Breitburn Energy Partners LP (BBEP) is an independent oil and gas limited partnership. It acquires, explores, and develops oil and gas properties for the purpose of generating cash flow to ultimately distribute to its unit holders. It is currently paying about a 10.7% distribution/dividend (K-1 form). It is a relatively safe stock as it has about 86% of its total production hedged for 2H 2013. 89% of liquids production is hedged at $95.00/bbl and 81% of natural gas production is hedged at $5.75/MMbtu. Furthermore Nymex natural gas futures (September 2013) are at $3.32/Mmbtu as of this writing on August 9, 2013. This is down from recently higher levels; but it is still up from 2012 levels at this time a year ago. Plus the high level of hedging should make expectations very reliable, even if natural gas and/or oil prices plummet. BBEP's hedging chart as of August 6, 2013 for the next several years of production is below.
The above chart includes the estimates for the Postle acquisition from Whiting Petroleum (WLL), which closed a bit early on July 15, 2013. It is assumed to contribute 7,400 boe/d of which 98% will be liquids.
When I say BBEP boasted and delivered, I mean exactly that. BBEP had a relatively poor Q1 2013 performance. Most importantly to long-term income investors it had a distribution coverage ratio of only 0.67x for Q1 2013. This was well below its long-term target of 1.1x - 1.2x. The distribution coverage ratio would have been 0.83x if one left out the effects of the $14.95 million common equity offering in February 2013 and a $200 million high yield bond offering in the fall of 2012. Still even 0.83x is bad, and use of that figure was being kind to BBEP. Distributable cash flow was only $32.1 million in Q1 2013 or approximately $0.32 per unit. However, BBEP declared a $0.475 per unit distribution/dividend for Q1 despite this. It bragged it expected Q2 to see a big improvement in distribution coverage ratio; and it claimed Q3 and Q4 would both see distribution coverage ratios above 1x.
To many the outlook for BBEP seemed fraught with peril; and BBEP's boasts were hard to believe. However, BBEP has already delivered better-than-expected results for Q2 2013. Far from cutting its dividend as many feared after the Q1 2013 result, it raised its distribution/dividend for Q2 2013 to $0.48 per unit (a 10.7% annual dividend); and it managed to turn in a distribution coverage ratio of 1.0x for Q2 2013 (up from 0.67 in Q1 2013). This was far above unit holder expectations; and it was above what the company had promised. Distributable cash flow was approximately $48.3 million; and adjusted EBITDA was $84.8 million (versus $64.1 million in Q1 2013). This last was a 31% increase from the year-earlier quarter.
Now BBEP brags the 2H 2013 distribution coverage ratio will be 1.4x - 1.5x -- absent any opportunistic financings. This is far above former expectations, and many had thought those were just so much pie in the sky. Even net earnings in Q2 2013 were significantly better than those of Q1 2013 -- +$76.4 million versus -$36.3 million.
How did BBEP manage to accomplish this great comeback? It executed on its plan, which was a good one. Q2 2013 saw higher crude oil and natural gas sales volumes and higher realized prices. It also saw better differentials in Wyoming, Texas, and Michigan as compared to Q1 2013. It saw oil, NGLs, and natural gas revenues climb from $120.4 million in Q1 2013 to $149.3 million in Q2 2013.
Organic growth helped BBEP record Q2 net production of 2.45 million Boe. Drilling was more successful than expected. The 2.45 million Boe was a 4.6% increase from Q1 2013 and a 26% increase from Q2 2012. Liquids production was up 6.7% compared to Q1 2013; and it was up 58% compared to Q2 2012. The production mix for Q2 2013 was about 52% oil and NGLs and 48% natural gas. BBEP plans to continue this great organic development in 2H 2013. It plans to drill 135 more gross wells and 111.5 net wells in 2H 2013; and it expects those results to also be great.
On top of the great organic development, BBEP closed its $876 million Postle acquisitions deals about half a month early on July 15, 2013. This means all of the Postle production (about 7,400 boe/d of which 98% is liquids) will add to the adjusted EBITDA for about 83% of Q3 2013 and 100% of Q4 2013. Even the most skeptical analysts have little doubt that this will add hugely to the distributable cash flow for Q3 and Q4 2013. In sum, BBEP proved in Q2 that its organic growth was already pushing its distribution coverage ratio above 1.0x (from 0.67x in Q1 2013) for 2H 2013. The Postle deal puts BBEP's distribution coverage ratio far above that in the almost stratospheric range of 1.4x to 1.5x. This should lead to further distribution/dividend increases. Plus the Postle deal expanded BBEP's PUD (proved undeveloped reserves) as a percentage of proved reserves from 9% to 22%. This makes the prospect of more good organic growth look much better.
Furthermore, the Postle deal is also a technology gain. Much of the oil being produced currently in the Postle acreage is being produced through tertiary development. Simply carbon dioxide gas is being pumped into wells to get more oil to come out. BBEP gets to learn this technology from an expert in the field -- Whiting Petroleum; and yet that is provided for in the deal. This seems highly likely to help it in the future. In the future, BBEP may be able to apply this technology to its currently active primary development wells as they produce less over time. In this way, it can possibly get double or triple the initially predicted EURs (expected ultimate recovery) from its pre-Postle deal oil wells. This will likely be a big boon to BBEP in the future; and it shows that management is thinking ahead.
In sum, BBEP executed organically. It made a great acquisition; and it acquired new technological skill. With the Postle deal, it upped its guidance to between 34,700 Boe/d and 36,100 Boe/d for its December 2013 exit rate. It upped its liquids percentage to 64% from 52%. That is quite a lot for half of one year. It bodes well for BBEP's future; and it speaks well of the management team. From only its legacy assets, BBEP expects to grow gross liquids production 35% in FY2013 -- great for an energy MLP. Further BBEP raised its distribution/dividend for the 13th consecutive quarter in Q2; and it gives every indication of being able to continue this trend for the near future. BBEP is a buy. I don't know how they could have done much better.
The two-year chart of BBEP provides some technical direction for this trade.
The slow stochastic sub chart shows that BBEP is neither overbought nor oversold. The main chart shows that BBEP has been in a consolidation pattern for the last two years. The Postle deal could help it move higher. The recent great organic growth results could help it move higher. In sum, the fundamentals on BBEP are bright at this time. The big risk for the company now is another U.S. recession. However, it should hold up much better than most other companies in such a situation. It has great hedges. Further BBEP now has a higher percentage of liquids production (64%). This should stand it in good stead. Oil prices have been much more robust and stable over the last few years than natural gas prices.
BBEP is a buy. It has an average analysts' recommendation of 1.8 (a strongish buy) and a CAPS rating of five stars (a strong buy). It shows no signs of having any huge problems at this time. It has a 10.7% annual distribution/dividend; and it may even see good stock price appreciation in the next 1-2 years. The average analysts EPS growth estimate per annum is 24.64%. This year and next, the EPS growth estimates are 187.50% and 114.30% respectively for 2013 and 2014. This is nothing short of fantastic for an income stock. Plus BBEP is relatively safe with its great hedging program. It is a buy for income investors.
NOTE: Some of the fundamental financial data above is from Yahoo Finance.
Good Luck Trading.