There's really only one reason why investors choose BreitBurn Energy Partners (NASDAQOTH:BBEPQ). They invest in the company to get paid its oil-fueled monthly distributions. While those distributions have come down over the past few months due to weaker oil prices, the fact remains that BreitBurn's future lies in its ability to turn oil into cash for investors. With that in mind, let's take a closer look at how long the company should be able to pay distributions based on its current proved oil and gas reserves.
Turning oil into cash
As of the end of 2014 BreitBurn Energy Partners had proved reserves totaling 315.3 million barrels of oil equivalent, or BOE. What that means is that third party petroleum engineering firms have estimated that there is reasonable certainty that Breitburn's current portfolio of oil and gas producing properties will produce more than 300 million barrels of oil and gas over their lifetime. These reserves are what the company will use to keep its production flowing so that it can continue to pay monthly distributions to investors.
As the slide above notes, that production is currently flowing out of the company's wells at a rate of about 57,595 BOE per day, which equates to roughly 21 million BOE per year. What this suggests to investors is that BreitBurn's current proved reserves have a reserve life of about 15 years. To put it another way, if the company did absolutely nothing other than invest enough capex to keep its production flat, it controls enough oil and gas in the ground to keep up its production steady the next decade and a half. However, the company is hoping to do much better than that with a goal to grow its production and reserves each year. That's why it invests beyond just maintaining its production so that it can grow its reserves with a goal to more than replace what it produced each year.
Not as easy as it sounds
Over the past year BreitBurn Energy Partners has actually grown its proved reserves by a net 101 million BOE. A large part of that growth was from the QR Energy merger as the company acquired a total 132 million BOE of proved reserves last year. That sounds like remarkable growth, but it's actually not quite as good as it sounds. That's because while BreitBurn produced 14.1 million BOE it only organically replaced 9.2 million BOE through extensions and discoveries, with reserve growth further offset by negative reserve revisions of 26.1 million BOE due to weaker commodity prices. The overall result was that the company's reserve life actually declined from 17.28 years at the end of 2013 to 15 years at the end of 2014. Said another way, it's almost like the company lost more than two years' worth of oil and gas last year and didn't replace any of it. However, that's not the case, part of what happened was that QR Energy's reserve life was much lower than BreitBurn's so that when the average production rates were combined it lowered the reserve life of the combined companies with oil price related reserve revisions not helping matters, either.
That said, replacing its ability to replace its reserves is a risk that BreitBurn points out in its annual report each year. In this past year's report the company noted:
We will require substantial capital expenditures to replace our production and reserves, which will reduce our cash available for distribution. We may be unable to obtain needed capital due to our financial condition, which could adversely affect our ability to replace our production and estimated proved reserves.
Because BreitBurn pays out nearly all of its free cash flow to investors it needs to access the capital markets to replace its reserves either via acquisitions or the drill bit. That access is a growing risk to the company as weak oil prices over the past year have affected its ability to borrow money as well as issue equity. That's one reason why the company needed to seek out $1 billion in debt and equity from private equity in order to pay down its credit facility, which had grown dangerously close to the company's borrowing capacity. Even with that cash infusion the company doesn't have a lot of spare financial capacity to invest in new reserves, which could become a problem down the road.
BreitBurn has enough oil and gas in the ground to last it more than a decade at its current production rate. However, the company's plan is to continue to grow its production and its reserves for decades to come. That's not always going to be easy as the company's weaker balance sheet could hold it back, which is why it needs to be extra careful not to overpay to grows its reserves.
Matt DiLallo has no position in any stocks mentioned. The Motley Fool recommends BreitBurn Energy Partners. Try any of our Foolish newsletter services free for 30 days. 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.