BreitBurn Energy (NASDAQOTH:BBEPQ) just wrapped up a monster quarter for itself. Domestic production of oil and natural gas is ramping up, and BreitBurn's results proved it. The company set a record for quarterly production, and yet, units of the upstream exploration and production MLP sold off after reporting.
While the market was likely disappointed by BreitBurn's secondary offering, the underlying fundamentals of the business look extremely strong. As a result, this may be a classic case of market irrationality presenting potential investors a nice buying opportunity.
Strong production drives record results
BreitBurn's total production rose to a record 3.1 million barrels of oil equivalent, which amounted to a 43% increase from the same quarter last year. Liquids production also skyrocketed, almost doubling year-over-year. Such huge production growth stems from the company's recent acquisitions.
During the quarter, BreitBurn closed an $864 million deal to purchase a great deal of midstream assets in Oklahoma and New Mexico. BreitBurn anticipates ten or more years of low-decline production from these assets. In all, BreitBurn will reap approximately 7,400 additional barrels of oil equivalents per day in net production.
BreitBurn is very similar to LINN Energy (NASDAQOTH:LINEQ) in terms of organizational structure as well as investor policies. Both BreitBurn and LINN operate under the same model, which is to raise cash when appropriate to fund acquisitions of long-lived oil and gas producing assets.
LINN had a successful third quarter of its own. Average daily production and net sales of oil, natural gas, and natural gas liquids increased versus the same quarter last year. LINN also easily covered its hefty distribution by generating $2 million in excess cash flow above what it pays to its investors.
Furthermore, LINN has also been active in acquiring new assets for production and development. In September, LINN purchased $525 million of oil and natural gas properties in the Permian Basin. Assets include proved reserves of approximately 30 million barrels of oil equivalents, and should fuel strong results in the years ahead.
Both LINN and its financial holding entity LinnCo (UNKNOWN:LNCO.DL) pay monthly distributions, which is an advantage for unit holders since it allows investors to compound their wealth more quickly. Until now, BreitBurn had paid quarterly distributions, but the company recently announced it would switch to monthly payouts starting in January 2014.
In addition, BreitBurn bumped up its distribution, by 4.8%, to $1.95 per unit. After the recent dip, BreitBurn trades for $18 per unit, making for a greater-than 10% yield. Again, that's on par with its peers LINN and LinnCo, which both provide a double-digit yield.
After releasing what certainly appeared to be great results, it was confusing to see BreitBurn units fall roughly 4%. Much moreso than the company's report itself, it seems likely that BreitBurn's unit offering was what disappointed the market. BreitBurn revealed it had sold 16.5 million units at an average price of $18.22 per unit, and since BreitBurn units had closed at $19.06 per unit the day before, the sell-off isn't unreasonable.
Then again, for an exclusively upstream operator which relies on finding and purchasing new assets for production, raising capital is part of the territory. Plus, BreitBurn utilized debt to fund its $864 million acquisition, so the unit offering was the natural choice.
Huge distribution, with plenty of growth in the pipeline
That's why, despite the secondary offering and subsequent sell-off, BreitBurn has a lot to offer investors. The underlying business is doing very well, and unit holders are being richly rewarded with a large, and growing, distribution. BreitBurn's huge payout is well-supported, and future growth is likely thanks to continued investment in new properties.
Reliable sources of income are hard to come by nowadays, as interest rates remain near historic lows and the stock market breaks record highs. For investors interested in securing hefty income from their investments, BreitBurn and its double-digit yield may be worth additional consideration.
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Bob Ciura owns shares of Linn Co, LLC. The Motley Fool recommends BreitBurn Energy Partners L.P.. 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.