1 Problem That Continues to Plague BreitBurn Energy Partners L.P.

Photo credit: Flickr/Maarten Heerlien

The strength of an oil and gas MLP is supposed to be its ability to acquire and quickly integrate acquisitions. These deals are the fuel that MLPs use to grow distributions to investors. Unfortunately, BreitBurn Energy Partners (NASDAQ: BBEP  ) is having a little trouble in that department.

Recurring theme
For the past two quarters BreitBurn Energy Partners has noted that its most recent acquisitions have underperformed expectations. In the fourth quarter the company noted that the Postle assets it acquired from Whiting Petroleum (NYSE: WLL  ) in a big oil deal fell short of expectations. Problems with getting a new carbon dioxide facility online caused BreitBurn Energy Partners to miss out on an average of 600 barrels of oil equivalent production per day in that quarter.

Then just this past quarter BreitBurn Energy Partners noted that its newly acquired oil wells in Texas weren't performing as expected. In fact, several wells were offline when the company took over operations, causing it to scramble to secure drilling rigs and equipment to get the wells back into production. That again caused the company's production to be lower than it should have been.

These issues, along with some other problems, caused the company's key distribution coverage ratio to come in lower than hoped. In the fourth quarter that ratio was just 0.93 times while the company managed to achieve a 1.0 times ratio in the first-quarter. While that's not a worrisome ratio, it still could be improved, which is what these deals are supposed to be doing for the company.

Photo credit: Flickr/Kool Cats Photography

Problems in the pipeline
Looking ahead, acquisitions could continue to plague BreitBurn Energy Partners if the company isn't careful. While it only closes on the very best deals it finds, its recent deals suggest that it might need to do even better in the future. There is, however, just one problem: It's not alone in its hunt for new deals.

On the company's last conference call CEO Hal Washburn noted that while the company is actively looking for new deals it's facing stiff competition for those deals. Washburn said,

We have been in the market, we looked at a lot of transactions, the deal flow, in gross levels is down slightly from last year we think but the number of deals that we are looking for and the number that we fully evaluated is actually higher than what it was in the first quarter of 2013. We're just not really successful, as you know, we look at several hundred deals a year generally closed fewer than 10, and so far this year we have not been successful bidder, we have looked at some properties that some of our peers acquired recently or in those processes, but obviously weren't willing to pay with what they pay.

In the past month alone there have been several significant deals within the oil and gas MLP sector. Among the notable deals was an enhanced oil recovery project that Atlas Resource Partners (NYSE: ARP  ) acquired for $420 million. In that deal Atlas Resource Partners picked up 47 million barrels of oil equivalent in oil and natural gas liquids reserves. These assets feature an ultra-low decline rate of just 3%-4% per year, making them an excellent fit within an MLP like Atlas Resource Partners.

Photo credit: Flickr/Ray Bodden 

The assets would have also been a nice fit for BreitBurn Energy Partners as they would have added to the company's growing number of enhanced oil recovery projects, including last year's acquisition from Whiting Petroleum. While we don't know if BreitBurn Energy Partners even bid on this deal, that still doesn't negate the fact that it's not alone in its quest to acquire these low-decline oil and gas properties.

Investor takeaway
The issue here is that BreitBurn Energy Partners' recent struggles with quickly integrating newly acquired assets, combined with growing competition for deals, could impact the company's ability to grow its distribution to investors. The company obviously doesn't want to get in a bidding war with its peers, nor does it want to be acquiring properties that will cause it issues down the road as that won't help with distribution growth. Because of this, investors need to keep a close eye on what BreitBurn Energy Partners buys next. What we don't want to see is a repeat of the rough starts experienced by the last two acquired properties.

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  • Report this Comment On May 28, 2014, at 2:43 PM, Pablomike wrote:

    It wasn't BBEPs fault WLL failed to deliver the CO2 facility as promised. I'd like to know if they received any post closing adjustment for WLLs failure to complete the CO2 facility on time.

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