Short-sellers have called BreitBurn Energy Partners (BBEPQ) 10.25% distribution "largely a mirage". Meanwhile, the company believes its payout is safe, which is why it has raised it by 4.3% over the past year, with the most recent boost just last month. The question that investors must be asking is: Whom should we believe? Let's take a look.
Danger level breached
The first quarter wasn't a good one for the company. Multiple operational and pricing issues caused the company's distribution coverage ratio to fall to a worrisome 0.67 times, which is well below the critical 1.0 level. CEO Hal Washburn, however, calmed investors' fears by saying that the company had a plan in place to get its payout back above 1.0 before the benefit of any acquisitions.
When looking at BreitBurn's peers it's clear that the company had a lot of work to do to catch up. For example, more conservative peer Vanguard Natural Resources (NASDAQ: VNR) already had a payout ratio right at 1.0 times in its first quarter. The company was able to further improve the payout to 1.05 times at the end of this past quarter, meaning that its investors have no need to worry about a looming pay cut. Meanwhile, more aggressive peer LINN Energy (LINEQ), whom BreitBurn has been likened to, had a payout ratio of 0.88 times in the first quarter and 0.89 last quarter, both well above BreitBurn's low mark. While LINN has struggled with the same operational and pricing issues as BreitBurn, it was able to maintain a higher distribution coverage ratio.
Down, but not out
In three short months BreitBurn was able to deliver on its promises to get its payout on more solid ground. In fact, this past quarter the company was able to deliver distributable cash flow of exactly $0.48 per unit, which represents exactly a 1.0 distribution coverage ratio. Further, the company sees its distribution coverage ratio increasing throughout the year as it continues to deliver on its oil-focused capital program.
What's truly impressive is that the company was able to deliver such a jump in its coverage ratio without the benefit of an acquisition (its Postle acquisition didn't close until after the quarter ended). That means BreitBurn should be able to deliver a payout ratio in a range of 1.4-1.5 times in the second half of the year thanks to the benefits its oil-focused capital program and its recently closed acquisition. Clearly, the distribution is safe and the company easily has the capacity to continue to grow is payout later this year.
The bottom line
While the company's coverage ratio during the first quarter was worrisome, BreitBurn did a fantastic job to solidify its payout. In fact, the company has plenty of capacity to issue equity in order to pay down the debt it took on to complete the Postle acquisition without causing its coverage ratio to drop anywhere near the danger zone. What that means is that BreitBurn's distribution is not only still safe; right now, it's really rock solid.
