With one stroke of the pen BreitBurn Energy Partners (NASDAQOTH: BBEPQ ) accomplished its acquisition goal for 2013. In fact, the company blew away its $500 million target by signing a nearly $900 million deal with Whiting Petroleum (NYSE: WLL ) and its partners for oil properties in the Oklahoma Panhandle. Let's take a closer look at what this deal means for BreitBurn's unit holders.
BreitBurn is acquiring Whiting's interest in the Postle and North East Hardesty oil fields in Oklahoma for about $860 million. It's also consolidating additional interests in these properties from other sellers for another $30.2 million. Finally, BreitBurn is acquiring associated midstream assets which include the Dry Trail plant processing facilities, an oil delivery pipeline and Whiting's 60% interest in the 120-mile Transpetco-operated CO2 transportation pipeline.
One thing investors need to key in on is that BreitBurn put the entire deal on its corporate credit card instead of issuing equity. The company had a lot of financial flexibility as it had just $230 million drawn on its $1.2 billion credit facility. To get the deal done, BreitBurn was able to get its banks to increase its borrowing base to $1.5 billion in order to give it a little more breathing room. Further, its banks were able to relax the total leverage ratio for the next five quarters to give BreitBurn time to digest the acquisition. While the deal adds to its leverage in the near term, I wouldn't be surprised to see equity rise at some point, once the price of its units bounce back a bit, to pay down the credit facility.
As far as the assets acquired, the carbon dioxide assets are very strategically important because they save the company from relying on third parties. In addition to that, they strengthen Breitburn's technical and intellectual know-how when it comes to enhanced oil recovery, or EOR.
We are seeing more oil and gas MLPs acquire EOR assets because these assets, once developed, fit well within an MLP structure. Just last year, LINN Energy (NASDAQOTH: LINEQ ) entered into a joint venture with Anadarko (NYSE: APC ) on its Salt Creek field in Wyoming. In that deal LINN was able to partner with a top-tier operator in an effort to gain from Anadarko's experience in carbon dioxide flooding. LINN saw the deal as a way to access this technology so that it could potentially transfer it to the company's existing base of assets. That deal was a great fit because LINN picked up technical know-how and oil production while Anadarko was able to secure additional capital to develop the asset. The great thing about EOR projects is that these assets feature well-developed production that comes with very low decline rates which is why they are such a perfect fit for an MLP.
Huge plunge into liquids
The other important appeal to BreitBurn when it comes to these assets are the liquid contents, because 98% of the production is high-margin oil and natural gas liquids. This will push the company's production mix to 63% liquids, up from just 49% earlier in the year. The deal will also boost the company's production by 7,400 barrels of oil equivalent per day.
Overall, BreitBurn is acquiring 35 million barrels of oil equivalent reserves which have an estimated reserve life of about 13 years. Further, these very low decline assets help to offset some of the company's more development-focused assets acquired over the past year. As I mentioned, these assets will fit much better in BreitBurn's MLP structure than in Whiting's development-focused business model. Whiting already has plans to use the cash from the sale to help fund its development opportunities in the Rockies and the Permian Basin.
One of the keys to this deal is that it immediately boosts BreitBurn's distributable cash flow per unit. The company had a rough first quarter; its distribution coverage ratio fell to just 0.67 times. That was well below its stated goal of 1.1-1.2 times. While no distribution increase was announced with this deal, the company did say that it supports the goal to target annual distribution increases of about 5% per year. BreitBurn has raised its distribution for 12 consecutive quarters now, so this transaction virtually assures that that trend will continue with the next distribution announcement.
Final Foolish thoughts
The transaction appears to be a solid one for BreitBurn. It has all the characteristics one likes to see -- these are high-margin, low-decline assets with a long reserve life. The deal also helps stabilize the distributable cash flow, which is why with a yield of over 11%, BrietBurn is a very compelling opportunity for income-seeking investors.
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