Why BreitBurn Energy Partners Will Make at Least 1 Deal This Year

BreitBurn Energy Partners has yet to make an acquisition this year. Should investors be concerned?

Jun 30, 2014 at 10:48AM

Glenn Pool Oil Pic Oklahoma Wiki

An oil well in Glenpool, Okla. Credit to Wiki Commons

A few days ago fellow Fool Matt DiLallo pointed out that BreitBurn Energy Partners (NASDAQ:BBEP), a major upstream master limited partnership, was way behind schedule to hit its acquisition goal for 2014. Indeed, BreitBurn has yet to complete a single deal this year despite setting an acquisition goal of $600 million for the year.

In the article, DiLallo mentioned that while BreitBurn has been in the bidding for at least a few parcels this year, the partnership has not yet been the successful bidder for any of them. However, last year BreitBurn achieved and exceeded its acquisition goal in just one deal with Whiting Petroleum (NYSE:WLL), and so unitholders are "likely in for a bit more excitement in the second half of the year." 

A slower pace
As a unitholder in BreitBurn myself, I'm OK with no excitement at all -- as long as the distributions remain secure. Also, I'm not bothered by the dearth of deals so far this year. When we look at the big picture, the market for mature U.S. acreage has gotten more competitive in 2014: The companies that typically sell these mature acreage parcels do so to reinvest in shale assets.

This year, however, those same companies have slowed their pace of acquisitions and are now focusing on developing the shale assets that they already have. Within the next couple of years, much of this shale acreage should become cash flow positive. As a result, companies such as Whiting Petroleum now see less need to sell mature acreage parcels. In other words, exploration and production companies are narrowing the supply of mature acreage that upstream MLPs typically buy.

Oil Well Pic Baytown Tx Roger Wollstadt

Oil wells in Baytown, Texas. Credit to Roger Wollstadt

Horizontal wave
In any case, I believe that BreitBurn will do at least one deal in the Permian Basin this year. The Permian Basin is BreitBurn's No. 1 area of focus in 2014: Management will spend slightly more than half of its capital budget in the Permian. All this spending will be on vertical drilling. However, BreitBurn's acreage is right atop the red-hot Wolfcamp shale, which is a fast-developing horizontal drilling location. 

While management will probably not engage directly in horizontal shale drilling, there is, in the words of management, "a lot of horizontal drilling coming our away." BreitBurn will likely 'farm out' horizontal production on its Wolfcamp acreage to another producer, and in exchange BreitBurn will opt for a cut of the production. According to management, several offers have already been made, and I would therefore expect an agreement to be reached within 2014. 

Foolish takeaway
BreitBurn investors shouldn't be worried about the decrease in acquisition activity in 2014. There are fewer acreage parcels for sale, and the environment is not as buyer-friendly as it used to be. Besides, BreitBurn already has a quite a portfolio: a strong position in both California and the Permian, both of which offer low declines and high margins, and also CO2 operations in Oklahoma, which will provide almost 10 years of production growth for the partnership.  

Nevertheless, I believe that BreitBurn will make at least one deal this year in the Permian Basin. While this deal will not be an acreage acquisition, BreitBurn will get a cut of production from horizontal drilling.

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Casey Hoerth owns shares of BreitBurn Energy Partners. The Motley Fool recommends BreitBurn Energy Partners. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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