Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.
What: Breitburn Energy Partners (BBEPQ) today continued its painful slide today, with a 14.4% decline on very heavy volume. This is just one painful day among many as this oil and gas producing master limited partnership has cratered 66% in the past three months alone.
So What: The main cause of today's crash is the continued collapse of oil prices. West Texas Intermediate (the U.S. standard price) dropped another 4.2% today, to $55.38/barrel. Mounting concerns over a glut of oil overwhelming weaker demand growth has crude markets declining on a near-daily basis.
Those concerns are fueled by statements such as those made over the weekend by Suhail al-Mazrouei, energy minister for the United Arab Emirates. Al-Mazrouei told Bloomberg that OPEC would "wait for at least a quarter" before reconsidering its decision to maintain production unchanged, even if oil plummets another 33% to $40 per barrel.
Now What: Oil markets are periodically rocked by severe volatility, as seen again in recent months. It happened during the financial crisis, and it will almost surely happen again sometime in the future as well.
Investors should focus on the fact that Breitburn's current price represents a potential opportunity to buy high-quality oil and gas assets at far below their future value. For example, the MLP is trading at just 4.5 times its last 12 months' distributable cash flow. In addition, the MLP is now valued at just 31% of its last standard measure, which calculates the future cash flows from its oil and gas reserves discounted at 10% annually.
That is not to say that the recent crash in Breitburn's unit price is not somewhat justified. Breitburn's distribution coverage ratio over the past year has been an unsustainable 0.95, and failure of crude prices to recover would likely result in a distribution cut sometime in 2015. In addition, the lower price of crude means future cash flows from Breitburn's fields might be lower than previously anticipated. However, Breitburn is trading at a 44% discount to the value of its oil and gas in the ground. Thus, even if the MLP is forced to cut its distribution in 2015, Breitburn still represents a well-managed, fast-growing oil and gas producer with a generous monthly distribution.
