The drop in the price of crude oil over the last quarter of 2014 was and continues to be bad news for companies that drill and own oil wells. In the jargon of the energy sector, these companies operate in the upstream portion of the spectrum from oil in the ground to gas in your car or electric power in your home.
The revenues of upstream energy companies are directly tied to the energy commodity prices. In the master limited partnership, MLP, subsector of the energy sector, the upstream MLPs are focused on owning producing oil wells and generating a steady stream of cash flow to pay high distribution yields to investors – in MLP terms called unit holders with a partnership.
The upstream MLPs use oil and gas derivative contracts to hedge or lock in the prices they will receive for a large portion of planned future oil and gas production. These hedging practices have allowed the upstream MLPs to pay steady distributions even as crude oil and natural gas prices fluctuate.
The focus MLP of this article, Breitburn Energy Partners LP (Nasdaq: BBEP), has about 75% of its forecast 2015 production hedged at over $90 per barrel for crude oil and almost $5.00 per Mcf for natural gas. Crude is trading under $50 and natural gas is at $2.94.
However, the rapid and large drop in energy commodity prices is forcing the upstream MLPs to re-calculate their 2015 budgets. Breitburn announced on January 2 that it was cutting its distribution rate by 52%, from an annual $2.08 per unit down to $1.00 per unit. Breitburn pays monthly, so investors will now earn 8.33 cents per unit every month. The market had been anticipating a distribution reduction with the fall in crude. Over the three months before the rate cut announcement, the BBEP unit price had dropped by 64%. In the two trading days since the new distribution rate announcement, BBEP has dropped just 1.4% in a market where all the major indexes were declining sharply.
With the new $1.00 per year distribution and the current $6.90 unit price, BBEP yields 14.5%. This is an attractive yield considering the steps Breitburn has taken to protect the distribution going forward.
With the new distribution rate, the company has calculated that cash flow generated from operations will cover the distributions by 1.35 times in 2015. This is very strong coverage in a sector where 1.05 to 1.10 times coverage is typical.
More importantly, Breitburn is now in a strong position to raise the distribution rate paid to investors if oil prices start to increase later in 2015. I believe the current low price of crude is temporary and oil will be back above $70 per barrel by the second half of 2015. If that happens, the current low price and 14%+ yield on BBEP will look very good as both the distributions and unit price start to rise.
BBEP is not a good investment if you’re inclined to believe that oil prices won’t go back up. The amount of production hedged beyond 2015 starts to decline, which will make it tougher to maintain the distribution rate in a low crude price environment. However, the current 1.2% yield every month allows you to wait and see what happens to oil for the next 6 to 9 months and earn a great yield as you wait.
BBEP is a solid investment if you’re also interested in consistent monthly payments from a dividend stock. And I’ve recently released a new dividend investing system for giving you steady monthly dividends through the income strategy with my newsletter, The Dividend Hunter. And there are currently several in my Monthly Paycheck Dividend Calendar.
The Monthly Dividend Paycheck Calendar is set up to make sure you’re getting 6, 7, even 8 dividend paychecks per month from stable, reliable stocks with high yields. (Note: February has a whopping 8 payments!) And it makes your income stream will be more stable and predictable as you’re getting payments every month, not just once a quarter like some investors do.
The Calendar tells you when you need to own the stock, when to expect your next payout, and how much you could make from stable, low risk stocks paying upwards of 8%, 10%, even 17% in the case of one of them. I’ve done all the research and hard work; you just have to pick the stocks and how much you want to get paid.
The next critical date this month comes on Wednesday, January 15th, so you’ll want to take action now to make sure you don’t miss out.
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