BreitBurn Energy Partners L.P. (NASDAQOTH:BBEPQ) announced Sunday night that it had received a $1 billion strategic investment by EIG Global Energy Partners. The infusion includes both a debt and an equity component that will enable the company to pay down its credit facility, which was almost maxed out due to the company's acquisition spree over the past few years. Unfortunately, this investment comes at a pretty hefty cost, including another 50% cut to its distribution.
The wrong side of the market
BreitBurn Energy Partners' back was against the wall after it spent more than $4 billion on acquisitions over the past two years, including its $3 billion merger with QR Energy. Several of these deals were put on the company's credit facility, which it had planned to pay down over time by issuing debt and equity in the public markets. That proved to be problematic as the market turned before it could refinance the debt on terms it was comfortable with. That left the company with a potential liquidity issue this April as BreitBurn's credit facility was scheduled to be redetermined by its banks. Because of the steep drop in oil prices there was a concern that BreitBurn's $2.5 billion facility would be cut below the $2.2 billion it had already borrowed forcing it to quickly find the cash needed to pay off the difference.
With the strategic investment by EIG Global Energy Partners, which includes $350 million of perpetual convertible preferred equity and $650 million of senior secured notes, BreitBurn was able to raise the cash it needs to pay down this facility before it was redetermined. While the terms aren't really all that great, the company is paying a pretty high interest rate on both the debt and the preferred equity, the deal does provide the company with the capital it needs to right size its balance sheet. Further, as part of the deal Breitburn is amending its facility to reset the borrowing base to $1.8 billion through April of next year and will be paying down all but $1.24 billion of the facility, giving the company substantial liquidity to withstand a potentially prolonged downturn in the oil market.
Preparing for the future
It's become very apparent that BreitBurn is concerned that it is in for a long market downturn. This is why the company also announced that it is cutting its distribution again by 50% just two months after cutting the payout 52%. In commenting about this further reduction the company said that this is part of its plan to increase its liquidity and strategic flexibility so that it will not only endure the current downturn but also take advantage of opportunities that should arise in the year ahead.
The company plans to use its excess liquidity, both from paying down its credit facility as well as excess cash generated by its operations to acquire oil and gas assets at depressed prices that are expected to become available as the downturn rages on. However, what's interesting about this approach is that it's quite the opposite approach of peer Linn Energy LLC (NASDAQ: LINE), which recently raised $1 billion in equity capital for acquisitions by taking on a strategic partner. The key difference is that Linn's deal was done off balance sheet as it set up a strategic entity with its partner to make these future deals. It was able to pull off such a deal, as well as a similar deal for drilling capital, because it had much more flexibility on its credit facility. Because BreitBurn's back was against the wall it was forced to take a less than optimal deal to weather the current storm.
BreitBurn, like a lot of other energy companies, had too much debt when oil prices turned south. Its debt burden was tighter than most as its credit facility was almost maxed out, leaving it with little flexibility when it needed it the most. This is forcing the company to make some really tough decisions and take tough deal terms so that it can take advantage of opportunities it sees on the horizon. It's not an ideal situation, but the company is dealing with the downturn the best it can after digging itself into a bit of a hole right before the market turned south.