The top exploration and production (E&P) MLP companies look very similar under the hood. BreitBurn Energy Partners, L.P. (BBEP), however, currently stands out amongst its peers with a 9.4% distribution yield and a growing payout.
BreitBurn Energy Partners, along similar lines as the businesses of Linn Energy LLC (LINE) and Vanguard Natural Resources (VNR), purchases producing natural gas and/or crude oil production properties and generates revenue from selling the resulting energy production.
Growth for the three companies comes from drilling additional wells on the owned assets and the buying up of more producing acreage. All three companies produce a lot of low-priced natural gas, but have active hedging programs covering production for several years into the future.
Note: MLP companies have units and pay distributions. The words 'stock', 'shares' and 'dividends' may be used here with the understanding that the rules of MLP units apply including the tax consequences of investing in MLP units.
Based on the most recent quarterly distribution, here is the current yield of the three E&P partnership companies:
- LINE: 7.10%
- VNR: 8.56%
- BBEP: 9.44%
It is not surprising that Linn Energy sports the lowest yield. This company is by far the largest and most visible of E&P MLP stocks with an excellent track record. Linn is probably the most aggressive of the three stocks discussed here, as far as hedging future production.
Vanguard Resources and BreitBurn Energy Partners are of similar size. Currently BreitBurn has hedges in place for a smaller portion of its projected production for the next couple of years. This may be one reason why the market expects a higher yield from BBEP.
BreitBurn suspended distribution payments for a full year, starting with the second quarter of 2009. The company ran into issues with the amount of money it was able to borrow and elected to use cash flows to pay down the debt. When the dividend was re-instituted for the 2010 second quarter, the 37.5 cents per unit was well below the former rate of 52 cents.
Since it restarted dividend payments, BreitBurn has increased the payout every quarter and the most recent 46 cents is 22% higher than the 2010 second quarter rate. Over the same time period, the Linn Energy dividend has increased by 15%, while the Vanguard Resources payout is up 14%. Linn and Vanguard have maintained their distribution rates through the dark days of 2009.
Is the Yield Worth the Risk?
All three E&P partnership companies are aggressively looking for and buying production acquisitions. BreitBurn Energy Partners' track record shows production growing at a rate commensurate with the distribution growth. It appears the risk factor built into the 9%-plus dividend yield mostly reflects the problems the company faced in 2009, and to a lesser extent, a less aggressive natural gas hedging position.
Although I am slightly more partial to Vanguard Energy, BreitBurn Energy Partners should be a good fit for investors looking to pick up that extra percent of yield with continued payout growth.
Click to enlarge
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.