What if I told you that you could own an E&P player with a 10% yield? This is the case for BreitBurn Energy Partners (NASDAQOTH: BBEPQ ) , an E&P MLP.
How can you be sure that BreitBurn will be able to keep paying out a 10% distribution while providing equity gains as well? BreitBurn's answer to that is by increasing production.
BreitBurn's 2012 exit production rate was ~25,000 boe/d, and for 2013 it is guiding for an exit rate of 34,700-36,100 barrels of oil equivalent per day. Keep in mind that is including the Whiting acquisition, but still would be decent growth. Subtracting out the acquisition, production will rise by around 3,000 boe/d.
BreitBurn spent $846 million on ~29,200 producing acres in the Oklahoma Panhandle, which was pumping out ~7,650 boe/d in July 2013. There is an estimated 41.4 million boe in the area with 15 years of production. About 95% of those reserves are made up of NGL and crude oil, which carry much higher margins than natural gas.
At the end of 2012 BreitBurn had total proven reserves of 149.4 million boe, which was made up of 53% crude oil and 47% natural gas. This acquisition allows for BreitBurn to push up its margins and cash flow through a far more profitable production mix, on top of proving it with a larger output and more income to distribute to unitholders.
This acquisition will provide stability to investors through larger reserves and a bigger drilling inventory. BreitBurn provides equity growth through higher levels of production and a more profitable production mix, while paying out most of that cash flow back to investors. It also provides stability through a hedging program that runs through 2017.
Another MLP with a similar business model, but built more so on organic production growth, is Linn Energy LLC (NASDAQOTH: LINEQ ) .
Granite Wash and growth
Linn Energy has a payout of 10.4%, which is very impressive. In the Oklahoma area of the play Linn is running four rigs to push up production, and in the Texas portion of the play it is operating five rigs. On the Oklahoma side it has at least 100 if not more locations to drill, which provides investors with growth potential.
The Permian Basin is another play Linn Energy is banking on for growth. Linn has plans to drill and complete 300 wells in the area over the next 4-5 years with the potential for upside through downspacing efforts.
Linn Energy is trying to purchase Berry Petroleum (UNKNOWN: BRY.DL2 ) , but the odds of the deal getting completed are looking slimmer and slimmer. This is due to Berry Petroleum's latest earnings release, which stated that the merger will not be completed by October 31 and that it could be terminated.
One Fool, however, still sees the merger as likely, with one of her reasons being Berry Petroleum shareholders would be trading a 0.66% yield for 10%. For every share an investor owns he or she would receive 1.25 units of LinnCo LLC (UNKNOWN: LNCO.DL ) .
Assuming the merger does go ahead, LinnCo, Linn Energy, and Berry Petroleum will all reap nice rewards. Berry Petroleum shareholders get a much larger payout and still get access to growth. LinnCo benefits through its investment in Linn Energy. Linn Energy's production will rise by ~30% if the merger goes through and will see a significant increase in its reserves.
Linn Energy sees the potential to utilize its bigger size to unlock a potential 3.8 trillion cubic feet equivalent in reserves, with ~75% of it being liquids. As far as proven reserves go Berry Petroleum has ~1.65 Tcfe with a production rate of ~40,000 boe/d.
Linn Energy has good growth prospects ahead of it, and both Berry Petroleum and LinnCo shareholders stand to benefit. Linn Energy pays out a 10.4% distribution, which is protected through a hedging program that also runs through 2017. With the potential to see production growth and a more profitable production mix Linn Energy is another E&P player (with better growth potential than BreitBurn) that offers strong returns with a payout north of 10%.
Most E&P players pay out small dividends or nothing at all. These MLP E&P players pay out distributions around 10% and still offer growth potential, which provides investors stable income and opportunity for growth.
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