Now that even Jim Cramer won’t shut up about Master Limited Partnerships (MLPs) as a safer, high-yield, non-euro-exposed investment, perhaps we’ve “jumped the shark” on this investment? It’s always hard to tell — popular investments can always get more popular.
But one thing’s for sure, Roger Conrad’s been talking up MLPs for quite a bit longer than Mr. Cramer — and pushing all kinds of high-dividend utility-type businesses for years and years now. His latest newsletter is the more aggressive (ie, riskier picks with higher current yields) Big Yield Hunting, and for that letter he’s pitching a MLP that sports a much-higher-than-usual 10.2% yield.
So we’d better find out what it is, eh? And no, we’re not going to do it the easy way (sign up for a subscription to Big Yield Hunting), we’re going to do it the hard way … the Gumshoe way, by making our list of clues, checking it twice, wrapping up our answer nice and tidy for you with a festive red bow, and letting you decide whether it’s naughty or nice.
Here’s how Roger tantalizes us:
“How would you like a mouthwatering 10.2% added to your wealth every year? In fact, this energy company specializing in natural gas liquids just RAISED its distributions 3%.
“That’s right! In the middle of one of the worst economic times, this Master Limited Partnership (MLP) just gave all of its unitholders a nice raise!
“But that’s not all. Its third-quarter distribution is the sixth consecutive quarterly distribution increase since May 2010. Can you imagine? Its investors are getting a raise every 3 months!”
And it gets better — maybe more dividend raises to come?
“In fact, this energy firm’s CEO recently stated he expects BETTER fourth-quarter numbers, and for the company to meet full-year guidance.”
Conrad goes on to tell us that we need to “get in while the price is still way below $18” … and before the ex-dividend date, which is in “early 2012.” So that’s not a lot of clues. Anything else?
He says that 500 shares will cost you $8,535 and get you $870 in dividends — which means the stock is just about exactly at $17, and pays a dividend of $1.74 per year. I’m assuming, since they’ve raised the dividend, that this is annualizing the last quarter’s dividend, which would mean the last payout was 43.5 cents per share. So those are a few more clues for us to toss into the Thinkolator.
And what answer comes rolling out the other end? This must be… Breitburn Energy Partners (BBEP)
I don’t remember ever having looked at this one in any detail — Breitburn is an energy producing MLP, not a midstream or pipeline MLP, so that in part explains the fact that their yield is high for the sector (big pipeline MLPs tend to yield about 6% these days), though Breitburn also carries a substantially higher yield than two of the other MLP producers we’ve looked at (albeit briefly) over the years, Linn Energy (LINE) and Legacy Resources (LGCY) — LINE is much larger, with a market cap of around $6 billion, and has been credited with a very prescient hedging program that let them keep the dividend steady during the downturn, they yield 7.4%; LGCY is about the same size as Breitburn, with a market cap near a billion dollars, and yields 8.1%.
Breitburn describes itself thusly:
“BreitBurn Energy Partners L.P. is an independent oil and gas partnership focused on the acquisition, exploitation and development of oil and gas properties in the United States. Our objective is to manage our oil and gas producing properties for the purpose of generating cash flow and making distributions to our unitholders.
“Our assets consist primarily of producing and non-producing crude oil and natural gas reserves located in the Antrim Shale in Michigan, the Los Angeles Basin in California, the Wind River and Big Horn Basins in central Wyoming, the Sunniland Trend in Florida, and the New Albany Shale in Indiana and Kentucky. Our assets are characterized by stable, long-lived production and reserve life indexes averaging greater than 16 years. Our fields generally have long production histories, with some fields producing for over 100 years. We have high net revenue interests in our properties.”
So — that’s the kind of thing you like to see in a producing MLP or an energy trust, assets that can produce for a long time and with proven and predictable production profiles. I own a near-peer company myself and have suggested it to the Irregulars in the past (that’s Dorchester Minerals (DMLP) — I like it mostly because I personally prefer Dorchester’s low profile, relatively low-risk royalty-focused model, and huge unexplored land potential), but that’s not to say that I have anything against Breitburn.
And I do generally prefer the MLPs to the trusts in this space, since they have the potential to increase production and grow (US energy trusts have their hands tied — they really exist just to produce known assets and can’t generally invest in other fields or growth projects). There are other publicly traded partnerships that are energy explorers and producers too, including Vanguard Natural Resources (VNR) and QRE Energy (QRE) — those two happen to fall between LINE and BBEP on the yield spectrum, I don’t know of any other decent-sized producing MLPs that have yields higher than BBEP’s 10%ish. I should also note that of those names, all but BBEP and DMLP have traded almost in lockstep over the past year, and DMLP has narrowly beaten out BBEP for the title of “worst performer” in that group over that same time period … so to be kind (to me) we’ll note that my favorite pick for that group has yet to “see its value realized.”
Like LGCY and LINE, Breitburn makes some effort to protect the stability of its payout from fluctuation of commodity prices, and they have hedged more than 2/3 of their expected oil and gas production through 2013 (at $6-7 for nat gas and $92-100 for crude oil) — so they have some pretty good downside protection against collapsing oil or gas prices over the next two years, though the coverage drops to well below 50% for 2014 and 2015. The flip side, of course, is that if oil goes to $200 and natural gas to $10 next year they’ll see very little cash benefit in their sales. They have spent the last couple years investing in natural gas, which makes some sense since those assets have been less expensive, but they are producing their oil much faster than their gas right now — their reserves are about 70/30 gas/oil, production is about 60/40 gas/oil and projected to stay that way for several years.
And … that’s about all I know about Breitburn. They have good coverage of their dividend, according to their presentation materials, and a higher dividend than their peers, and they have at least a decent reserve life in the teens currently (15-17 years) and solid hedging to ensure pretty good cash distribution levels for at least a couple years. They carry a pretty similar level of debt (about a third of their enterprise value) to LINE and LGCY, and they’re certainly heavily exposed to natural gas, so if natural gas is going to be at $3 (or lower) for decades thanks to the shale gas revolution, as some folks think, then that would doubtless hurt them.
Otherwise, I’m new to this company so I’ll open up the floor — any thoughts on Breitburn or the other energy producer MLPs? Are you interested in buying into a partnership with volatile prices and production and reserves considerations to get a higher yield, or do you prefer the steadier “toll road” businesses of most of the pipeline MLPs? Let us know with a comment below.
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