Is Breitburn Energy Partners LP Finally a Buy?

Breitburn Energy, like most oil and gas E&P companies, has had a terrible year. Here's why things might finally be looking up.

Bob Ciura
Bob Ciura
Jun 19, 2015 at 9:11AM
Energy, Materials, and Utilities

Breitburn Permian Basin. Source: Company website

To say that it's been a rough year for Breitburn Energy Partners LP (OTC:BBEPQ) would be an understatement. The oil and gas master limited partnership's unit price collapsed 75% in the past year. Clearly, a company that loses three-quarters of its market value in the span of 12 months is in deep trouble. For Breitburn, the reason is obvious: the oil crash.

As a heavily oil-weighted upstream exploration and production company, Breitburn's financial health is closely tied to the price of oil in the United States. Crude oil's steep fall from $100 per barrel at its 2014 peak to $45 per barrel at the 2015 low brought Breitburn down along with it.

However, some signals suggest things are getting better for Breitburn Energy. Here's why Breitburn might finally be a buy again.

On firmer footing
In the first quarter, Breitburn's distributable cash flow, a non-generally accepted accounting principles measure that is more important than earnings per share when evaluating MLPs, fell 43% year over year. This is unquestionably poor performance, as the crash in oil and gas prices took its toll. Breitburn realized average sales prices of $43.62 per barrel for oil in the first quarter, down from $92.12 in the same period last year.

But Breitburn took steps to shore up its financial position, first by cutting spending: lease operating expenses fell 9% per barrel of oil equivalent, quarter over quarter. Breitburn also has hedges in place to help protect itself from further volatility in commodity prices.

This year, Breitburn is 73% hedged at an average oil price of $93 per barrel. The company's hedges drop off dramatically after 2016, so if oil and gas prices stay depressed for several years, Breitburn's recovery might not materialize. This year shouldn't be a concern, although long-term investors should understand that a prolonged period of low oil prices will suppress Breitburn's recovery.. Also, there has been notable progress in the oil market. Crude oil has rallied about 30% off its lows this year, and currently sits near $60 per barrel, in a stealth rally that few analysts are appreciating.

Financially, Breitburn has received some much-needed capital to boost its liquidity, including a $1 billion investment led by EIG Global Energy Partners. Proceeds were used to reduce debt under Breitburn's credit facility. Its borrowing base was reset to $1.8 billion. Separately, Breitburn also raised $252 million by issuing 14 million units last October. Cumulatively, these moves strengthened Breitburn's balance sheet and added much-needed liquidity at a difficult time operationally.

Plus, as it pertains to arguably the most important aspect of MLPs, the distribution, Breitburn is on stronger ground as well.

Distribution now well-covered
Due to the oil crash, Breitburn took the painful, albeit necessary, step of cutting its distribution not once, but twice. The upside to this is that the current distribution, which still yields 9%, is well covered with underlying cash flow. Last quarter, Breitburn covered its $0.50 annualized per-unit distribution by more than 2.2 times with underlying cash flow.

For all the challenges presented by falling oil prices, Breitburn still has a premier asset portfolio. Breitburn's focus is on long-lived assets with shallow rates of decline and an average reserve life of longer than 15 years. Breitburn has a foothold in the best production regions of the United States: 18% of its proved reserves are in the Permian Basin, 13% in the Mid-Continent region including Oklahoma, and another 7% in California. This high-quality asset focus allowed Breitburn's proved reserves to grow 23% at a compound annual rate from 2009-2014. Production was up 17% per year in the same time period.

While this accelerating production exacerbated Breitburn's woes when oil crashed, if and when the commodity recovers, the company will be a major beneficiary. Breitburn has had a horrible time over the past year, but for investors looking at this MLP, the future might be much more promising than the recent past. Income investors should feel confident that Breitburn's 9% distribution is covered with cash flow.