BreitBurn Energy Partners LP has been on a cross-country acquisition spree – and investors are pumped up.

The L.A. master limited partnership that specializes in extracting oil and gas from older fields recently snapped up parcels in Wyoming and the Permian Basin in Texas.

Investors have responded by sending BreitBurn shares up nearly 18 percent during the last three months. The stock closed Sept. 19 at $19.47.

Shares rose despite a second quarter earnings report that came in slightly below expectations and a sizable offering earlier this month that diluted the stock. That offering of 10 million shares raised about $185 million, most of which was used to pay off short-term financing for the acquisitions.

While the 18 percent jump in share price was average for independent oil and gas producers, it was well ahead of broader market averages such as Standard & Poor’s 500 and Nasdaq, both up about 8 percent for the last three months.

“It’s been almost a straight trajectory up for BreitBurn since June,” said Michael Peterson, senior oil and gas analyst with MLV & Co. in New York. Even the partnership unit offering only resulted in a brief downward blip; once investors realized the proceeds were being used to pay off recent acquisitions, the price shot back up again.

Longer term

The company’s recent acquisitions are part of a longer-term strategy that relies on a constant stream of acquisitions to offset swings in oil and gas prices: the more diverse the portfolio, the less impact price swings have on the company.

“To mitigate the effects of commodity price volatility on distribution stability, the partnership’s strategy is to continue to grow through acquisitions,” Chief Executive Hal Washburn told analysts in a second quarter earnings call Aug. 7.

Washburn said the company completed five acquisitions totaling over $650 million in the last 12 months; he added that the company is on target for upwards of $500 million in acquisitions for all of 2012.

Washburn said that to further reduce the impact of oil and gas price swings, BreitBurn is seeking to keep an even split between oil and gas fields. In recent years, oil and gas prices have tended to move in different directions.

The Permian Basin acquisitions have particularly pleased investors because they allow BreitBurn a toehold in one of the key regions for future oil and gas production while one of the acquired entities, CrownRock LP of Midland, Texas, will operate any new wells.

“This is BreitBurn’s entry into the Permian Basin and it’s being done in a very low-risk way, letting the other party assume much of the operational risk,” Peterson said.

BreitBurn doesn’t have to spend large sums of money on new wells and it can learn the tricks of operating in the Permian Basin from CrownRock and use that knowledge to operate oil and gas fields on its own as it acquires more fields in the region, he said.

Also, fields near BreitBurn’s Michigan holdings have been yielding more natural gas than expected. That bodes well for the company’s operations there, as the nearby yields show the possibility that BreitBurn’s technology will be able to pull out more gas than originally projected.

“BreitBurn may have some upside in unconventional resources in Michigan underneath its existing gas production,” said Ethan Bellamy, analyst with the Denver office of Robert W. Baird Research. “This serendipity factor adds an option value to the equity that is compelling to some investors.”

Bellamy said that BreitBurn has also benefited from stabilizing natural gas prices, which had been declining for several quarters as new deposits of shale gas resulted in a supply glut. But that changed in the last few months as hot summer temperatures prompted utilities to bring more natural gas-fueled power plants on line.

The expectation is for natural gas prices to rise slowly in coming months, meaning BreitBurn’s revenue from its natural gas operations should also go up, he said.

Yet BreitBurn still faces some risks. If the economy slows and demand for energy dips, that could send both oil and gas prices plunging, which could hurt the company. To protect from that risk, Washburn said the company makes extensive use of hedging products. But those carry their own risks, notably volatility.

Also, Bellamy said that a possible tax overhaul could remove a corporate income tax exemption that BreitBurn and other master limited partnerships enjoy.

Finally, there’s always the risk that one or more of BreitBurn’s recent acquisitions might yield less oil or gas than anticipated.

“BreitBurn management has a strong track record of evaluating and entering into transactions which are accretive to unit holders,” Bellamy said. “However, despite the best diligence, some transactions can underperform.”