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For the Aggressive Investor

By Elliott H. Gue on Sep. 14, 2013

Mid-Con Energy Partners LP (NSDQ: MCEP) — MLP Ratings

Mid-Con Energy Partners LP, which went public in late 2011, uses water-flooding to extract crude oil from mature fields in Oklahoma, Kansas and Colorado. Mid-Con Energy Partners estimates its total reserves at about 10 million barrels of oil equivalent, 99 percent of which is crude oil.

About 96 percent of the master limited partnership’s (MLP) properties are in production and have been water-flooded. Mid-Con Energy Partners’ fields in southern Oklahoma (about 55 percent of the MLP’s total reserves) are still in the early stages of secondary recovery and will drive organic production growth. However, acquisitions will be the primary driver of distribution growth for Mid-Con Energy Partners.

In the second quarter, the MLP paid $28.05 million for additional working interests in a number of existing water-flood projects, including a 60 percent stake in the Cushing field. These purchases boosted Mid-Con Energy Partners’ second-quarter output to 2,593 barrels of oil equivalent per day–up 3 percent sequentially and 48 percent from year-ago levels. The MLP also hiked its distribution by 2 percent sequentially and generated enough distributable cash flow to cover this higher payout by 1.26 times.

We expect drop-down transactions from Mid-Con Energy III and Mid-Con Energy IV, two investment funds affiliated with the partnership’s general partner and Yorktown, an energy-focused private-equity firm that controls a sizable chunk of the MLP’s outstanding units. Yorktown created the investment funds in June 2011 to buy and develop water-flood projects at various stages of development, with the goal of selling these assets to Mid-Con Energy Partners.

Mid-Con Energy III and Mid-Con Energy IV effectively serve as project incubators, buying properties suitable for water-flooding and investing in these fields until production recovers to a level that justifies dropping down the acreage to the MLP.

During a conference call to discuss second-quarter results, Mid-Con Energy Partners’ management team indicated that a sizable drop-down transaction could be forthcoming in the back half of 2014. This deal would serve as proof of concept for investors who have stayed on the sideline.

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