BreitBurn Energy Partners (NASDAQOTH:BBEPQ) recently reported a terrific third-quarter. Oil and gas production hit a record, and is up 43% year-over-year. The company's focus on high-margin oil growth has really paid off, as it represents 61% of total production.
This oil-rich production is falling right to the bottom line. Last quarter the company reported that it was able to earn 30% more than it paid its investors in distributions. That said, if there was one concern about the company, it's the fact that it has put on a lot of debt this year. The company really stretched its limits when it made a big oil deal this summer that was funded completely with debt.
At the time of that deal, BreitBurn's units were under pressure; it was swept up in the same negativity as LINN Energy (NASDAQOTH:LINEQ) and LinnCo (UNKNOWN:LNCO.DL) when it was called "LINN Energy Junior", while its distribution was called a "mirage." Times certainly have changed, as LINN Energy seems to have basically been cleared to continue with business as usual. That has fueled a recovery in the price of LINN Energy's units and LinnCo's shares. It is a recovery that has also affected units of BreitBurn.
It was only a matter of time before BreitBurn took advantage of this recovery in its units to raise equity. In my third-quarter review, I said that one thing "investors should expect to see at some point in the future is an equity raise." That's why it comes as no surprise to see BreitBurn doing just that.
The company announced that it would offer to sell upwards of 17 million units, which could raise over $300 million for the company. If it sells that many units the distribution coverage ratio would drop from 1.3 times to 1.13 times, which is still very solid. In fact, to put that into perspective, LINN Energy's current coverage ratio is just at 1.0 times.
Another point of reference: BreitBurn's coverage ratio will still be higher than Vanguard Natural Resources (NASDAQOTH:VNRSQ), which has a ratio of 1.09 times. Vanguard is regarded as the most conservative of the three because it doesn't invest any capital to grow organically, instead acquiring its growth.
For BreitBurn to continue growing it needed to raise equity capital. The company only had about $300 million left on its credit facility, and its leverage ratio was just slightly below four times. BreitBurn has said repeatedly that it wants to get its leverage ratio closer to three times. By raising close to $300 million it should push its leverage ratio down to about 3.3 times, which, while not at its stated goal, is a much more comfortable ratio.
All of this is to say that BreitBurn's more than 10% distribution is rock-solid and one worth buying today. This is a company that has plenty of room to grow its payout, and, with a history of 14 straight quarters of distribution raises, BreitBurn's payout will keep going higher. Not only that: starting next year, it will move to a monthly distribution payment schedule. Add it all up, and BreitBurn is a must buy for investors looking for a rock-solid high yield.