What’s important to note here is that reserve mixes tend to shift over time as new assets are added into a company’s portfolio. Vanguard Natural Resources, LLC (NASDAQ:VNR), for example, has gone from 100% gas at its IPO, to just 35% gas a couple of years ago. Its natural gas reserves now constitute the majority of its portfolio as the company has taken advantage of the dip in natural gas prices to pick up cheap gas assets. On the other hand, both Linn Energy LLC(NASDAQ:LINE) and BreitBurn Energy Partners L.P.(NASDAQ:BBEP) have been acquiring oil reserves, as both are looking to counterbalance lower natural gas prices with higher margin oil so today’s mix might not be the same a year from now.
Geographic diversity
The location of a company’s reserves is the driving factor in determining whether those reserves are more oily or tend to be on the gassy side. The chart below shows two important differentiations – you’ll get a good picture of how geographically diverse each company is, as well as see in which basins each is most levered.
Source: Company Investor Presentations and Author Calculations
The first thing that jumps out is how levered EV Energy Partners, L.P. (NASDAQ:EVEP) is to the gassy Barnett Shale which explains why the company’s reserves are so gas-heavy. The other thing you’ll notice is how important the Mid-Continent region currently is to LINN Energy’s reserves. In LINN’s case it will greatly improve its geographic diversity once the company completes its deal for Berry Petroleum, which will add more geographical balance by adding to LINN’s positions in California, the Rockies, and the Permian Basin. Finally, notice how geographically balanced both BreitBurn Energy Partners L.P.(NASDAQ:BBEP) and Vanguard are right now with no one geographic area being more than a third of reserves. As an investor, geographic diversity is important from a risk management standpoint which is why you need to know whether your investment is diversified or concentrated.
Hedging policy
The final area to look at is the company’s hedging policy. Do you want income certainty for the next few years? Then you’d want a company that’s more hedged. On the other hand, if you are okay with exposing your income to volatility as long as you are open to upside, then leaving some production unhedged is a risk you’d be willing to take. So, how do our MLPs stack up?
Source: Company Investor Presentations and Author Calculations
As you can see both LINN and QR Energy LP(NYSE:QRE) are very well hedged, while some oil and gas production at BreitBurn Energy Partners L.P.(NASDAQ:BBEP) and EV Energy Partners, L.P. (NASDAQ:EVEP) are left unhedged to capture upside. Personally, I prefer a secure dividend, but that’s because I take my risk elsewhere. If income security is important to you, then you need to make sure your company has a very robust hedging policy.
Final Foolish thoughts
As you compare these three core areas you can really see the differences between how each company currently operates. LINN Energy, for example, has balanced reserves and a more robust hedging program. EV Energy Partners, L.P. (NASDAQ:EVEP), on the other hand, offers much more upside, but that upside could carry more risk. So, while all five currently yield more than 8%, you have to dig deeper than just current yield to get the whole story.
The article Tempted By a Yield That’s Over 8%? Read This First! originally appeared on Fool.com.
Fool contributor Matt DiLallo owns shares of LINN Energy, LLC. The Motley Fool recommends BreitBurn Energy Partners L.P. (NASDAQ:BBEP)
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