There has been a lot of drama in the upstream oil and gas MLP sector this year. Negativity from a variety of sources has pulled down LINN Energy (LINEQ), while also taking down peers like BreitBurn Energy Partners (BBEPQ). This has created quite a headache for both management teams, making it tough for them to do what they do best, which is acquire mature oil and gas properties.
Source: LINN Energy
For years the model had been to acquire an asset package from an exploration and production company and use a combination of debt and equity to fund the purchase. However, this year's drama has really taken the equity component off the table as a funding option for BreitBurn because its units are now so undervalued. That didn't stop the company from completing its most ambitious deal to date.
What's interesting to note here is how the company was able to pull off its big oil deal. Because of smart capital allocation prior to the deal, BreitBurn was in the position to fully fund the deal to acquire nearly $900 million worth of oil assets from Whiting (WLL) and its partners with debt. While using debt is obviously not an ideal situation, it does show that proper planning can put a company in the position to act even when the conditions are not ideal. In fact, what was once viewed as negative has turned out to be quite positive for the company.
When BreitBurn missed first quarter expectations earlier this year, many investors overlooked one of the factors that caused the miss. The company had issued units earlier in 2013 to pay down all but $100 million from its credit facility. If the company had not made the move, its distribution coverage ratio would have been 0.83 times, instead of the 0.67 times it reported in the quarter. So, while the move stung its results, if the management team hadn't raised that equity capital when it did, BreitBurn would not have had the financial flexibility to move quickly to close the deal for Whiting's oil assets, which will substantially boost its distribution coverage ratio.
The speed at which the Whiting deal closed is also important to note, especially when considering LINN Energy's complex, and drama-filled deal to acquire Berry Petroleum (NYSE: BRY). Because that deal is a first of its kind, including using shares of affiliate LinnCo (NASDAQ: LNCO) as the currency, the deal has taken the company much longer to close than expected. Also, it has faced a barrage of short-seller accusations which has now brought the attention of the SEC. So, while short-sellers call BreitBurn "LINN Energy Junior" that is simply not the case and this deal proves that these companies do operate very differently.
The key takeaway here is that management teams matter. While the teams at both LINN and BreitBurn have been criticized this year, both have put together very compelling deals that wouldn't have been possible without proper planning. Both companies have planned ahead and used unconventional ideas to position the companies to pounce when the opportunity presented itself.
That has enabled BreitBurn to move lightning fast to pick up low-decline, oil-rich assets that no longer fit in Whiting's business model. Meanwhile, LINN was able to structure a deal for high-margin oil assets of its own by first putting the company in the position to strike when Berry was ready to sell. That makes me pretty confident as an investor that both companies will get past the current negativity and thrive in the future.
