Could Leeb’s “Sinclair Oil” Help You Pocket $150,000?

Looking into Stephen Leeb's pitch about a high-yield potential acquisition target for Sinclair Oil

By xiexgp@gmail.com, December 2, 2014

This article originally ran just over a year ago, when the stock being teased was around $18 — it rose to about $22 over the Summer, then collapsed with almost every other energy stock over the last couple of months and is now trading around $11, with an indicated yield of about 18%. The stock has fallen more than 20% in just the last few days, though this morning it seems to have bounced back a little bit.

We poke this one up to the top of the pile for your attention because Stephen Leeb is touting this again as as buyout candidate and a high-yielder, and the ad that many readers have been asking about is essentially the same as it was a year ago. Our article below is also unchanged, though we’ll add a few new notes at the bottom for those who are interested. Enjoy!

—from 11/5/13—

If you read only investment newsletter pitches, you could be forgiven for believing that energy companies and biotech stocks make up the entirety of the investing universe — that’s where you can imagine riches flowing instantly from something exciting, without having to picture a company becoming a regular ol’ blue chip manufacturer or tech company or compounding earnings for decades from selling uniforms or hot dogs or whatever else.

And oil and gas and other energy stocks are obviously sometimes great investments — it is a big sector, with things like oil prices having a big influence on marginal spending among consumers in the US and with, bigger picture, something in the range of 8-10% of global GDP being associated with energy expenditures of one sort or another.

So keep that in mind … even though it sometimes seems like half the stocks we write about are oil-related, don’t let your mind drift into thinking that this one sector should take up a huge chunk of your brain or your portfolio.

But, um, today we’re writing about another oil stock. Just like yesterday. Which brings us to five or six of ’em in the last dozen articles. They’re all different kinds of stocks, of course, and we try to follow up on the ideas that we’re asked about most often, so let’s get to it.

This time around it’s Dr. Stephen Leeb, who’s telling us that Sinclair Oil could end up helping us “pocket over $150,000 in 2014.”

And no, he’s not telling us to invest in Sinclair Oil — that’s a private company, one of the largest private companies in America — he’s telling us that Sinclair might be interested in buying out the stock Leeb likes.

Oh, and it pays a big ol’ dividend, too, of “nearly 11%.”

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So who is it? Let’s check out the clues …

“Driving through Wyoming, the only question in my mind was which oil company would end up becoming the massive home run, the Peter Lynch 30-bagger type winner. The answer was easy. The cattle ranchers in Wyoming all identified one company signing leases all along Little Goose Creek.

“In fact, this one company has snatched up leases to over 218,000 valuable acres within oil-rich Green River, Big Horn and Powder River Basins in Wyoming.

“This stealthy company’s CEO is an expert on petroleum engineering from Stanford University. He’s successfully leveraged advanced drilling and completion technologies: horizontal drilling, multi-stage isolated fracture simulations and 3-D seismic imaging.”

OK, so that sounds interesting … a few more details to entice?

“The company now controls 964 productive wells across Wyoming. Total net production increased this August to a record 2.45 million barrels per day. That’s up a whopping 26% over the second quarter….

“Best of all, this Wyoming Wildcatter is structured as a Master Limited Partnership (MLP). This means you may pay absolutely zero taxes on investment gains and dividend checks in your mailbox.

“You’ll pocket a whopping dividend yield of nearly 11%. That’s right; the company has increased their dividend payout to investors for 16 consecutive quarters and counting!”

And Leeb says that “the word across Wyoming” is that Sinclair is looking to control more reserves in the area, partly because they have two Wyoming refineries, but that there could be other suitors as well, including the Guggenheims, who he says just bought a stake in “my top-secret Wyoming Wildcatter.”

Which really ought to be enough clues, no?

