Pioneer Natural Resources (PXD), Pioneer Southwest Energy Partners L.P. (PSE) Downgrades are an Entry Opportunity

Pioneer Southwest Energy Partners L.P. (NYSE:PSE) is an upstream master limited partnership formed by parent company Pioneer Natural Resources (NYSE:PXD) in 2007. The partnership was formed to own and acquire oil and gas assets mainly in the West Texas Spraberry field. As an MLP, the partnership receives tax breaks significant enough that it boasts an effective tax rate of about 1%. These savings allow the partnership to distribute larger than average dividends to its parent company, and to common shareholders like you. If you’re unfamiliar with the tax benefits and complications associated with own MLPs you should read this first.

Pioneer Natural Resources (NYSE:PXD)On February 21st, UBS analyst Christopher Sighinolfi downgraded the partnership from neutral to sell. His main reason for the downgrade had nothing to do with the partnership’s fundamentals: His concern was simply its valuation. He didn’t think it’s 8.3% yield was worth the premium at the time, and perhaps he was right. The partnership’s share price fell about 4% following his comments. Although the stock regained some of its losses during Friday’s session, this stable and high yielding partnership is looking very attractive to me.

Insider transactions a positive sign

Fuelling my interest in Pioneer Southwest Energy Partners L.P. are the insider transactions I noticed when I tried to download the latest quarterly report from its IR page. Chairman and CEO Scott Sheffield and two other officers were awarded a combined 32,242 shares one day ahead of the UBS downgrade. The transactions were given code “A,” which indicates they were awarded, rather than bought on the open market, but this is still a positive sign. Further digging into the partnership’s SEC filings revealed several insider purchases, but not one sale in the past year.

Rock steady production and dividend distribution

One of the things I love about Pioneer Southwest is its predictability. On October 31st 2012, the partnership issued guidance that Q4 production would fall between 7,400 and 7,900 BOEs per day. Sure enough, the partnership reported an average of 7,668 BOEs per day, smack in the middle of its estimate. Personally, when it comes to investing, I like boring and predictable, especially when it pays a steady 8.5% dividend yield.

Several factors make Pioneer Southwest’s dividend extremely reliable going forward:

  • Slowly declining reserves combined with ability to continue drilling new wells
  • Addition of a new Driver plant in April 2013 is expected to boost ethane recovery by a few percent
  • An impressive return on invested capital of 25.9%
  • A low debt to equity ratio of 0.34

Competitor Mid-Con Energy Partners LP (NASDAQ:MCEP) is another oil and gas producing MLP that offers an attractive and growing dividend. At its current price, Mid-Con’s yield is about 9%, and the partnership has steadily increased its dividend about a penny per quarter since the middle of 2012. What keeps me from getting too excited about Mid-Con is it’s age. The partnership has an impressive TTM Operating Margin of 58.63%, but it has only been operating for about a year and a half. If Mid-Con can maintain its impressive growth for a few more years, it will be one of the most attractive MLPs around. For now, I consider it a highly speculative play that is worth keeping an eye on.

Also relatively young, Pioneer Southwest has been paying dividends since 2008, and hasn’t missed or decreased its distribution since. Sighnolfi was right to note that dividend growth has only risen by 4% over the past 4 years, and I think he was also correct about the partnership not being worth the premium, that its share price was demanding before his downgrade. Since his comments, however, shares of Pioneer Southwest have fallen to a level that makes it much more attractive.

The article Pioneer Southwest Downgrades are an Entry Opportunity originally appeared on Fool.com and is written by Cory Renauer.

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