BreitBurn Energy Partners L.P. (BBEPQ) has grown its distribution to investors by more than 30% since 2010. An additional dividend increase is in the cards later this year as the company already announced plans to boost its payout 3.5% when it closes its acquisition of QR Energy LP (NYSE: QRE). While the company's past success at growing its distribution is great, the question that needs to be answered is how sustainable this growth will be in the years to come. Let's take a look.
History as our guide
After cutting its distribution in the aftermath of the financial crisis, BreitBurn Energy Partners has steadily rebuilt its payout, as the following slide shows.
Source: BreitBurn Energy Partners L.P. Investor Presentation
As that slide notes, the company's payout has moved higher each quarter. That steady march higher isn't expected to end anytime soon as the company has already announced that the payout will be at least $2.08 per unit on an annualized basis after the close of the QR Energy deal.
The reason why the company can afford all of these distribution increases is because it has been able to grow its distributable cash flow. A combination of acquisitions and organic growth has slowly pushed cash flow higher, as illustrated in the chart below.
Source: BreitBurn Energy Partners L.P. earnings press releases
There is, however, one concern. Even with rising cash flow the company's distribution coverage ratio has been 1.0x or less in all but one quarter over the past two years:
Source: BreitBurn Energy Partners L.P earnings press releases
This is a concern because it means that BreitBurn Energy Partners is paying out more than it's earning. In 2013, for example, the distribution coverage ratio was a weak 0.97x. What that means is that the company paid out all of its available cash flow plus 3% more than it had. That forced the company to borrow from future cash flows in order to pay last year's distributions. Because of this there is some concern that BreitBurn Energy Partners' distribution growth might not be sustainable.
The game-changer
BreitBurn Energy Partners alleviated some of the concerns that its distribution growth wouldn't be sustainable when it acquired QR Energy. That deal will provide a big boost to distributable cash flow per unit, which will eliminate the near-term worries with the coverage ratio.
Going forward the company plans to target a much safer coverage ratio. According to CFO Jim Jackson on the company's second quarter conference call, BreitBurn Energy Partners plans to:
Continue to target about 1.1 to 1.2 times coverage ratio. You will see us on a quarterly basis, with variability. Obviously we've been close to 1.4 a year or two ago and down at 0.86 this quarter. So that will bounce around, but we'd like to target long-term 1.1 times to 1.2 times.
But it's still as focused as ever on distribution growth.The company sees no reason to doubt that growth will continue, as CEO Hal Washburn noted:
[Our] hope is to maintain the same distribution trajectory that we've been on, 4% to 5% per year. That is our goal and it remains our goal and we feel comfortable that we'll be able to continue to achieve that. But as you know, that requires good operations, good acquisitions, good deployment of capital and we've done that well for 26 years, but we need to continue to do that to maintain that trajectory.
To get there, the company reviews several hundred deals per year and closes on only the very best that will move the needle. So, as long as it can continue finding deals that move the needle -- and with the shale boom there are lots of mature assets available as shale players continue to sell mature assets for cash -- it should have no problem continuing to grow its distribution in the future.