This is clearly one of the class of “producing MLPs”, a group that was very small until a few years ago and now numbers 20 or so — these are master limited partnerships, similar in structure to the more well-known MLPs that own pipelines and midstream processing plants and tend to have very steady, fee-based, capital-intensive businesses that lend themselves to high cash payouts but different in that instead of being a “toll road” or a processor of energy products, they actually produce oil and gas. That obviously makes their business more highly variable, but they do generally hedge to help maintain payment schedules, and they generally own long-lived, steady and boring producing oil and gas fields without a lot of execution or exploration risk.

They own depleting assets, though unlike the oil trusts that have also cropped up in recent years they have some flexibility in buying and selling assets or investing in their projects — trusts are more passive, they just get a cut from a specific field for a set period of time, MLPs can be more active in replenishing assets or changing plans or priorities along the way. In most cases the producing MLPs focus on trying to buy steady, producing oil fields from the exploration companies who would rather have cash now (so they can explore somewhere else, or grow in some other way) than wait for all the cash to come in from future oil sales over years or decades.

But which one is it? Thinkolator sez this is: Breitburn Energy Partners (BBEP)

Which is indeed one of the higher-yielding producing MLPs, with a current yield of just about 10%. Their next earnings announcement is tomorrow, by the way, so do note that it might be a little bit bumpy. Hopefully not as bumpy as it was back in the Summer, when accounting concerns about Linn Energy (LINE), another producing MLP, drove BBEP prices down by about 10% in the blink of an eye (LINE’s shares fell much more sharply, of course, down about 25%).

I have no idea whether or not BBEP will become an acquisition target, by Sinclair or anyone else, in 2014 as Leeb asserts — but it does have that fat distribution payment that keeps investors excited, and they have managed some acquisitions in recent years to keep their production levels up.

And yes, they did report 2.45 million barrels of oil equivalent per day as their production rate in August — you can see a quick note about that in an LA Times article profiling the company here.

And Wyoming is one of their important production areas, with (as teased) 964 productive wells, though they’re also active in several other basins. You can see a broader picture of their business in this recent presentation to an investment conference. They have indeed been a consistent distribution raiser — they’ve lifted the distribution each quarter for 13 quarters in a row (not quite 16 as was teased — they slashed the dividend by about 25% during the financial crisis, when oil prices cratered).

That puts a strong onus on the company to keep it up — if they announce a quarter without a dividend increase, I would expect to see some selling pressure. Presumably future payments will be dependent largely on oil and gas prices (their Wyoming properties are about 50/50 oil and natural gas, though the rest of their portfolio is more oil-heavy), and to some degree on interest rates (they’ve been borrowing money to make most of their acquisitions, though they also do issue new shares with some regularity).

I generally prefer the producing MLPs to the oil trusts, in large part because they’re more active and flexible, but I don’t know a lot about Breitburn specifically and haven’t owned this one personally. It was also a pick from Roger Conrad’s Big Yield Hunting service about two years ago, when it was also yielding about 10% — over that time it has mostly bounced around in the $17-20 neighborhood, with some big swings on sentiment about MLPs in general (as when tax fears came up regarding the sector, or when Linn’s accounting debate hit the wires this Summer) or about oil prices, but most of the time it seems like BBEP “wants” to be a fairly aggressive, levered, 10% yielding MLP. I find it hard to picture a world in which you get 50% capital gains from a stock like this in a year unless oil or gas prices shoot much higher, but it’s certainly feasible that they can keep doing what they’re doing … and a 10% yield ain’t bad.

That’s not so say I think you should rush out and buy it, of course — that’s your choice to make, and hopefully you’ll know more about the stock than I do before you make that decision. There are several other producing MLPs available, the Dividend Detective has a good list here and most of them currently carry yields of between 8-10%.

Got a favorite high-yielder you want to share with the gang? Shout it out with a comment below.

