What: Shares of Breitburn Energy Partners (BBEPQ) took a 14% nosedive today after Linn Energy (LINEQ) announced in its earnings presentation that it was recommending to suspend its distribution. Shares of Linn took an even bigger tumble, ending the day 26% down.
So what: Breitburn Energy and Linn are thought to be twins in the oil and gas space. They are both upstream master limited partnerships that pay out high-yield distributions to their shareholders. To get where they are today, both companies have taken on large debt loads to finance the acquisition of already-producing oil fields from other producers. Also, they have protected their cash flows by building portfolios of futures contracts for that oil and gas production.
So when Linn announced that it was recommending to suspend its distribution to preserve cash flow, despite the fact that Linn's cash flow remained strong this quarter, it suggests that management sees low oil prices sticking around for a while, which could really hurt once those futures contracts get used up.
Many investors appeared to have fled shares of Breitburn Energy Partners in anticipation that it, too, would need to suspend its payments to shareholders. It probably doesn't help Breitburn's case that it has already slashed its distribution twice in order to meet its debt covenants, either.
Now what: This is one of those cases where a company's stock is being pushed around by peers in the industry. This does not necessarily mean that Breitburn will be forced to suspend its distribution, but it goes to show that oil producers like Breitburn and Linn underestimated the length and severity of the slide in oil prices.
I guess we'll just have to wait and see if this bad omen comes true when Breitburn reports its own earnings on Aug. 6.
