Oversold Dividend Payer BreitBurn Energy Partners' Earnings Explained: Great Q4 2012

Mar. 1.13 | About: Breitburn Energy (BBEPQ)

BreitBurn Energy Partners LP (BBEP) is an oil and gas limited partnership with a great, almost 10% annual distribution/dividend. It engages in acquisition, exploitation and development of oil and gas properties in the US. In the last year it has moved from a reserves distribution of about 35% oil to about 53%. Much of this was accomplished by the acquisition of over $600 million in new, "oily" properties in 2012. The acquired assets increased total proved reserves by approximately 34 million Boe, and they will meaningfully increase oil production in 2013. This is good strategy, since oil prices have held up much better than US natural gas prices in the last few years.

The most important metric to investors in this income stock is the dividend/distribution. BBEP has demonstrated great, consistent growth in this area. The chart below shows BBEP's recent dividend/distribution growth.

The chart above shows 10 consecutive quarters of distribution raises. Q4 2012 made it 11 straight quarters with a raise to $0.470. The distributable cash flow was approximately $0.51 per unit. The coverage ratio was 1.08x. For FY2012 the coverage ratio was a healthy 1.18x. Many MLP companies target a coverage ratio of 1.1x to 1.2x. BBEP is in the sweet spot.

Fueling the above gains was BBEP's production increase to 8.32 million Boe for the year. Q4 2012 production grew 11% compared to Q1 of 2012. Some third party infrastructure downtime, some gas curtailment, etc. negatively impacted this result. BBEP is projecting total production of between 9.5 Boe and 10.1 Boe for FY2013. Good growth is expected to continue. The FY2012 result was an 18% increase from FY2011. Adjusted EBITDA (from which the distributions are determined) was $295.8 million, an increase of 31% from 2011. Adjusted EBITDA for Q4 2012 was approximately $78 million. This was a 21% increase from Q4 2012.

Before any 2013 acquisitions, BBEP is projecting adjusted EBITDA of $330 to $340 million. The midpoint of this is an approximate 13% raise over FY2012 adjusted EBITDA. Since there will be acquisitions, this is a very conservative estimate. The company is targeting at least $500 million in acquisitions. Plus it will have a very active drilling program for its own fields. The outlook is great for FY2013.

The most misunderstood part of BBEP's earnings is the EPS number. BBEP had a net loss of $10.3 million (or -$0.13 per diluted common unit) in Q4 2012. This compared to a net loss of -$73 million (or about -$1 per diluted common unit). All of this sounds terrible. Except you have to realize that these two figures were almost completely due to non-realized losses in derivatives due to higher oil and gas prices and some minor write downs of assets due to lower natural gas prices in the SEC's 12 month rolling average. Excluding the unrealized commodity derivative losses, BBEP would have had net income of $8.4 million for Q4 2012 and $41.2 million for FY2012.

How can this be? Most investors evaluate companies primarily on EPS and revenues. In the case of energy MLP's this technique does not work well. For example, BBEP had the following hedge structure as of October 30, 2012 (see chart below).

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You can see that BBEP was well hedged for Q4 2012 and in many cases far into the future at prices for both oil and gas that are higher than current oil and gas prices. If you simplistically look at these hedges as put options, it is easy to understand that they lost value as the price of natural gas and oil rose in Q4 2012 (and in Q3 2012). This is not actually bad for the company's "real" profits because these hedges only cover part of the production, and the amount lost on the hedges is actually gained on the oil and gas itself (for that quarter). For the part of the production that is not hedged, the company gets that proportion in more revenue and profits, which is good for distributions.

The often misunderstood facet is that the hedges extend far into the future. Therefore as natural gas and oil prices rise in one quarter, the company incurs non-realized losses on all of its hedges (for years of hedges). These non-realized losses can easily swamp out "real" profits from a single quarter or more. This also explains why BBEP reported EPS of +$1.29 when natural gas prices hit their nadir in Q2 2012. In this case the company incurred non-realized gains on derivatives for natural gas. This is why adjusted EBITDA is a much better metric to use to evaluate BBEP and similar energy MLPs. EPS is still important, but only in the very long term.

Revenues were a slight disappointment at $113.2 million for Q4 2012. This was lower than the average expectation of 8 analysts of $122.2 million. However, it was 7.0% higher than the year ago quarter's $109.9 million. Keep in mind that natural gas prices are still low. Q1 comparisons should be better. Plus the company indicated that some of the sequential fall was simply due to the timing of shipments. There is little doubt that over the long term revenues are going far up.

In sum BBEP put in another great quarter. Its outlook for the future is bright. It is a long-term buy.

The two year chart of BBEP provides some technical direction for this trade.

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The slow stochastic sub chart shows that BBEP is oversold. The main chart shows that BBEP is in a very weak uptrend. The consistently increasing adjusted EBITDA, distributions/dividends per unit, and the healthy coverage ratio for all of 2012 of 1.18x are good fundamental justifications for this. BBEP's continual development of its resources at reasonable prices and its acquisition of new "oily" properties at bargain prices further justify a good growth outlook. This great dividend payer (nearly 10%) is expected by analysts to grow EPS 242.90% in 2013 and an average of 32.23% per annum over the next 5 years. This is fantastic growth for a company with this kind of dividend. Plus BBEP is well hedged, which ensures a lot of its revenues. You won't find many companies that are better long-term investments than this one. Analysts give it a mean recommendation of 1.7 (a strongish buy). CAPS rates BBEP five stars.

BBEP is technically a buy. However, investors should keep in mind that the overall market is overdue for a retracement. Many think this will be a 7% to 10% retracement. BBEP with a Beta of 0.62 will likely fall with the market. Further there has been no resolution of the sequester issue. This means it goes into effect today, Friday March 1, 2013. There may be a deal later on, but even a deal will almost certainly include some austerity. The Q4 GDP growth was small at +0.1% in the latest estimate. The new taxes at the beginning of 2013 are curbing consumer spending already. The addition of the austerity cuts will exacerbate that. The US is in for a slowdown, if not a recession. With this in mind, it is appropriate to average into this great stock over the course of 2013. Then you will get an overall good price. BBEP is technically oversold now, so it might be appropriate to nibble a bit now, but I would wait for the retracement nadir to buy significantly.

NOTE: Some of the fundamental fiscal data is from Yahoo Finance.

Good Luck Trading.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in BBEP over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.