Oil and gas companies like BreitBurn Energy Partners LP (BBEPQ) face many of the same risks. Oil prices, regulations, and cost inflation are common risks found within the annual reports of almost every energy company on the planet. In addition to these common risks energy companies also have their own specific set of risks that can be the difference between delivering market performance or awful underperformance.
BreitBurn Energy Partners has a number of these more specific risks and one factor that investors should keep an eye on is BreitBurn Energy Partners' customer concentration risk. This is due to the fact that just three customers account for a whopping 40% of its sales. Let's drill down a bit closer to see if trouble could be ahead.
Three key customers
In BreitBurn's annual report it informed investors that:
In 2014, we depended on three customers for a substantial amount of our sales. If these customers reduce the volumes of oil and natural gas that they purchase from us, our revenue and cash available for distribution will decline to the extent we are not able to find new customers for our production. In addition, if the parties to our purchase contracts default on these contracts, we could be materially and adversely affected.
That's a lot of concentration among its top customers. If one of them went under it could have a devastating impact on BreitBurn Energy Partners as it would need to find new takers for its oil and gas. That said, this fear isn't quite so grave once we keep reading and see the names of these key customers. BreitBurn reported that,
In 2014, Shell Trading [or Royal Dutch Shell (RDS.A) (RDS.B)] accounted for approximately 22% of our net sales revenues, Phillips 66 (PSX 3.58%) accounted for approximately 10% of our net sales revenues and Marathon Oil Corporation (MRO -0.08%) accounted for approximately 8% of our net sales revenues.
Having Shell pay it for 22% of its sales is actually not all that concerning given that the big oil giant is one of the world's largest oil companies. Further, Shell boasts a Double-A rated balance sheet, ranking it in the top three of the five supermajors. So, clearly there's not much to be worried about Shell sending BreitBurn checks totaling 22% of its sales.
Likewise, both Phillips 66 and Marathon Oil are well capitalized energy companies. Phillips 66 is one of the country's largest independent refiners while Marathon is a top independent oil and gas company. Having these two strong energy companies hand BreitBurn another 18% of its revenue isn't too concerning either. Still, investors should be aware of this and keep an eye on this risk in the future as any trouble hitting these companies could trickle down to BreitBurn.
Michigan is more important than you think
While BreitBurn has a lot of concentration among its top three customers, these sales aren't its only customer concentration risk. In that same section BreitBurn also highlighted another concentration risk by pointing out that:
Natural gas purchase contracts account for a significant portion of revenues relating to our Michigan, Indiana and Kentucky properties. We cannot assure you that the other parties to these contracts will continue to perform under the contracts. If the other parties were to default after taking delivery of our natural gas, it could have a material adverse effect on our cash flows for the period in which the default occurred. A default by the other parties prior to taking delivery of our natural gas could also have a material adverse effect on our cash flows for the period in which the default occurred depending on the prevailing market prices of natural gas at the time compared to the contractual prices.
While BreitBurn doesn't talk about it as much due to its recent focus on oil, the company's natural-gas-rich position in Michigan is actually very important to the company. In fact, its Antrim Shale position accounts for more than 15% of the company's proved reserves, and it's the only field that holds that distinction. So, while this position doesn't deliver the margins that its oil fields produce, it's a key field as it provided 16% of the company's total production in 2014.
So, if one of the company's gas customers were to default it could have a noticeable impact on BreitBurn's cash flow. It would force the company to find new takers for its gas, and they might not pay BreitBurn as much as it had been receiving.
BreitBurn Energy Partners has a lot of customer concentration as just three customers make up 40% of its sales. On top of that the company's position in the Antrim Shale in Michigan is more important than investors realized as it's the only position that's more than 15% of production and reserves. A key customer default or issues with keeping production flowing could cause problems for BreitBurn Energy investors down the road.