Breitburn Energy Partners: A Hidden Small-Cap MLP Gem Offering A 9% Yield

| About: Breitburn Energy (BBEPQ)


Breitburn Energy is aggressively acquiring assets.

Once its deal for QR Energy closes, it will have a high-quality portfolio with large amounts of reserves.

Investors are treated to a 9% yield, and the acquisition should provide room for future distribution increases.

Income investors often flock to oil and gas Master Limited Partnerships, and for good reason. Many of them provide huge yields. Energy partnerships are an even more attractive investment right now because oil and gas production in the United States is booming.

Therefore, investors should consider Breitburn Energy Partners (BBEP). Breitburn is a small cap, with just a $2.6 billion market capitalization. But that means it's got plenty of room to grow, especially since it is embarking on an aggressive expansion program.

The bottom line is that Breitburn is growing, and pays a 9% distribution yield.

Ambitious acquisition strategy

For exploration and production companies, it's crucial to keep locating and securing new assets for development. Initiating its own exploration program can be a costly and time-intensive endeavor. Instead, Breitburn has decided to buy growth, and the strategy is working in the company's favor.

Breitburn recently closed on a $3 billion acquisition of QR Energy. Management recently gave a company presentation which states that the combined company will be the largest oil-focused upstream MLP. This follows a $300 million acquisition of considerable properties in the Permian Basin. Breitburn's Permian acquisition strongly complements its existing operations, which are spread across the United States.

The new Breitburn will hold a very high-quality portfolio, which is critical to upstream exploration and production companies. To that end, Breitburn's properties are two-thirds liquids based, which are higher-margin products. In addition, Breitburn's assets have over a 15-year proved reserve life.

The results are plain to see. Breitburn's total production grew 38% last quarter year over year, to 3.4 million barrels of oil equivalents, which set a company record. Distributable cash flow increased 9%.

One concern that is definitely worth noting is that Breitburn's distributable cash flow fell short of fully covering its distribution last quarter. The company generated just 86% of its distribution in underlying distributable cash flow, down from a 100% coverage ratio the previous quarter.

Of course, some context is important. Breitburn is ramping up its capital program to acquire new assets and expand. Once this winds down, in addition to the synergies expected as part of the QR Energy deal, distributable cash flow should improve. Because of this, management is confident enough to raise its distribution.

Distribution growth

Even better, Breitburn announced it would increase its distribution upon closing of the QR Energy deal. The annualized distribution will rise to $2.08 per unit, representing a 3% increase over its previous distribution. At its recent unit price, Breitburn yields a very attractive 9.4%.

Management is confident providing such a high forward yield based on its growth prospects. Estimated total production for 2014 is expected to rise 10% from 2013. And, proven reserves have grown at a 29% compound annual rate since 2010, which should provide stable growth for the foreseeable future.

Moreover, Breitburn expects to realize significant financial improvements once the deal closes. This includes $13 million in immediate synergies, and an optimized portfolio that should reduce costs and increase efficiencies.

The bottom line

Breitburn Energy is in the middle of an ambitious expansion. This is a wise move, since oil and gas production is ramping up in the United States. Once its acquisition of QR Energy closes, Breitburn will have a high-quality, diversified portfolio of oil and gas assets spread across the United States.

Income investors should see a lot to like from Breitburn and its 9% yield.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.