BreitBurn Energy Partners LP (BBEPQ) CFO Jim Jackson recently presented at an energy conference. With the upheaval in the oil market he wanted to address the concerns analysts and investors have of his company's ability to weather the current storm. One of his key messages was to take a closer look at the company's history in a time of crisis to see how it performs. This message gives us a lot of insight into how the company should perform this time around.
Where we stand today
Before Jackson got to his history lesson he wanted everyone to know where the company stands as it enters the current crisis. The key thing he wanted everyone to keep in mind is that heading into the slump in oil prices BreitBurn Energy Partners is pretty well hedged, which will largely insulate it from the move in oil prices. We see this on the following slide where 71% of next year's production is hedged.
Source: BreitBurn Energy Partners LP Investor Presentation
These hedges are vitally important as it keeps the company's cash flow relatively stable. We see this in the next slide as the hedges help to mitigate the volatility of commodity prices on the company's cash flow.
Source: BreitBurn Energy Partners LP Investor Presentation
As that slide shows the company's adjusted EBITDA, which is a proxy for cash flow, has been largely stable aside from trending upwards as the company acquires additional oil and gas assets. Jackson pointed this out by saying:
The fact is, with the amount of production that we have hedged, generally at any given time, if commodity prices on oil and gas were to step down, call it, $10 on oil and a similar percentage on gas on the first day of the year and they were to stay at that level throughout the year, generally our EBITDA varies by between 3% and 4%. So if you assume you are in an environment where it is $90 oil going to $80, that is about a 12% decrease in the commodity across the curve. Basically, when you run the sensitivity on BreitBurn, EBITDA changes by only about 3% or 4%. So about a third of the delta in commodity price flows through in any given period to EBITDA.
Basically, what he is saying is that for every 12% move in oil prices BreitBurn's exposure is limited to only 3%-4% due to its hedges. Further, that's the full exposure if commodity prices drop suddenly and stay at that level for a full year. It also assumes that its costs don't drop along the way, which as Jackson pointed out isn't likely as its cost structure falls when commodity prices remain in a prolonged slump. In fact, during the financial crisis its operating costs dropped 20%, which helped to mitigate some of the drop in commodity prices.
Stepping back into history
Jackson then went on to remind investors of how the company weathered the storm of the financial crisis of 2008 and 2009. As that second chart above noted the company's adjusted EBITDA was largely stable during the financial crisis. Its adjusted EBITDA went from a peak of $62 to a trough of $47 million, which was a 24% hit. This is despite the fact that oil prices plunged by more than 70% over that same timeframe.
WTI Crude Oil Spot Price data by YCharts
Meanwhile, the company also had a lot of levers to pull in order to stay afloat during the market's darkest days. Jackson pointed out that BreitBurn slashed its capex budget from $130 million to $19 million to conserve capital. It monetized and rehedged its hedge portfolio a couple of times used that cash to reduce debt. The company even halted its distribution for a quarter and restarted it at a lower rate to reflect these new hedges.
Those were dark days for the company, and the whole world for that matter, but BreitBurn Energy Partners emerged out the crisis intact. Since those days it has become an even stronger company as it is now the second largest upstream MLP in America. So, the odds are pretty good that the company will emerge out of the current crisis intact and will likely thrive again once the crisis is over.
Investor takeaway
BreitBurn Energy Partners is built to handle commodity price shocks. That's why the company hedges so much of its oil and gas production. Those hedges act as a drag during good times, but are a life raft during tough times. The company's history proves this and that same history suggests that when all the dust has settled BreitBurn Energy Partners will thrive when the energy market returns to some state of normalcy.
