How These Two MLP's Are Paying Millions Upfront For Billions Later

How These Two MLP's Are Paying Millions Upfront For Billions Later

BreitBurn Energy Partners just coughed over $282 million for 16.6 million barrels of oil equivalent in the Permian basin, but was it worth it? It will take over a decade to pump out all of that energy, but the future return could vastly exceed the sale price.

Existing production
BreitBurn Energy Partners bought 2,900 boe/d in production with the acquisition, which is 60% weighted toward oil. The purchase will add to BreitBurn Energy Partners' position in the Permian Basin, which allow Breitburn to reduce its cost via scale.

With 93 wells producing in the area, BreitBurn Energy Partners will be able to expand through 300 potential drilling locations located along its new acreage. With those drilling locations, BreitBurn Energy Partners has the drilling inventory to produce oil and gas for 15 years from the acquisition, according to its reserve index.

10% -- What?
A 10.2% distribution is hard to grow, but with this acquisition BreitBurn Energy Partners thinks that its new asset will add instantly to its distributable cash flow, which should get income-orientated investors excited. A double-digit distribution is hard to maintain, but if an investment is able to do so then market beating returns ensue.

BreitBurn Energy Partners had proven reserves of 21.7 million barrels of oil equivalent in the Permian Basin at the end of 2012, so BreitBurn will be roughly doubling down in the area with this acquisition.

This isn't the first time an MLP has put down big bucks on the Permian Basin, LINN Energy has also been investing hundreds of millions in Texas. By comparing the possible returns for both these players you can get a better picture of what to expect from future acquisitions.

Just over half a billion
Both of these companies share a similar business model: invest in assets will low decline rates and return most of the free cash flow back to unit holders. For example, LINN Energy purchased $525 million worth of assets in the Permian Basin a few months back, which should close in the fourth quarter. The acquisition adds to LINN Energy's current operations in the area, and like BreitBurn Energy Partners will benefit from scale.

What does $525 million buy you in the Permian Basin?
With half a billion bucks you can buy a lot of things: ~500 Lamborghinis, a bio-tech firm, a small island, or 30 million barrels of oil equivalent that is 70% weighted toward oil.

This purchase will add instantly to LINN Energy's distributable cash flow and should give investors a source of income for 17 years. 300 potential drilling locations will hopefully allow for LINN Energy to keep pumping out distributable cash in the Permian.

Was it all worth it?
The big question is, "Was this all worth it?" Well, for BreitBurn, if it sold its acquired oil and gas for at an average of $70 a barrel it would bring in ~$1.16 billion in revenue. Now, over the course of 15 years you would expect the price of oil and gas to go up as demand increases from developing nations, but conservatively, BreitBurn still only paid $282 million for over a billion dollars of future production.

For LINN Energy, if it received an average price of $80 a barrel for its recent oil-heavy acquisition, it would make $2.4 billion in revenue. Again, not a bad deal, and one that is likely to reward investors over a long period of time. You should also note that LINN Energy sees an additional 24 million barrels of oil equivalent that it could possibly pump from its new asset pending future development.

The bottom line
The bottom line is this: both of these companies paid millions up front for a chance at billions down the road. Any income orientated investor should take a look at these two MLP's, as they both pay out distributions around 10%. Now, no good thing can last forever, but these two MLP's have long term oriented goals to try and keep putting cash in investor's pockets.

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Callum Turcan 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.

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