With interest rates so low, investors are increasingly looking outside of the bond market for yield. One area investors are turning to are the large distributions that can be found in oil and gas master limited partnerships, or MLPs. With a distribution nearing 9%, BreitBurn Energy Partners (OTC:BBEPQ) is producing a lot of income for investors, but will that high yield come back and burn them?
What is BreitBurn?
For those who don't know the company, it's very similar to LINN Energy (OTC:LINEQ). Both are focused on acquiring mature oil and natural gas assets, hedging production, and distributing the income to investors. There are a few differences: LINN hedges more of its production for a longer duration; BreitBurn is structured as an MLP while LINN Energy is an LLC.
Once burned, twice shy
The other difference is that BreitBurn's distribution is 150 basis points higher than LINN's. Higher distributions, at times, can be viewed by the market as a red flag with the potential that the current distribution level is unsustainable. Among its peers, BreitBurn's distribution is on the higher end of the spectrum, but its yield is in line with most of theirs. Peers with lower yields like LINN are more established in the marketplace, or are in more of a growth mode. That's where you'll find EV Energy Partners (NASDAQ: EVEP), for instance, which is currently yielding around 5.25%. While EV Energy has only grown its distribution by a nickel since 2009, its units are up more than 200%.
While its distribution is certainly in line with other peers, BreitBurn has had sustainability problems in the past. The company had to suspend its distribution back temporarily in the dark days of the credit crisis. At the time, the company had no other option, as it needed to reduce debt after its borrowing base was cut. The company was able to reinstate distributions a year later, but at a reduced rate. Since that time, it's increased the payout every quarter.
The company expects to continue growing that distribution at a 5% annual rate. That is a much slower pace than investors enjoyed in 2010 and 2011 when the company boosted its yield by an average of 10% each year. The company expects to maintain a disciplined distribution coverage ratio which is currently between 1.1 times to 1.2 times its distributable cash flow.
The bottom line
I see no reason for investors to be worried about getting burned by BreitBurn Energy Partners. While the company engages in acquisition driven growth, it has a balanced approach and a fairly low leverage ratio. The company is unlikely to see a repeat of its past distribution cut for the foreseeable future. Instead, the distribution is likely to continue to head higher as the company executes on its growth plans.