With the exception of one horrifying drop due to a headline event from upstream MLP giant Linn Energy (LINE), BreitBurn units have not dropped below $17.20. And just last week management announced the aforementioned share offering. As it is right now, units of BreitBurn are trading at $19. While units at this price do carry significant downside risk, that risk is well defined. Also, at a yield of 10.2%, BreitBurn is worth picking up if you are an income-oriented investor whose horizon is long term. Operationally, BreitBurn is coming off an excellent year. That operational excellence, combined with the relative value of BreitBurn units right now, make this partnership perhaps the best value in the upstream MLP space.
Outstanding Coverage, Substantial Income
This year has been a rough one for upstream MLPs. Many partnerships, still heavy on natural gas liquids production, have been hit by ethane rejection. Some upstream MLPs have seen their distributable cash flows drop dangerously close to or even below their respective distributions. BreitBurn has been an exception. Better than expected oil production and relatively little exposure to NGLs has put BreitBurn's 2013 coverage ratio at between 1.1 and 1.2 times distributions. This coverage ratio is perhaps the best in the upstream MLP space.
And despite the partnership's relatively high coverage ratio, BreitBurn's yield is also on the high end at 10.2%. Contrast that to Linn at 9.6%, Vanguard Natural Resources (VNR) at 8.6% and EV Energy Partners (EVEP) at 9.1%, all of whom actually have lower coverage ratios than BreitBurn does, and we see the discount BreitBurn trades at.
Recent Operational Highlights
In the third quarter BreitBurn was able to grow its liquids production by 35% in that quarter alone, with nearly all of that growth coming from oil. From legacy assets, overall production grew by 3% with an increased weighting towards oil. California production grew by 55% from the same quarter last year, with the partnership drilling 20 wells. Wells in Belridge Field in particular have been meeting or exceeding expectations. Texas, where BreitBurn has a sizeable Permian position, saw production rise 3% over the last quarter. The Permian is BreitBurn's most active area in terms of capital spending, with no less than five rigs operating there. Rounding out the partnership's top three geographies, Wyoming was flat.
Postle Acquisition
Earlier this year BreitBurn acquired over 30,000 acres from Whiting Petroleum in the Oklahoma panhandle for $860 million. Management calls this the Postle acquisition. This acquisition adds 7,400 BOE per day of production, of which 87% is crude oil.
Perhaps the most important aspect of this deal is the CO2 injection expertise BreitBurn is acquiring. At this stage in its life, the Postle field is a "tertiary recovery" play. With primary recovery methods no longer effective at extracting oil here, Whiting has employed CO2 injection, which can often recover amounts of oil similar to that of primary recovery methods in a given field.
(click to enlarge)
Chart courtesy of Denbury Resources
The above chart shows just how profitable CO2 injection can be, especially when compared to shale drilling plays. Because CO2 injection can be applied to mature, conventional fields where infrastructure has already been built, added costs of production involved in using this method are pretty low. Denbury Resources, a pure-play CO2 injection company, can operate profitably at as low as $50 WTI.
BreitBurn will take this CO2 injection expertise and apply it to the partnership's other mature acreage. CO2 injection should be particularly effective in BreitBurn's Permian and Californian acreage, and could significantly extend the operating lives of fields in both geographies. The market has not at all accounted for the distinct possibility that BreitBurn's biggest fields could have longer reserve lives than originally thought.
Unit Offering
To partially fund this acquisition BreitBurn has issued 15 million additional units, which represent about a 15% increase in the current float. With the proceeds of this offering BreitBurn will be able to reduce its debt back down to within the targeted range of between 2 to 3 times EBITDA.
(click to enlarge)
YCharts
The chart above illustrates the relationship between BreitBurn's unit price and share offerings. The partnership's first secondary offering brought about a drop in price per unit from approximately $22 to $17. The second offering in early 2012 brought a drop from 20 to 16, roughly. There have since been two share offerings, both of which caused a 5-10% drop in unit prices from which units quickly recovered. Nevertheless, the flood of units has no doubt kept prices under $20. The most recent secondary offering has so far brought only a mild drop in price. Perhaps the market has come to understand and accept that BreitBurn uses units as a currency to acquire.
Valuation
The above chart also shows strong technical support at $16.20. At today's price of $19 that is a downside of 14.6%, about 18 months worth of distribution income.
Data from respective partnerships' 2013 DCF guidance.
Despite BreitBurn's distribution coverage ratio being the highest of the three major upstream MLPs, BreitBurn is actually valued the cheapest. The above chart shows a price to distributable cash flow ratio of 9.9 times. If there is one MLP to buy right now, it's BreitBurn. Those with a long time horizon can pick up BreitBurn right here, although the partnership would be more of a solid buy at around $18. Considering the substantial secondary offering, BreitBurn could drop to that level. But if BreitBurn did drop back down to $18, it would be substantially cheaper than other upstream MLPs at current pricing. BreitBurn units are priced reasonably here.
Yes, This Income Is Sustainable.
When I write about BreitBurn, there is a common sentiment in the comments section that this yield is too good to be true or unsustainable. Consider this comment from six months ago.
You have to be kidding! No way that dividend will last another ninety days. This stock needs to be shorted.
Disbelief is understandable. After all, how can a name like BreitBurn yield 10% in an environment with such low rates? Something must "not be right." Those new to upstream MLPs should understand that these entities are taxed as partnerships, meaning that they pay no corporate taxes. Secondly, these names often operate in mature, conventional fields which provide high profit margins. Third, these partnerships do not have exploration budgets. Upstream MLPs generally do not explore, and therefore they grow production through acquisitions. Frequent acquisitions mean that upstream MLPs are also relatively levered and often times issue units to acquire acreage. Those are the risks involved with upstream MLPs, but BreitBurn's high yield is no mirage.
Disclosure: I am long BBEP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)
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