg News last week, Energy Transfer Chairman and CEO Kelsy Warren predicted that mergers and acquisitions would make a comeback next year after the brief hiatus, as smaller players look to sell geographically concentrated assets.

For the moment, though, no one’s selling on the cheap and Warren seems focused on ETE’s organic growth projects, including the Trunkline pipeline conversion project still recruiting customers for its planned capacity of moving 420,000 barrels of crude a day from Illinois to the Gulf Coast. Natural gas exports to Mexico via a new pipeline is another growth project under active consideration, Warren said.

The next wave of MLP acquisitions could certainly presage a market top if the acquirers are compelled to do to the deals in order to continue growing their distributions. But at the moment, with US energy output surging in new basins where there is still often a shortage of infrastructure, there seems to be no shortage of market opportunities for savvy operators like Energy Transfer. Continue buying ETE below $69.

— Igor Greenwald