JP Morgan's favorite Upstream MLPs

[dan_s]

JP Morgan initiates MEMP and BBEP at OW and lists VNR as another top pick -- All three are in our High Yield Income Portfolio. Always nice to see another firm confirming our picks. - Dan

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Exploration & Production (E&P) MLPs

Small-Cap Value, Mid-Cap Growth – Initiate Coverage
of MEMP and BBEP at Overweight

We initiate coverage of MEMP with an Overweight rating and YE14 PT of $25 given
the partnership’s strategic growth relationship with its GP, MRD, and low-cost
operations. We initiate coverage of BBEP with an Overweight rating and YE14 PT of
$23 given what we see as its outpaced distribution growth potential relative to its E&P
MLP peers. We highlight MEMP for value-oriented MLP investors and BBEP for
growth-oriented MLP investors.

Still constructive on the upstream MLP space. In our view, the discount on a
yield basis relative to other MLP sectors compensates investors for commodityprice
exposed cash flows. Supply-demand fundamentals also support our stance, in
line with the positive supply outlook from the JPM Global Commodities team,
which forecasts US crude supply to grow to 8.5 MMBbls/d (+12%) and dry natgas
production to rise to 67.6 Bcf/d (+1.3%) in 2014. Although the commodities team
expects crude price volatility to remain high, MLP E&Ps hedge a significant portion
of production. We see M&A fueling growth next year with E&P C-Corps running a
reinvestment rate median of ~117% based on estimates from JPM E&P analyst
Joseph Allman. While our overall view remains constructive, we favor E&P MLPs
that we consider better positioned to benefit from the current outlook and highlight
MEMP, BBEP, and VNR as top picks in the E&P MLP space.

Memorial Production Partners LP (MEMP): Low-cost operations, strategic
partner to drive growth. We expect MEMP to continue growing via M&A and
drop-downs that leverage the scale and size of its GP, Memorial Resource
Development (MRD). MRD enables MEMP to joint-bid on assets that may
otherwise not be accessible due to MEMP’s size. Given the partnership’s smaller
size vs. peers, smaller transactions can be meaningful drivers of growth, compared to
larger-cap names that may require transformational or larger transactions to grow. In
our view, MEMP’s growth potential overshadows relatively greater undeveloped
reserves and warrants a premium valuation to peers. As MEMP’s tenure as a public
partnership increases, we see the high yield compressing.

BreitBurn Energy Partners LP (BBEP): Top-tier distribution growth among
peers; M&A key driver. We forecast a distribution CAGR of more than 5% over
the next two years, one of the highest among E&P MLPs under our coverage. We
expect BBEP to continue its successful M&A growth strategy due to a lower cost of
capital (no IDRs) and diversified production portfolio that provides scale and scope.
Despite the partnership’s strong track record and growth potential, BBEP trades near
avg. valuation levels; we believe the units merit a premium and see room for upside