BreitBurn Energy Partners (BBEP) is one of a number of upstream MLPs. Other upstream MLPs include Linn Energy (LINE), QR Energy (QRE), and Vanguard Natural Resources (VNR). I find all of these upstream MLPs attractive because:
- They pay very high yields (7.5% - 11%).
- They normally raise their dividends from year to year, and sometimes even from quarter to quarter.
- There is standard method (explained below) that is used to determine whether the dividend is safe.
I already own LINE, QRE, and VNR, and I wanted to increase my exposure to this sector without adding any more to any of those stocks (I was "all in" already on those three). I came across BBEP and it seemed very attractive since the yield was almost 10%.
It's been my experience that MLPs with this kind of yield will go up in price significantly if the distribution paid proves to be secure (or even better, if it steadily increases). I'm also paid quite well to wait while the market figures this out and increases the price. In addition, upstream MLPs have had a problem recently because the price of Natural Gas Liquids (NGL) has be unusually low. BBEP has very little exposure to NGL, so that makes this stock even more attractive.
However, first I had to make sure the distribution from BBEP was safe. Like most MLP investors, I determine whether the dividend (called a distribution in the MLP world) is safe by examining the Distributable Cash Flow (DCF) and Distributable Coverage Ratio (DCR). Normally, when the DCR is over 1.10 I feel the distribution is safe. Even better is when the DCR exceeds 1.25 because then the MLP can often safely increase the distribution.
So far, BBEP has not published the DCF and DCR directly, but after doing some digging they can be determined. After I did this I came up with a DCR that leaves me very comfortable that the distribution is safe and is likely to be safely increased.
Specifically, BBEP, like most other MLPs, defines the DCF as:
- Adjusted EBITDA, less
- Cash Interest Expense, less
- Estimated Maintenance Capex
Most MLPs show either or both of DCF or DCR directly, and many even highlight these amounts. BBEP financial statements show the Adjusted EBITDA and Cash Interest Expense, but you have to go to the footnotes for the Estimated Maintenance Capex. Once this is done the DCF or DCR fall out directly.
Specifically, in their most recent earnings release BBEP published their Estimated EBITA and Cash Interest Expense for the second half of 2012 as follows (in millions):
- Adjusted EBITDA 155 - 165
- Cash Interest Expense 32 - 34
In addition, footnote 5 of the release ends by saying "management estimates that the partnership would need to spend approximately $35 million in the second half of 2012 to hold production flat". This $35 million can be used as Estimated Maintenance Capex.
Using these three items, together the 71.7 million fully diluted units shown in footnote 13 of the 2nd quarter 10-Q, gives a DCF and DCR as follows:
|Cash Interest Expense||(32)||(34)|
|Estimated Maintenance Capex*||(35)||(35)|
|Fully Diluted Units**||71.7||71.7|
*Note 5 of press release dated 8/8/12
**Note 13 of 6/30/12 10-Q filed 8/8/12
A DCR in this range makes me very comfortable that the distribution is safe and that it will remain safe as it is gradually increased.