Acquisitions fuel Breitburn Energy Partners L.P.'s (NASDAQ:BBEP) growth. Over the past three years the company has acquired over $4.5 billion in oil and gas properties, which have more than doubled the company's proved reserves and production. Given its appetite for such purchses, the company understandably would like to take advantage of the current market downturn to be an active buyer. Breitburn CEO Hal Washburn made the abundantly clear on the company's latest quarterly conference call.
Growing more optimistic on acquisitions
When oil prices plunge oil and gas companies are forced to to take a hard look at their asset base and liquidity. Many companies realize they need to improve liquidity, and the best way to do that is to sell mature assets, which plays right into the hands of a company such as Breitburn as it seeks to acquire mature assets.
That being said, energy companies have been much slower to shed assets in this market than in past downturns. As Washburn stated:
The market is still adjusting to the rapid decline in oil prices from last year and earlier this year, so you're not seeing as many deals actually being done at this level, although things appear to be picking up. I think sellers' expectations are becoming more reasonable and buyers' expectations are settling in. We expect to see that increase over the course of the year, and we are starting to see that.
As this situation develops, Washburn said:
We're starting to see a lot of interest in different areas and hearing that certain properties that we think would fit quite well in Breitburn could be coming on the market. So we expect to be opportunistic. ... We'll hope to be successful in some good acquisitions that add to our existing operations and are accretive to our unitholders. We'll just see how that market plays out. We're optimistic that it's becoming more of a market where you can transact.
Acquisitions that drive value creation would be key for Breitburn by fueling growth and possibly solving a big problem facing the company.
Acquisitions: The key to balance sheet improvement
Aside from driving production and reserves growth, acquisitions could also improve Breitburn's balance sheet. This is because the company plans to issue equity to pay for deals rather than using more debt. Washburn suggested Breitburn would "Look at acquisitions as a way to delever balance sheet, so I would say that over equitizing or otherwise financing acquisitions of size, it would make sense."
The company has previously used both debt and equity to fund deals, but it has used more debt than it should as it took advantage of its inexpensive credit facility to fund several deals. Now that its credit facility has limited borrowing capacity, BreitBurn is looking to use more equity to fund deals, which would shift its debt-to-equity ratio more toward the equity side. As the chart below shows, that ratio has weakened over the past year as the downturn has drastically reduced the equity value of the company's oil and gas assets.
Nonetheless, Breitburn Energy Partners isn't in a rush to make a deal. Washburn said the company has "a lot of opportunities and we have a business that runs quite well without any acquisitions in the next few years, but we also expect to make acquisition." Rather than deal making for deal making's sake, Breitburn is looking for the right fit within its business plan, which is to acquire an underutilized asset that it can exploit by investing to develop the asset to its full potential.
Acquisitions are an important source of growth for Breitburn, which is why it hopes to take advantage of current market conditions to be an active buyer. Furthermore, it sees acquisitions as an opportunity to delever its balance sheet, which has become laden with debt after management used debt to make several deals over the past few years. While the buying market has been slow to develop, Breitburn is optimistic that opportunities are on the horizon.
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.