These are tough times for a few upstream Master Limited Partnerships, which are turning in some disappointing quarterly results. Exploration and production company BreitBurn Energy (OTC:BBEPQ) is the latest to post a quarter that fell short of estimates, following fellow E&P giant LINN Energy's (OTC:LINEQ) quarterly disappointment.
However, once again it seems the market is disappointed over what amount to some fairly solid underlying results. If you're a Foolish investor willing to take a pass on the Wall Street expectations game, it's plain to see that BreitBurn is a well-run upstream energy company that achieved its major objectives last year.
Two core accomplishments in the books
Heading into 2013, BreitBurn management set two over-arching goals to reach. First was to expand its asset base through oil-weighted acquisitions. Secondly, BreitBurn set out to accelerate the development of its oil legacy assets with a strong capital program. In management's conference call, the company took exceptional pride in the fact that it succeeded on both fronts.
BreitBurn recorded $1.2 billion in acquisitions this year, which were specifically targeted to liquids-rich assets. Devoting additional investment into liquids was a separate desire for BreitBurn, since liquids production carry higher margins. To that end, BreitBurn has increased its liquids exposure as a percentage of its total reserves by 25 percentage points, from 35% to 60% in just two years.
The company's crown achievement from an acquisitions standpoint was its purchase of the Postle field in Oklahoma for $845 million. These resources should prove to be extremely valuable, since they involve mature fields with large amounts of oil in place. Moreover, these assets will generate predictable production, steady cash flow, and low rates of field decline. In all, the estimated proved reserves of the acquired properties total 43.6 million barrels of oil equivalents.
In addition, BreitBurn executed a $295 million capital program last year, which was the largest in the company's history. It focused its investments on the most promising opportunities in its Texas, California, and Oklahoma properties. This allowed Breitburn to effectively grow the business.
Impressive production and cash flow growth
BreitBurn produced a record 11 million barrels of oil equivalents last year, a 32% increase year over year. This flowed through the financial statements and was reflected in the company's impressive cash flow. BreitBurn's adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) grew 34%.
These results mirror those achieved by LINN Energy, which operates a similar business model as BreitBurn. Both companies are upstream Master Limited Partnerships, and units of each sold-off after releasing earnings. LINN grew average daily production by 23% in 2013, and its proved reserves jumped 34%. Its success was most pronounced in its Permian Basin operations. Average production there rose to approximately 18,000 barrels of oil equivalent per day, which represented 32% growth year over year.
As a result, BreitBurn paid out a monthly distribution that amounted to a double-digit yield. And, the company demonstrated a commitment to not just paying a high distribution, but to growing the payout as well. BreitBurn increased the dividend nearly 5% last year.
One minor cause for concern
Unfortunately, BreitBurn's performance last year wasn't without its blemishes. BreitBurn generated a distribution coverage ratio of just 0.97 times in the fourth quarter. That means that the company distributed more to investors than it generated in cash flow. This reflects some operating challenges BreitBurn encountered late last year. Primarly, management stated the company ran into some production hiccups as the year drew to a close, due mostly to higher oil and gas capital expenditures.
Total oil and gas capital expenditures were $295 million last year, a 93% increase versus the prior year. However, much of that was due to its asset acquisitions that will fuel the future. Acquiring new properties for development and production is the lifeblood of an upstream MLP, and these resources will help the business realize future growth.
The bump in the road is entirely manageable
However, investors shouldn't be overly concerned about the distribution. That's because BreitBurn expects strong growth this year. It projects production to hit at least 13.6 million barrels of oil equivalents. This will result in impressive cash flow growth. The midpoint of BreitBurn's cash flow projection calls for 36% growth than last year's results.
As a result, while the market may have been disappointed with BreitBurn's results, it's important to not get too caught up in the short-term picture. BreitBurn succeeded on nearly all of the core metrics important to an upstream E&P, including production, cash flow, and strategic acquisitions. That's why BreitBurn's superb 10% distribution yield appears secure.