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Memorial Resource Development Corp: Half a General Partner

By Elliott H. Gue on Jul. 25, 2014

Memorial Resource Development (NSDQ: MRD) is an exploration and production company that controls about 205,000 net acres that are prospective for hydrocarbons and contain an estimated 1,126 billion cubic feet of natural-gas equivalent in proven reserves.

In April 2014, Memorial Resource Development’s total production averaged 179 million cubic feet of natural-gas equivalent per day. Natural gas accounted for about 50 percent of the firm’s total revenue, with crude oil contributing one-quarter and the remainder coming from natural gas liquids (NGL).

Besides its exploration and production operations, Memorial Resource Development also owns a 50 percent interest in Memorial Production Partners LP’s (NSDQ: MEMP) incentive distribution rights (IDR), a management fee that a master limited partnership (MLP) pays to its general partner.

This arrangement is structured in such a way that the general partner receives a progressively higher cut of the MLP’s incremental cash flow at predetermined distribution levels. (We discussed the ins and outs of IDRs at length in The Lowdown on MLP IDRs: Incentive or Impediment.)

Here’s a look the Memorial Production Partners’ IDR structure.


Source: Memorial Production Partners LP

Memorial Production Partners pays a quarterly distribution of $0.55 per unit, placing the MLP in the second rung of its IDR ladder.

In total, the partnership disbursed about $0.55066 per common unit, with $0.55 per unit destined for unitholders and the general partner collecting $0.0066 per unit. Memorial Resource Development’s cut of this incentive distribution would have amounted to $0.0033 per common unit.

At this juncture, Memorial Resource Development’s general partner interest in Memorial Production Partners doesn’t constitute a major portion of the C corporation’s revenue. However, as the MLP grows its payout and issues stock to fund asset acquisitions, the cash flow accruing to Memorial Resource Development will increase.

Over the next two years, Memorial Production Partners should grow its distribution to about $0.65 per unit–an average annual growth rate of roughly 8.5 percent.

At that level, the MLP would be in the top tier of its IDR structure–the high splits in industry parlance–entitling the IDR holders to almost one-quarter of all quarterly distributions above $0.59375 per unit. 

When Memorial Production Partners’ unitholders receive a quarterly distribution $0.65 per unit–an 18 percent increase–the total incentive distribution collected by its IDR holders more than quadruples to about $0.027 per common unit.

Memorial Resource Development’s 50 percent stake of Memorial Resource Partners’ IDRs gives the parent strong leverage to the partnership’s underlying growth story and incentivizes the general partner to sell assets to the MLP at valuations that are accretive to cash flow. The industry refers to these deals as drop-down transactions.

 

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