P.S. Oh, I almost forgot — no, it’s not a “wildcatter.” Wildcatters drill oil wells in new areas with a hope and a prayer, producing MLPs try to buy up very proven, long-lived reserves in established producing areas and do just boring infill drilling and optimization of existing wells. But, of course, “Wyoming Wildcatter” sounds a little sexier than “long-lived reserves levered by debt and optimized for cash flow to unitholders.” And yes, this is a MLP so the usual MLP-specific questions will probably come up — MLPs generate a lot of tax-deferred income because of their depletion and depreciation expenses, but they aren’t tax-free and they do require some additional recordkeeping and tax filing, and anyone buying MLPs should be careful to note whether they’re more appropriate for your taxable or tax-deferred accounts. And no, I don’t know what the tax implications are for non-US investors in these publicly traded partnerships, but you do buy and sell them exactly the same way you buy and sell stocks.

——back to December 2014—–

BBEP has been growing during these tumultuous times for the oil producers — they just acquired another producer and also just raised their monthly dividend again, probably largely because, like other producing MLPs, they have some short-term protection from their commodity price hedging program.

You can see Breitburn’s current hedging summary here, it looks like they have hedged (that is, effectively pre-sold) about 70% of their 2015 production at an average of $93.50 for oil and $5 per btu for natural gas — so if we assume that their production will continue as expected, they should likely be in decent shape and able to continue their dividend for the next year. The hedges drop down pretty sharply both in price and in percentage of production for the following years, but are still meaningful — particularly if oil stays at such depressed prices in the $60s or drops still further.

Their recent acquisition of QR Energy, which closed just recently, is more akin to a merger that balloons the size of the company, but it didn’t cost them cash — this was a unit-for-unit acquisition, so although they agreed to the price at the top of the market they shouldn’t be hurting from the deal. If you think that oil comes back pretty solidly within the next 6-12 months, then this is an interesting way to play that — their commodity price hedges should give some backstop to the dividend, which is currently huge, as long as oil doesn’t remain at these prices well into next year, when we start to worry more about their much smaller 2016 hedges.

Oh, and Leeb is also now calling this a buy in part because the Guggenheim family funds “just bought a stake” — Guggenheim Capital does indeed own a small position in Breitburn Energy Partners, but they own shares of hundreds of companies and this position is pretty trivial in their portfolio. They’ve held for at least a few quarters (I didn’t check their 13F filings going back that far) and have steadily increased the position, but it’s still very small. I’d say the Guggenheim ownership means nothing, other than the fact that the name is recognizable and catches your attention in Leeb’s ad.

So what do you think? Looking for a high-dividend oil and gas producer with some decent hedging? Think Breitburn fits the bill? Let us know with a comment below (and yes, we’ve kept the few original comments below so they aren’t lost to the ages).


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Kma
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Kma
December 5, 2014 8:57 pm

I am hopeful for a rebound in the stock price next week, but slightly on edge now. When does this jump back to the teens? All the fundamentals seem to be right for BBEP.

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Larry
Irregular
December 9, 2014 6:39 pm

sorry to be the dummie here but what is the 4.00 stock all the newsletters are touting?
thanks from lifetime member Larry

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Travis Johnson, Stock Gumshoe
December 9, 2014 6:49 pm
Reply to  Larry

I suspect you’re referring to the Money Map pitch for XOMA, which we covered here: http://www.stockgumshoe.com/reviews/bioscience-millionaire/rare-move-by-fda-to-ignite-tiny-4-stock-with-a-35-to-1-bang/

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SoGiAm
Irregular
December 9, 2014 6:54 pm
Reply to  Larry

XOMA-Larry see comments on portola thread. Check out CTIX for a gr8 4.USD something stock and the current TLOGloist bio-thread for other biotech equities. Best-Ben

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Travis Johnson, Stock Gumshoe
May 16, 2016 10:51 am

And now BBEP announces they’ll file for bankruptcy protection… like many of the other producing MLPs (all of which have had two terrible years with oil’s slide), this was a favorite of several of the high-yield-focused newsletters.

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