Mid-Con Energy Partners LP (NSDQ: MCEP) owns about 9.9 million barrels of oil-equivalent reserves in Oklahoma, Kansas and Colorado. Crude oil accounts for 98 percent of the master limited partnership’s (MLP) estimated reserves, a favorable asset base at a time when natural gas prices continue to hover near record lows.

Like most upstream MLPs, Mid-Con Energy Partners operates in established plays that feature limited drilling risk and predictable decline rates.

When the first well is drilled in an untapped field, pent-up geologic pressure forces the hydrocarbons into the well and to the surface of the earth, a process known as “primary” production. This reservoir pressure declines throughout the well’s life span, reducing the rate of production. More than 90 percent of Mid-Con Energy Partners’ wells have been in production since 1982 or earlier.

These mature wells still have value and can yield oil and gas for decades after their output peaks: Less than 20 percent to 30 percent of recoverable reserves are extracted during primary production.

Although mature wells won’t generate much production growth, these assets fit well within the MLP structure because of their predictable decline rates and low maintenance costs.

Mid-Con Energy Partners uses water flooding to enhance production from their wells. This secondary-production technique involves injecting water into the periphery of a field to restore reservoir pressure and push oil toward producing wells.

More than 90 percent of the MLP’s 272 producing wells employ water flooding to improve production rates. Six to 18 months of water injections are required to increase production, but the technique works: At the end of the third quarter of 2011, Mid-Con Energy Partners’ acreage yielded about 1,343 barrels of oil equivalent per day–up 100 percent on a year-over-year basis. Management attributes about 75 percent of this production growth to water flooding; acquisitions and basic maintenance work accounted for the remainder of these gains.

Mid-Con Energy Partners has two options for growing cash flow: ramping up production in its existing leasehold and making bolt-on acquisitions.

Operating in mature fields doesn’t constrain Mid-Con Energy Partners’ prospects for organic growth. Consider the MLP’s ongoing operations in the Highlands Field, an area that’s been in production since 1980 and has already yielded more than 3 million barrels of oil. The outfit began water flooding this play in October 2008, and production rates began to tick up in April 2009. Today, the field produces about 657 barrels of oil equivalent per day, up more than sevenfold from just 91 barrels of oil equivalent per day in January 2010.

At this point, Mid-Con Energy Partners has pumped enough water into the field to offset about 27 percent of the liquids extracted from the play since 1980. Output from this enhanced-recovery technique will peak once the MLP has injected an equivalent amount of water to previous production. Management estimates that the field’s gross output will exceed 1,500 barrels of oil equivalent per day once this occurs.

These water-flooding projects can extend a field’s productive life by more than a decade. Mid-Con Energy Partners began pumping water into the Southeast Hewitt Unit in June 1997, 18 years after the field was first discovered. Output from the field began to tick up in November 1997. Management estimates that the volume of water pumped into the field represents about 98 percent of extracted resources. Production from the field peaked in 2010–about 13 years after secondary production began.

Mid-Con Energy Partners also has ample opportunity to grow its output and cash flow through acquisitions. The MLP has formed two limited liability companies (LLC) with Yorktown Partners, a private-equity firm that focuses on energy-related assets and owns Mid-Con Energy Partners’ general partner. These LLCs will acquire properties where producers are already using water-flooding to enhance output and acreage that appears well-suited for this approach.

Mid-Con Energy Partners’ management team initiated almost one-quarter of all water-flooding projects in Oklahoma over the past six years, which inspires confidence in the firm’s ability to identify lucrative bolt-on acquisitions. In addition, Yorktown Partners, which has about $3 billion in assets under management, has already invested in a number of oil- and gas-producing properties that might be a good fit for Mid-Con Energy Partners.

By dropping down a new water-flooding project to Mid-Con Energy Partners, Yorktown Partners would be able to immediately monetize this asset and shield ongoing revenue from the field from corporate taxation. Meanwhile, rising production and cash flow from the dropped-down asset would enable Mid-Con Energy Partners to grow its distribution. With an almost 50 percent stake in Mid-Con Energy Partners’ outstanding units, Yorktown Partners has ample incentive to pursue strategies that will foster the MLP’s growth.

Hedges help to insulate the partnership from fluctuations in commodity prices. Management aims to hedge between 50 and 80 percent of total production over a rolling three- to five-year period. At present, the MLP has hedged about 53 percent of its 2012 production and 30 percent of 2013 production, locking in prices of about $100 per barrel.  

Although Mid-Con Energy Partners’ hedge book isn’t as comprehensive as that of Growth Portfolio holding Linn Energy LLC (NSDQ: LINE), the MLP’s exposure to rising oil prices could bolster cash flow.

Mid-Con Energy Partners plans to pay a minimum quarterly distribution of $0.475 per unit, equivalent to a 12-month yield of approximately 9 percent. The MLP pays its general partner 2 percent of any distributable cash flow.

Management estimates that the MLP will generate enough cash flow to cover its full-year 2012 minimum distributions by a healthy 1.2 times. However, this projection assumes that the partnership will grow it production by roughly 80 percent and that crude oil prices will average about $96 per barrel. Based on the firm’s production history, these estimates don’t appear overly aggressive, though cash flow could take a hit if oil prices tumble.

Mid-Con Energy Partners has no exposure to depressed natural gas prices and unhedged exposure to oil prices, a positioning that works well in the current environment. At the same time, a correction in oil prices would weigh on the MLP’s cash flow. The units offer a higher-than-average yield to offset this risk. Mid-Con Energy Partners LP rates a buy under 24