BreitBurn Energy Partners, L.P. (BBEPQ) recently reported weaker-than-expected fourth-quarter results. The company experienced a number of challenges during the quarter that caused its production to remain flat while its distribution coverage ratio fell. Let's take a deeper look at what went wrong.
Drilling down into the numbers that matter
The most important number to investors in BreitBurn Energy Partners is the company's distribution coverage ratio. That number, as I mentioned, fell on the quarter from 1.31 times to 0.93 times. That's below the 1.0 times that I noted was the number to watch when previewing the quarter.
One of the reasons the coverage ratio slipped was because production didn't grow on the quarter. The company's production averaged just 33.5 MBoe/day in the quarter, which was slightly less than the 33.7 MBoe/day the company averaged in the third quarter. Among the company's production challenges on the quarter according to COO Mark Pease were "new well production timing, the delayed completion of the Libby Ranch carbon dioxide facility, difficult winter weather and downtime on a few key wells."
Those challenges hurt both production growth and cash flow on the quarter. The big concern is knowing whether these are temporary or if investors should expect more problems in the future.
A closer look at what went wrong
BreitBurn Energy Partners noted that new well production timing was an issue in the quarter. The company found that it's taking two to three months longer than originally forecasted for its wells in Texas to reach full production after completion. Because of this the company's production was 700 BOE/d lower than anticipated. While that's a disappointment for the fourth quarter, now that the company is aware of the issue it can simply factor that into future guidance.
Another big issue in Texas last quarter was the weather. The company experienced freeze-offs and power outages that accounted for 175 BOE/d of lost production in the quarter. BreitBurn Energy Partners wasn't the only energy company affected by the weather, nor is this the first time weather affected results. This issue is likely to continue as a recurring theme for the company, as it is for most other energy companies.
The final issue the company experienced this past quarter was at its newly acquired Postle assets in Oklahoma. The assets, which were acquired from Whiting Petroleum (WLL), had some production challenges in the quarter. This caused production to be 600 BOE/d below forecast. The issue was at the Libby Ranch carbon dioxide development project, which was operated by Whiting Petroleum through completion and experienced a delayed start. The project was supposed to come online in June but didn't come online until November. That delay significantly affected the supply and injection of carbon dioxide.
In order to address the gap in carbon dioxide supply, BreitBurn Energy Partners amended its contract with ExxonMobil (XOM -0.21%). Under the amended contract ExxonMobil will now supply Postle with an additional 10 million cubic feet per day of carbon dioxide, which started this past January. In addition to that, ExxonMobil will provide another 15 million cubic feet per day starting in 2015. While BreitBurn Energy Partners remains confident that its production will increase, this is certainly an area investors need to watch in the future.
Production shortfalls are to be expected at an energy company. The weather will always be a factor and new wells don't always perform as expected. So, while Breitburn Energy Partners reported a down quarter, it wasn't a complete wash. The company still remains on track to grow production in 2014 and its distribution is still very solid despite a rougher than expected end to what was a pretty solid year.