1 Number BreitBurn Investors Simply Must Know

Apparently, oil and gas in the ground is worth next to nothing. At least that's what short sellers of BreitBurn Energy Partners (NASDAQ: BBEP  ) would have you believe after saying the company's units are worth as little as two dollars apiece. Here's the thing: Simple math shows that this isn't the case at all.

Before we get to that, a little background is in order. This attack is really just a continuation by the same short-sale firm that's been trying to take down LINN Energy (NASDAQ: LINE  ) and LinnCo (NASDAQ: LNCO  ) . This company has gone on to say that BreitBurn is really just LINN Energy junior and that its distribution is "largely a mirage." The problem is that, other than the fact that it's just plain false, it's not giving BreitBurn much of any credit for the oil and gas it has in the ground. Those reserves are what matters most if you were to value the firm. That's why for base value the company's third-party-verified reserves are used, which total an estimated 149.4 million barrels of oil equivalent and are spread around the nation, as shown in the following map:

Source: BreitBurn Energy Partners investor presentation

The most basic way to value an oil and gas company is to put a number behind its oil and gas reserves. The simplest way to do that is to go to its latest annual report and take a look at its PV-10, which is the present value of its reserves discounted by 10%. For BreitBurn, that number is $1.99 billion, which you can find on page seven of last annual report (link opens a PDF). If you are an investor in BreitBurn, that number is really the one that you simply must know.

What that number means is that if oil and gas prices stay the same, and if BreitBurn doesn't discover any additional oil and gas reserves, that's about what investors can expect the company to produce in future cash flow. It's in a sense the worst-case scenario of the future because when its oil and gas reserves are gone, investors won't be left with much else. It could be used as a rock-bottom valuation of the company, which makes BreitBurn worth much more than what short sellers would have you believe.

Here's where the simple math comes into play. Take the net present value of BreitBurn's future cash flow and net out its debt of about $1.1 billion (as of the end of last year) and what's left is just about $900 million in equity. Simply divide that number from the outstanding units, which were 84,668,000 as of the end of last year, and get a value of $10.50 per unit.

Again, that value doesn't account for the company's prospective properties nor does it account for any future upside in commodity prices. It also doesn't account for the company's ability to acquire future reserves at a discount. It is simply the basic value that BreitBurn investors could expect to see if the company's management did nothing. I'd be very surprised to see that happen.

Here's what you might not know about BreitBurn's management team: They are very good at what they do. Not only that, but they tend to see things that most others miss. Just take a look at the following quote from CEO and co-founder Hal Washburn about the time when he and his partner started the company:

[We] had a theory, a thesis, that technology was going to allow us to increase recoveries of oil and gas and we thought that, it would work very well in the United States and that the exodus from United States by all the major oil companies in late 80's was a mistake. We felt that new technologies would allow us to continue to grow production here in United States and so we built the business on the back of that. We acquired interest in large oil and gas fields, embracing technology to increase the reserves, the production, the cash flow and therefore the value.

That's something that you simply cannot put a price tag on. However, I'll go out on a limb here and say that BreitBurn's worth a whole heck of a lot more than $2 per unit and likely worth a great deal more than the baseline $10.50 per unit in oil and gas reserves.

Unfortunately, as investors in both LINN and LinnCo have realized, the accusations that are being made are compelling enough to scare many investors. Given the double-digit loss that BreitBurn investors endured this week, the allegations against it are making investors sell first and ask questions later. That's really a shame because this is a great company with a great asset base that's worth far more than two bucks, and I'd venture to say its also worth far more than it's currently trading. That's not to say the company won't endure a rocky future, but those reserves are its solid ground. 

The worst part about all this is that these attacks are meant to hurt you, instead of help you. These short sellers know that you are in either LINN or BreitBurn for the income and will flee if that's at risk. That's why the whole ordeal should be a good reminder to all of us to diversify our income to be better able to hold through adversity. So, if indeed you're on the lookout for a few more high-yielding stocks, The Motley Fool has compiled a special free report just for you. It outlines nine top dependable dividend-paying stocks and it's called "Secure Your Future With 9 Rock-Solid Dividend Stocks." You can access your copy today at no cost! Just click here.


Read/Post Comments (7) | Recommend This Article (17)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 03, 2013, at 12:53 PM, awallejr wrote:

    I just view it as a buying opportunity for BBEP. I bought. If they say it is worth $2, well I have received well more than that over the years in distributions.

  • Report this Comment On July 03, 2013, at 2:39 PM, rueroyal wrote:

    What is behind these smaller oil company's being attacked. Its must be more than the short sellers?

    If big oil pulled out in the eighty's perhaps they want back in? Or the Obama adm wants to scoop them up. So Americans loose even more oil for america. This administration is shutting down coal Perhaps shutting down oil production?

    Keystone will be going to the westcoast of Canada and from there to china and Indonesia. Obama is also trying to hamper The Port of New Orleans by limiting dredging. It seems he wants California Ports to handle the Oil and Gas exports.

    There is something more to all this? lets see how it plays out?.

  • Report this Comment On July 03, 2013, at 2:48 PM, kramsigenak wrote:

    Thanks Matt,

    Nice to hear a sane voice amid the turmoil today. Bought BBEP, QRE and VNR today along wit a bit of LNCO. Like the high distro and price action... the noise should quiet down in time.

  • Report this Comment On July 03, 2013, at 3:00 PM, Harlybarley wrote:

    Since when has the PV-10 of proved reserves been a reliable indicator of value anywhere other than in the fertile minds of optimistic managers who have "embraced new technology" in the estimation of their reserves. Since when has it been the worst-case scenario for investors? I suggest you go ask the hapless investors in ATP Oil and Gas Corporation if PV-10 is the worst-case scenario? Come to think of it, when it comes to junior oil and gas companies, since when has PV-10 been anything other than a marketing device designed to raise much-needed capital and sucker the foolish investor? You paint a very rosy picture where all kinds of goods things may happen. They often don't!

  • Report this Comment On July 03, 2013, at 3:55 PM, CatFoodMoney wrote:

    Matt,

    Thanks for putting things in perspective. I hope that this situation gets resolved in a positive manner.

    Thanks again,

    Nathan

  • Report this Comment On July 04, 2013, at 1:56 PM, nontechie wrote:

    I established a position in BBEP relatively recently and took yesterday's dive as an opportunity to lower my mean cost of shares substantially--below the $18+ book value figure I have seen. My intention is to do precisely what I have done with other MLPs such as KMP and simply collect the distributions over time until I have amortized most of my cost for the shares.

    Shorting a stock like Linn or Breitburn must be an expensive proposition since it pays such a high distribution that the short seller must pay. While, as I said, I plan to sit tight and just collect the distributions, I'm also guessing this short raid cannot last too long because of the distributions--over 10% a year now.

  • Report this Comment On September 13, 2013, at 10:10 PM, gr8twhtebuffalo wrote:

    I picked up 60 shares a week ago at just over $11. I like this investment.

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