Master Limited Partnerships can be an excellent investment vehicle for individuals, in many cases employing conservative business models that generate strong cash flows and tax-sheltered earnings. Breitburn Energy Partners (BBEP) is an unusual member of the MLP family as it does not currently pay a distribution. Let's take a closer look.
Breitburn is an asset-rich MLP with 140 million BOE of reserves. The firm continues to generate significant cash flow and earnings. Management projects EBITDA in the range of $178-$196 million for 2009. This equates to $3.37 to $3.71 per unit. Distributable cash flow is projected at $97 million for the year after interest expense of of $33 million and baseline Capex of $57.5 million (per management estimates).
Breitburn has paid distributions of $3.79 per unit since the first quarter of 2007. Suspension of the dividend was announced April 17. Following the announcement, shares fell from $8.50 to below $6.00 but have since climbed back to a price of $8.31 per unit. This compares to a book value of $26.05 per share.
Why the huge discount? It goes almost without saying that investors dislike an MLP without a dividend. Another major contributor to the valuation gap is probably Breitburn's of lack of financial flexibility. The firm has explored funding alternatives, but has not found a suitable alternative to their current credit line. The covenants restrict the partnership from paying distributions if the outstanding debt exceeds 90% of the available line.
In April 2009, Breitburn's lender reduced the debt ceiling to $760 million from a previous level of $900 million. With $717 million outstanding, this reduction put BBEP in violation of the 90% rule, preventing them from paying the quarterly distribution. The ceiling is set to be reviewed again in October 2009. It is very possible that it will be reduced again.
So why buy Breitburn today? I see Breitburn as a speculative MLP investment because of the funding uncertainty outlined above. It should be viewed as more of a satellite than a core holding for that reason. There is no assurance that distributions will be reinstated in the near future. However, the strong earnings and cash flow certainly warrant a look as well as the underlying asset value represented by reserves in excess of 2.5 BOE equivalent per share.
Please do your own research before purchasing. Keep in mind that because BBEP is an MLP, you will receive a K-1. It may not be appropriate for IRA's because of the potential for UBTI. Consult your tax advisor.
Disclosure: Long BBEP