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Breitburn Energy (BBEP), a serial equity issuer

September 10, 2012

Didn’t I write the same post 6 months ago? Yep, in February Breitburn raised $173 million (9.2 million units priced at $18.80) and now they’re at it again. This time 10 million units at $18.51 to raise $178 million (or up to $204 million if the underwriters take up their optional overallotment). Once again dilution for unitholders, with book value falling yet further. But are we unitholders being unduly penalized by management’s acquisitive nature?

I took a look at distributions. Since being reinstituted in March 2010 distributions have risen at a 9.5% annual rate. That’s not bad but you have to consider that when distributions were suspended in early 2009, the annual rate was $2.08 or about 12% above the current level. Furthermore, book value has declined about 10% since early 2009. This is not very encouraging but still, with units yielding about 10% and the distribution growing about 9.5% annually, Mr. Market still seems to be penalizing us unitholders, perhaps because of management’s poor showing in 2008/2009. Maybe the haircut is warranted, but if distributions can continue to be raised at the current rate, and that’s a big if, the units appear to me to be underpriced. What would you pay for a security paying out $1.84 annually, yielding 10% with the payout growing 9.5% annually? That’s certainly more attractive than a fixed income security paying 10%. And did I mention the payout is linked to the price of oil?

Recently, I was considering liquidating my position in Breitburn even though the unit price hasn’t reached my target of $24 (the book value when I purchased). Raising cash, looking out to potentially higher tax rates next year and all that seemed good reasons. After all, the unit price has more than doubled since I purchased the position in 2008/9. But, on reflection, I think I’ll wait to see what the growth in the distribution is over the next two quarters. If management can continue growing the distribution at a 9-10% annual rate, it seems to me, given the low-interest environment stretching before us, that the units should yield more in the range of 6-8% which translates into a price 25-40% above today’s level.

Is there a potential downside? Of course! With all the asset purchases over the past year the company may be growing too fast and the anticipated cash flows from the new properties may not be sufficient to continue growing the distributions given the increase in the number of units outstanding. A slowdown in the growth of the payout not due to fluctuations in the price of oil seems to me an appropriate trigger for reconsidering a sale in six month’s time.

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