I am going to revisit a theme I have hit on a few times in the last few months. This is to highlight some of the good yield opportunities available in some energy partnerships. These entities are benefitting from the huge oil-and-gas production increases in this country over the past five to six years.
The sector has underperformed over the last few months -- as have most high yield sectors on the back of the rise in interest rates. However, I believe the sector should deliver solid and consistent returns in the near and medium term.
First, after a big rise, I don't see interest rates going much past the recent 3% level in the 10-year Treasury note. Economic and job growth is likely to remain tepid and the Federal Reserve is likely to remain extremely accommodative. This should keep a ceiling on rates.
Second, one of the first as well as one of the oldest and largest energy partnerships to report this earnings period, Kinder Morgan Energy Partners (KMP), posted results on Wednesday that showed very strong cash and distribution flow in the quarter.
Finally, Credit Suisse just released a report stating that all the energy partnerships it covers should see a collective 6% to 8% distribution growth on back of a 22% to 25% earnings before interest, taxes, depreciation and amortization (EBITDA) gain year over year this earnings season.
Below I highlight a couple of energy partnerships that I find attractive at current levels. Both provide a better than 10% distribution yield and have had some recent insider buying activity as well.
Breitburn Energy Partners (BBEP) is an oil-and-gas exploration-and-production (E&P) outfit organized as a master limited partnership. The company has mature long-lived reserves and has grown through acquisitions as well as organic growth. I purchased this MLP in mid-July after watching several insiders buy over $1million in new shares. The stock has had a nice rise since then, but I still like its long-term prospects.
This is another energy partnership that has better than 10% distribution yield. Breitburn also has consistently and incrementally raised its payout since emerging from the financial crisis. Oppenheimer and Stifel Nicolaus have made positive comments on this play over the past few months.
The company continues to deploy its capital budget to grow its overall oil production, mitigating the impacts of low natural gas prices. The company currently allocates 90% of its budget is to oil-and-liquid producing projects. Roughly 50% of its proven reserves also consist of crude oil.
Breitburn is ramping up production and should come in with better than a 60% revenue gain this fiscal year with analysts expecting another ~30% sales increase in fiscal 2014. The company has done an impressive job of making accretive acquisitions since coming public in 2006. Breitburn has grown EBITDA at better-than-30% annual rate since becoming a public entity.
Atlas Resource Partners (ARP) is a limited partnership active in oil-and-gas production. The partnership owns an interest in over 8,600 producing natural gas and oil wells in the Barnett Shale in Texas, the Appalachian Basin and in the Mississippi Lime region in Oklahoma.
Investors can now pick up this play at slighter lower prices than a couple of insiders paid to repurchase more than $1.5 million in shares in Mid-June. The shares also provide an over 10% distribution yield. The company has raised its distribution payout by 35% in several incremental moves since it came public in early 2012.
Atlas is experiencing rapid revenue growth and is on track to see its sales almost double this fiscal year. Analysts believe revenues will post at least a 40% gain in fiscal 2014 as well. Earnings are also expected to double in fiscal 2014 to $0.90 a share. Finally, the shares are selling about 25% below the median price target held by the seven analysts that follow the stock.