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Two Attractive MLPs In Permian Basin

July 22, 2014 | About:
Value Investor

Value Investor

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Production in Permian basin has increased from 850,000 barrels per day in 2007 to 1,350,000 barrels per day in 2013. The increase is attributed to six prolific oil formations of Spraberry, Wolfcamp, Bone Spring, Glorieta, Yeso and Delaware. Growth in these counties has exceeded the production from the Gulf of Mexico offshore region since 2013, making it the largest crude oil producing region in the United States.

This is due to increase in horizontal oil drilling rig activity in the Permian basin. This horizontal drilling activity began at the start of 2013 and by the end of May 2014 there has been an addition of 63 rigs deployed in the region. This increases the number of rigs by 50% in the United States.

Horizontal rigs are used to drill wells to produce tight, low-permeability formations. The change in the number of horizontal rigs demonstrates that the consumers are attracted towards the potential of new production from the tight oil formations, stacked in multiple layers.

This change in the number of horizontal drilling rigs in the Permian basin shows an increase in drilling activity in the tight oil plays relative to other production areas. In the beginning of 2013, both Eagle Ford and Williston Basin of Bakken Shale had more horizontal drilling rigs, but the number has been surpassed by Permian by the end of 2013.

In December 2013 Permian basin had 215 rigs whereas Eagle Ford and Williston Basin had 173 and 164 rigs respectively. And in the first quarter 2014, the increase is four times of the combined horizontal rigs of Eagle Ford and Williston basin.

In this article I will discuss two MLPs in the Permian region with strong fundamentals and which will benefit increasing rig activity.

Breitburn Energy: Master of Accretive Acquisitions

Breitburn Energy Partners (BBEP) is an oil and gas master limited company involved in the acquisitions, development and production of oil and gas properties in the United States. The company has a well known history of acquisitions. In 2011 to 2013, the company has made acquisitions of $2.1 billion with $1.2 billion worth acquisition in 2013. All the investments are carefully analysed by a team of 15 to make sure that they are low decline and accretive to unit holders.

This is evident by the company’s transaction activity according to which the company has screened 400 opportunities and finally closed two deals in 2013. The acquisition has increased BreitBurn’s proven reserves by 113%. The company is aggressively looking for new acreages in Permian Basin which is estimated to hold more than 75 billion barrels of oil. Acquisition of more than 18 million barrels of oil in the Wolfberry shale from Crown Rock L.P is a result of the company’s strategic move to take advantage of the rich resources in Permian basin.

The company estimates a capital expenditure of $600 million in fiscal 2014. Considering high activity level in the Permian Basin it is likely that BreitBurn will add more acreages in the basin. This will have a considerable upside impact on the company’s growth. With a current yield of 9.1% and 10-year projected distribution growth of 35%, BreitBurn can be considered the best MLP to invest.

Vanguard: Unlocking Hidden Value

Vanguard Natural Resources (VNR) is also a master limited company which acquires and develops natural gas properties in the United States. The company owns and operates in eight operating basins which include Arkoma, Williston and Permian basin. In this article, I will focus on the company’s Permian basin operation and its objective to generate stable cash flow to distribute to its shareholder on a monthly basis.

Vanguard currently has 42.3 million barrels of oil equivalent as proved reserves in the Permian basin. With 115,357 gross and 84,115 net developed acreages, Permian basin is the second most active area of operation for the company.

In the first quarter 2014, the company has completed 10 workovers of one frac and nine acid jobs, resulting in 9 barrels per day and 177mcf increase in production with an investment of $650,000. Second quarter 2014 would also result in production uplift with the completion of an estimated six more fracs.

The company is leveraging the expertise of its partners like Diamondback, Atlantic and Athlon and has entered in to a number of drilling ventures to unlock the hidden value of these assets. Moreover, the management has allocated a capital expenditure of $13.4 million including growth capital investments for fiscal 2014. This would ensure a better competitive bidding of assets that have a larger drilling component.

Conclusion

I am of the opinion that both Breitburn Energy Partners and Vanguard Natural Resources with their operation in Permian look attractive. Both have a compelling dividend yield of 9.1% and 8.0% respectively and a focussed strategy to cater to the development opportunities in Permian. Value unlocking will provide investors with meaningful rewards in the foreseeable future.

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Value Investor
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