Becoming America's largest oil-weighted MLP seemed like a good idea at the time. But the dramatic drop in the price of oil over the past few months has turned the best laid plans of BreitBurn Energy Partners (OTC:BBEPQ) awry. That was pretty evident by the company's fourth-quarter earnings report, which saw a notable degradation in the company's oil-fueled cash flow. With that in mind, here are three key takeaways from that earnings report.
No. 1: Hitting peak oil production right at the peak
BreitBurn Energy Partners delivered "good news, bad news" when it came to fourth-quarter production. First, the good news, which was that the company set a record for quarterly oil production as it produced 2.3 million barrels of oil in the quarter. That was up from just 1.9 million in the prior quarter thanks to its acquisition of QR Energy, which closed in the quarter.
The bad news, however, is the fact that the company hit its oil production peak at the same time that the price of oil did this:
That deep drop in the price of oil really affected the company's oil-driven cash flow.
No. 2: Oil crash cut deep
One of the most important metrics for MLPs like BreitBurn Energy Partners is its distribution coverage ratio. This tells investors whether or not the company is earning enough money to cover its distribution. Last quarter the company failed miserably as the plunging price of oil cut into the company's realized oil price.
BreitBurn Energy Partners only realized $69.36 per barrel of oil in the quarter, which was a big drop from the $90.12 per barrel it realized just a quarter ago. This caused the company's oil-levered cash flow to also drop as distributable cash flow fell from $53.3 million last quarter to $43.9 million in the fourth-quarter. That drop led to a big shortfall in the distribution coverage ratio, which was just 0.83 times, meaning the company paid out 17% more than it earned. That's a big reason why the company cut its 2015 distribution by 52%.
No. 3: Resetting the business for 2015
In slashing the company's distribution BreitBurn Energy Partners is basically hitting the reset button on its business. After spending $2.7 billion last year to bolster its oil production, it now has to regroup as oil is no longer as lucrative to produce as it was when he company went on its acquisition binge. As a result, the company is also cutting back its spending and shifting to a much more conservative approach. That's evident by the fact its cutting its capital spending plan from $389 million it spent last year to just $200 million in the year ahead.
The big reset is to the distribution plan. Gone are the days where the company was comfortable paying out more than it earned, as BreitBurn had a long history of sub-1.0 times distribution coverage ratios. Instead, the company is planning to have a robust 1.35 times coverage ratio in 2015 leaving it with upward of $80 million in excess cash flow after paying its reset distribution and funding its dramatically reduced capital spending plan. That excess cash flow should provide the company with some cushion as it has a pretty big debt pile to maintain after years of pursuing oil-focused growth.
At the time, BreitBurn Energy Partners' decision to focus on oil to fuel its future seemed like the right plan. However, the upending of the oil market has derailed its plans and forced the company to hit the reset button. Now, the company needs to execute on its new plan and keep its debt in check as it strives to resume growth from its newly reset base position. It really has no choice as no one knows for sure when, or even if, the price of oil will recover to its previous lofty price.