This Dividend Stock Is a Bit Risky

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Shares of BreitBurn Energy (NASDAQ: BBEP) moved higher after the company released its first-quarter 2013 results. BreitBurn saw growth in various aspects of its operations. However, there are also rising concerns about its distribution coverage ratio, which missed estimates. BreitBurn's quarter ended with a coverage ratio of only about 0.7x, which is below the target rate of 1.1x to 1.2x.

A coverage ratio of 1.0 would have put the company on the safe side of being able to payout 100% of its earnings to its investors. Distribution coverage of about 0.7 could imply that BreitBurn might be paying more than it is earning. While the company's cash flow from operations matches closely with its distributions, its free cash flow has been negative. 

However, this is not much of an issue in a single quarter. But if it persists for several quarters, then that would be alarming. Even then, it is best to check the financials for better analysis of its distribution coverage.


One of the highlights of the first quarter 2013 report was total net oil and gas production. It saw a remarkable increase by 18% at approximately 2.3 million barrels of oil equivalent (MMBoe), compared to the 1.9 MMBoe output in the year-ago quarter. This is also higher by 6% compared to the total net production of 2.2 MMBoe in the prior quarter.

Its net liquids production also jumped to 1.2 MMBoe, up 40% from the 859 MMBoe in Q1 of 2012. This is higher by 20% compared to the previous quarter. The total production of natural gas also saw a quarter-over-quarter increase from approximately 6.7 million cubic feet (MMcf) to 6.8 MMcf. However, it sequentially declined from 7.2 MMcf total gas production in Q4 2012.

Another major highlight of the first-quarter results was the notable increase in revenue. It posted $96.9 million in total revenue, up 64% from the year-ago quarter at $59.1 million. But this is 17% lower than the previous quarter's value of approximately $117.6 million.

While the company incurred net losses quarter-over-quarter, the net loss improved from $50 million to $36 million. The adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) also improved from $61 million to $64 million. But just like the total revenue, the adjusted EBITDA sequentially dropped from $78 million.

During the first quarter, BreitBurn had five rigs running; 16 wells drilled, and 10 completed workovers. According to its CEO, Hal Washburn, the company is on track of its goals. He further said that the first-quarter results delivered beyond expectations.

The company aims to hit the $261 million capital program. It sets its production for the full year at around 9.5 million to 10.1 million Boe. Furthermore, it plans to have a total of 11 rigs running by the end of the year. This is relatively achievable with five rigs already operational in the first quarter.

BreitBurn's president and chief operating officer, Mark Pease, stated that the firm will focus 95% of its capital spending on high-margin oil projects. During the first quarter, the firm spent $45 million in total capital, which was aligned with expectations. Management is looking forward to increased drilling activities in the ensuing quarters.

Dividend history

BreitBurn is a lucrative dividend stock with a history of increasing distributions quarter-over-quarter since 2010. The annualized amount is above the $1.00 threshold. This makes it attractive to investors looking for stocks with alternative earning opportunities aside from gains on the trading floor.

In 2010, the annualized dividend paid by BreitBurn was slightly less than $1.15 per share. This was raised to approximately $1.68 per share in 2011, or a remarkable increase of 47%. In 2012, however, the increase was reduced to 8.4% growth; the annualized dividend was $1.83 per share.

Nevertheless, investors can always look forward to an increase in dividend payout every quarter. In 2013, BreitBurn has already paid out quarterly dividend of $0.47 and $0.475 for the first and second quarters, respectively. BreitBurn has one of the highest yields within the master limited partnership (MLP) space with a projected yield of approximately 9.7%.

BreitBurn vs. similar companies

Although there are various upstream MLPs, one of BreitBurn's close peers is Linn Energy (NASDAQ: LINE). Linn Energy is a mid-cap company with a market capitalization of $8.5 billion. Just like BreitBurn, Linn Energy is a dividend MLP energy stock with a very attractive dividend history.

The annualized dividend Linn Energy paid in 2012 was $2.89 per share, which is higher than BreitBurn's distribution. In 2013, Linn Energy has already paid out a total of $1.45 per share at slightly higher than $0.72 per quarter. Linn Energy also failed to meet its distribution coverage at about 0.9x. However, there is a higher chance that Linn will go beyond the acceptable coverage ratio of 1.0. This is based on the fact that the company just acquired Berry Petroleum.

Another MLP of similar market cap is Vanguard Natural Resources (NASDAQ: VNR). The company also engages in the acquisition and development of oil and natural-gas properties in the United States. Headquartered in Houston, Vanguard Natural Resources has proved reserves of 152.2 million boe, as well as interests in 2,266 net productive wells. Its yield is closer to that of BreitBurn. However, Vanguard Natural Resources is trading at twice the book value, whereas Breitburn is trading slightly above its book value.

Similar to Breitburn, Vanguard also has a hedging program that consists of derivative contracts at commodity prices. The company expects its production to almost double this year thanks to the recent Range Permian acquisition. The future growth potential makes it an attractive MLP. However, unlike typical MLPs the company does not have a general partner and it does pay incentive distribution rights.

While most other financial indicators are similar to Breitburn, one positive thing about Vanguard is the insider position. Insiders seem to be pretty bullish on the company, acquiring thousands of shares in recent months. 

Bottom line

While BreitBurn has relatively higher yield than Linn Energy, it is least secure due to its hedging strategy. Energy companies like BreitBurn and Linn will normally hedge their gas and oil production to improve cash flow. Linn's 100% hedging provides a better stability to the company.

Although there is nothing wrong with BreitBurn's planned 50% hedging, this is a bit risky. In the event of declining prices, BreitBurn might find itself with insufficient cash flow, partly due to its un-hedged production. This makes it a risky play despite its quite lucrative dividend history.

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Nur Tarkak has no position in any stocks mentioned. The Motley Fool recommends BreitBurn Energy Partners L.P.. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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