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How These Two MLP's Are Paying Millions Upfront For Billions Later

BreitBurn Energy Partners (NASDAQOTH: BBEPQ  ) just coughed over $282 million for 16.6 million barrels of oil equivalent in the Permian basin, but was it worth it? It will take over a decade to pump out all of that energy, but the future return could vastly exceed the sale price.

Existing production
BreitBurn Energy Partners bought 2,900 boe/d in production with the acquisition, which is 60% weighted toward oil. The purchase will add to BreitBurn Energy Partners' position in the Permian Basin, which allow Breitburn to reduce its cost via scale.

With 93 wells producing in the area, BreitBurn Energy Partners will be able to expand through 300 potential drilling locations located along its new acreage. With those drilling locations, BreitBurn Energy Partners has the drilling inventory to produce oil and gas for 15 years from the acquisition, according to its reserve index.

10% -- What?
A 10.2% distribution is hard to grow, but with this acquisition BreitBurn Energy Partners thinks that its new asset will add instantly to its distributable cash flow, which should get income-orientated investors excited. A double-digit distribution is hard to maintain, but if an investment is able to do so then market beating returns ensue.

BreitBurn Energy Partners had proven reserves of 21.7 million barrels of oil equivalent in the Permian Basin at the end of 2012, so BreitBurn will be roughly doubling down in the area with this acquisition. 

This isn't the first time an MLP has put down big bucks on the Permian Basin, LINN Energy  (NASDAQOTH: LINEQ  )  has also been investing hundreds of millions in Texas. By comparing the possible returns for both these players you can get a better picture of what to expect from future acquisitions.

Just over half a billion
Both of these companies share a similar business model: invest in assets will low decline rates and return most of the free cash flow back to unit holders. For example, LINN Energy purchased $525 million worth of assets in the Permian Basin a few months back, which should close in the fourth quarter. The acquisition adds to LINN Energy's current operations in the area, and like BreitBurn Energy Partners will benefit from scale.

What does $525 million buy you in the Permian Basin?
With half a billion bucks you can buy a lot of things: ~500 Lamborghinis, a bio-tech firm, a small island, or 30 million barrels of oil equivalent that is 70% weighted toward oil. 

This purchase will add instantly to LINN Energy's distributable cash flow and should give investors a source of income for 17 years. 300 potential drilling locations will hopefully allow for LINN Energy to keep pumping out distributable cash in the Permian.

Was it all worth it?
The big question is, "Was this all worth it?" Well, for BreitBurn, if it sold its acquired oil and gas for at an average of $70 a barrel it would bring in ~$1.16 billion in revenue. Now, over the course of 15 years you would expect the price of oil and gas to go up as demand increases from developing nations, but conservatively, BreitBurn still only paid $282 million for over a billion dollars of future production.

For LINN Energy, if it received an average price of $80 a barrel for its recent oil-heavy acquisition, it would make $2.4 billion in revenue. Again, not a bad deal, and one that is likely to reward investors over a long period of time. You should also note that LINN Energy sees an additional 24 million barrels of oil equivalent that it could possibly pump from its new asset pending future development.

The bottom line
The bottom line is this: both of these companies paid millions up front for a chance at billions down the road. Any income orientated investor should take a look at these two MLP's, as they both pay out distributions around 10%. Now, no good thing can last forever, but these two MLP's have long term oriented goals to try and keep putting cash in investor's pockets.

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Read/Post Comments (3) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 17, 2013, at 12:49 PM, tk77mann wrote:

    BBEP's current 10.2% return is already "market beating." The average annual market return over the long term is 10% per year. Therefore the market has provided an opportunity to buy a stock with good growth potential and a good history of paying increasing dividends at below market prices.

    Of course some would say much of this dividend income is ordinary (not qualified) income. But even if you have to pay 40% tax on it you still net 6+% after tax.

    In this age of incredibly puny returns from CDs and from bank accounts an over 6% net should get all investors (both "income oriented" and "growth") interested. (If growth investors want growth from BBEP all they have to do is reinvest the dividends!)

    The current BBEP price shows there are ways to invest and beat the market averages with some fair assurance of performance, even at today's almost record highs.

    Disclosure: Long BBEP

  • Report this Comment On December 17, 2013, at 1:23 PM, brooks1988 wrote:

    Interesting premise to compare purchase price to ultimate revenue without any adjustment for actual costs to drill the land over the 15 years, not to mention (as I will) the related time value of money of paying millions now that would easily more than double in value within the time period considered.

    I am not saying either deal is a bad one, only that the analysis of this article is overly simplistic....

  • Report this Comment On December 17, 2013, at 1:47 PM, zorro6204 wrote:

    They're not "paying out" 10%, they're paying, well, what they're paying.

    The market price is what sets the yield, and that's been depressed most of the year in the upstreams due to the LINE controversy. Once all the drama has faded it's likely they will return to "normal" yields, BBEP probably in the 8's, LINE into the 7's. That doesn't mean they'll be paying less, the unit price will be higher.

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Related Tickers

9/23/2016 3:59 PM
BBEPQ $0.06 Down -0.01 -8.13%
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Linn Energy, LLC CAPS Rating: **