Memorial Production Partners Still Attractive Despite Downgrade

In a report published Thursday, analysts at Raymond James downgraded

from Strong Buy to Outperform. The price target was lowered from $22 to $20. The company's 1Q15 results came in below the consensus and the estimates. The lower than expected 1Q adjusted EBITDA was driven by higher than anticipated G&A costs and a decline in hedge revenue. However, the production levels were marginally ahead of the analysts' expectations. "While we still believe that Memorial will be able to maintain its distribution, the road is slowly becoming harder as the company needs to realize a significant amount of cost savings to boost its coverage ratio above 1x," the analysts said. The company was able to achieve a 10 percent sequential decline in per unit lease operating expenses, as well as a 3 percent sequential decline in G&A cost per unit of production. Raymond James expects both costs to decline by a further 10 percent and 20 percent, respectively, through the remainder of the year. This should help distribution coverage to recover to above 1x in 2H, while any potential incremental acquisition could bolster confidence in "the management's ability to maintain the distribution," according to the analysts.