Please ensure Javascript is enabled for purposes of website accessibility

Why BreitBurn Energy Partners LP Could Be About to Report a Huge Loss

By Matthew DiLallo – May 4, 2015 at 3:06PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The headline numbers could get ugly when BreitBurn Energy Partners LP reports first quarter results on May 5.

Oil and gas prices have been hammered over the past year. That's leading to not only weaker oil and gas cash flow for companies like BreitBurn Energy Partners (BBEPQ), but it's also causing the asset values of oil and gas properties to fall. Because of this simple fact of G.A.A.P. accounting, investors shouldn't be surprised if the company announces that it is writing down the value of some of its assets when it reports results on May 5. Here's why a writedown might happen and how it could impact the company in going forward. 

Investors have been warned
BreitBurn actually warned investors in its most recent annual report that a write down could be on the way. In the risk factors section of that report it highlighted this risk by saying, "Future oil and natural gas price declines may result in a writedown of our asset carrying values." The company then laid out why as it wrote:

Accounting rules require us to write down, as a non-cash charge to earnings, the carrying value of our oil and natural gas properties in the event we have impairments. We are required to perform impairment tests on our assets periodically and whenever events or changes in circumstances warrant a review of our assets. To the extent such tests indicate a reduction of the estimated useful life or estimated future cash flows of our assets, the carrying value may not be recoverable and therefore requires a writedown.

Obviously, a 50% drop in oil prices is a circumstance that warrants a review of its assets. It's also very possible that during this review the company will find that some of its assets won't deliver as previously expected and therefore it will writedown the value of these assets.

This wouldn't be the first time the company has written down assets as last year it recorded noncash impairment charges of about $149 million. The bulk of that charge, or $124.8 million, was related to its assets in Florida due to reserve adjustments and lower oil prices. However, the company also wrote down the value of other assets around the country. Like Florida, most of these adjustments were either due to reserve adjustments or lower crude prices, however some of these write downs were due to weaker well performance and others were due to expiring leases it chose not to renew.

Because so many issues can lead to a writedown BreitBurn warned:

We also may incur impairment charges in the future, which could have a material adverse effect on our results of operations in the period incurred and on our ability to borrow funds under our credit facility, which in turn may adversely affect our ability to make cash distributions to our unitholders.

At the moment that credit facility is safe as BreitBurn has locked in its liquidity through next April as part of its recent capital raise. That said, big writedowns in 2015 could be what leads to its borrowing base being reduced in 2016. That's why investors should at least keep an eye on any big write down it has in this, or subsequent quarters.

Following the leader?
One reason why it's not beyond the realm of possibilities that a big writedown could occur in the first-quarter is because we've already seen a number of these taken by others in the industry, including upstream MLP leader LINN Energy (LINEQ). In LINN's first quarter report it took a $533 million, or $1.61 per unit noncash impairment charge. Most of the impairment was split between its assets in Texas and those in California, which just happen to be two areas where BreitBurn also operates. As a result of this writedown, as well as other factors, LINN Energy's borrowing base is expected to be cut this spring from $5.9 billion to around $5.2 billion and the company expects another $300 million cut to its borrowing base during the fall redetermination, unless commodity prices substantially improve.

Investor takeaway
BreitBurn investors can almost certainly expect that the company will report an asset writedown when it reports results this week. However, in the near-term the writedown won't matter much as it has already locked in its bank borrowing base through next April. The real issue is that future writedowns could lead to a credit crunch further down the road as the assets being written down are part of what factors into its overall borrowing base.

Matt DiLallo owns shares of Linn Energy, LLC. The Motley Fool recommends BreitBurn Energy Partners. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Linn Energy, LLC Stock Quote
Linn Energy, LLC
LINEQ
Breitburn Energy Partners LP Stock Quote
Breitburn Energy Partners LP
BBEPQ

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
356%
 
S&P 500 Returns
118%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 11/28/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.