This is a selection from my Q2 letter to the partners of Braewick Holdings. Braewick currently has a position in BreitBurn Energy (BBEP). I posted about our first investment in BreitBurn two years ago.
BreitBurn is essentially a physical oil and gas hedge fund. They invest in properties that have proven reserves, and receive a return on that investment through extracting and selling the oil & gas at market rates. Like a hedge fund, they limit market risk by purchasing various hedges on future prices. Unlike most hedge funds, they have direct involvement in the operations of each of their holdings. Excess returns are achieved through the following methods:
- Opportunistic reserve purchases (low price-to-value, or “value investing”)
- Good hedging strategy (market timing + exploiting contango in futures prices)
- Operational efficiency (keeping costs low and extracting extra reserves)
Units of BreitBurn are currently yielding about 11%, and I believe this yield is safe for multiple years out. In other words, I believe that through a combination of the above methods, value per unit will increase at least 11% per annum.