BreitBurn Energy Partners (NASDAQ: BBEP ) is a master limited partnership, or MLP, engaged in producing oil and gas from mature, high-margin, and long-lived assets. In other words, BreitBurn is an 'upstream' MLP.
The upstream MLP industry is in a sort of 'bonanza' period. As many large oil companies are racing to develop shale resources, these same businesses are financing shale development by selling mature assets in the U.S. Taking these high-margin and long-lived but mature oilfields off the hands of larger companies, upstream MLPs have been a big, if indirect, factor in the financing of shale projects across the country.
It's a buyer's market for the assets that upstream MLPs are typically interested in, and these partnerships can often get these parcels at reasonable prices. However, there is concern that some upstream MLPs have bitten off more than they can chew, so to speak.
For example, Linn Energy (NASDAQ: LINE ) , with its acquisition of Berry Petroleum, had to increase its offer from 1.25 shares to 1.69 shares in exchange for each share of Berry. In doing so, the deal was no longer immediately accretive to that company's distributable cash flow. Another example would be Vanguard Natural Resources' (NASDAQ: VNR ) most recent acquisition, which represented a deviation in strategy from a cash flow focus to a drilling and growth focus for that partnership. Although only one quarter old, Vanguard experienced significant drilling delays from its operating partners and posted cash flow numbers well below expectations as a result.
BreitBurn, however, boasts a history of careful and measured acquisitions as well as smooth transitions. Its most recent acquisition of a CO2-injection aided oilfield in the Oklahoma panhandle, developed by world-class independent Whiting Petroleum, has thus far been accretive to distributable cash flow. Not only that, this deal, dubbed the 'Postle acquisition,' will provide production growth for the next 10 years.
Like many other upstream MLPs, BreitBurn is eager to acquire mineral rights in California's mature oil basins. That's because oil produced in the Golden State fetches Brent Crude pricing, which sits at a premium to West Texas Intermediate. While BreitBurn has more than 3,000 net acres, mostly in the mature and highly profitable Midway-Sunset and Wilmington fields, management has expressly stated that it would like to acquire more. Unfortunately for BreitBurn, barriers to entry in California have been very high, particularly because oil production in the state is so concentrated into the hands of only three producers.
This situation might soon be changing. Occidental Petroleum (NYSE: OXY ) , one of those three big producers, is splitting up and moving its headquarters from Los Angeles to Houston. As a result, the California oil picture will change, and BreitBurn will be better able to compete for mineral rights when the opportunities arise.
Upstream MLPs are usually valued by their respective distributable cash flow, nearly all of which is distributed to shareholders. As we can see above, at 9.8%, BreitBurn's distribution yield is second among the biggest and best upstream MLP names. While the partnership does not provide forward distributable cash flow guidance, and its hedging policy is admittedly a bit weaker than that of Vanguard and Linn, its acquisition track record is so far the cleanest, so to speak. I believe that BreitBurn is worth a shot right here.
For a partnership with, I would argue, the best acquisition track record so far, BreitBurn has quite a high yield for an upstream MLP. Despite the fact that this partnership does not give forward guidance, I would argue that its distribution, at this time, is among the most secure in this industry. With growing production from the Postle field and an increasingly good chance that it will have an opportunity to expand in the Midway-Sunset or Wilmington, BreitBurn is likely to maintain and modestly grow its distribution for the next few years.
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