What: Units of oil producer Breitburn Energy Partners L.P. (NASDAQ:BBEP) were up by just about 10% in early morning trading.
Today's jump can be largely attributed to the rally in the price of oil. Crude oil surged last Friday after a big drop in the U.S. rig count as oil companies responded to lower prices. That rally carried over to today as the benchmark U.S. oil price touched $50 per barrel before falling back.
So What: As the largest oil-weighted master limited partnership, Breitburn Energy Partners' future is heavily tied to oil. As such, the rising price of petroleum pushed up Breitburn units, which have been decimated by the plunge in crude over the past few months. Investors are buying today in hopes the rally can be sustained and that oil producers such as Breitburn will enjoy meaningfully higher oil prices going forward.
That being said, today's move isn't all that meaningful to Breitburn as 75% of its oil production is hedged this year, meaning most of its cash flow from oil is already locked in. A more crucial event would be solid evidence that oil prices are about to rally significantly higher -- that would mean the company would enjoy higher cash flow from its unhedged production in 2015 and beyond, giving it more cushion to pay down debt.
Now What: Breitburn Energy Partners needs sustained higher oil prices over the long term in order to provide cash flow to meet its debt obligations and fund distributions to unitholders. While the company cut its payout and capital expenditures in response to lower oil prices, investors still worry about its debt in a low oil price environment. This means the company's units will be volatile whenever oil prices are moving.
Matt DiLallo has no position in any stocks mentioned. The Motley Fool recommends BreitBurn Energy Partners. 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.