With most energy stocks at all time highs, why is Breitburn BBEP trading near its lows? The units are yielding 9% to boot. Over a series of post, I will walk you through why I think the stock is cheap, a couple different ways to think about pinning a value on the company, and specific catalysts that should drive the stock from its current level towards its fair value.
 
Due to assumed cost of capital advantages and its tax-advantaged status, master limited partnerships (MLPs) like Breitburn rely on acquisitions for growth. To fund this growth, MLPs like Breitburn rely on a mix of debt and equity. This usually isn't a problem when the credit and capital markets are in good order. But as we all know, things haven't been in good order since last summer. Consequently, Breitburn's stock has taken it on the chin. The stock has rebounded over the past few months, but it is still off 40% from its high despite $135 oil and $12 natural gas prices. With a weakened stock price and the credit gravy train gone, making acquisitions is tough.

To make matters worse, Breitburn has had to deal with a fleeting shareholder base as well. First, Breitburn relied on a special type of funding—private placements in public equity (PIPEs)—to speed up the acquisition process last year. These investors accentuated the move down when they started heavily shorting Breitburn's shares to hedge their positions until the PIPE shares became freely tradable. Second, Breitburn's former parent Provident PVX announced in February that it was looking to sell the remainder of its U.S. interests by the end of the second quarter. Provident, a Canadian producer, owns 22% of the outstanding units and 95% of the general partner. 

Last but not least, Breitburn has yet to achieve the production and distribution levels it targeted following the acquisition of Quicksilver's KWK Antrim Shale assets last September.

In my next post, I'll add some numbers to the mix to show why despite the ugly picture painted above that it pays to dig in the garbage.

To be continued…
 
(Disclosure: an internal investment fund I co-manage owns shares in BBEP)