BreitBurn: A Solid Pick for Income

 | Nov 20, 2013 | 11:00 AM EST
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BreitBurn Energy Partners (BBEP), an upstream master limited partnership, last week announced a major equity offering. BreitBurn will issue 15 million shares, roughly a 15% increase in its float, and will use the proceeds to pay off debt incurred from its latest acquisition in the Oklahoma panhandle.

Units of BreitBurn have since fallen modestly, and I believe that now is a good time to look into BreitBurn for its operational strength and generous distribution yield.

There are a number of other good reasons to like BreitBurn right now, the first being a very high distribution yield of 10.6%. That yield is secure, too. BreitBurn's distributable cash flow will be 1.1 to1.2x distributions this year. This is among the highest coverage ratios in the upstream MLP space. It might even be the highest.

Despite its relatively ample coverage rate, we can see that BreitBurn trades at a discount to its peers. But that discount doesn't seem justified. Operationally, BreitBurn has likely exceeded its peers. Distribution growth, for example, has been between 5 and 10 percent for the last three years, outpacing both Linn (LINE) and Vanguard (VNR) over the same period.

BreitBurn also hedges. While its hedge program may not be as long-lived as some of its peers, BreitBurn still secures cash flow for the majority of its production for three years into the future. Like most upstream MLPs, BreitBurn hedges with swaps and collars, thereby offsetting most of its cost. Oil and gas prices would therefore have to fall and stay low for years before BreitBurn's distribution could ever come under threat.

Over the last few years BreitBurn has been transitioning from lower margin dry gas and into higher margin oil. This change may have come a bit late, but it's better late than never. Its Oklahoma panhandle acquisition is a big part of this transition. This mature acreage, acquired from Whiting Petroleum (WLL), will be producing oil for the next ten years with virtually no decline in production. Dubbed "Postle" by management, production from these fields comes from tertiary recovery methods, or CO2 injection. This provides BreitBurn with expertise in this important recovery method which could be applied to some of BreitBurn's other fields, thereby extending significantly the productive lives of those fields.

Financially, BreitBurn has de-levered significantly thanks to this equity offering. The partnership's debt is now down to management's target of 2-3x earnings before interest, taxes, depreciation and amortization. The flood of new units on the market has brought prices down from $19.50 to under $18.50, but I believe that demand for BreitBurn's high but secure yield will keep the price afloat.

Units have solid price support at around $16.20, about 12% below today's price. If your horizon is for multiple years, BreitBurn's 10.6% yield is more than worth the potential downside. Those who want to add income and don't mind some added energy exposure can pick up BreitBurn right here.        

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