Oil and gas MLP BreitBurn Energy Partners L.P. (NASDAQOTH:BBEPQ) is expected to report its second-quarter results this Thursday before the market opens. Given what we've been seeing from its oil and gas peers that have already reported, we have a pretty good idea of what BreitBurn's report might contain. Here are three things that investors can almost bank on seeing in that report:
1. The suspension of its distribution
While BreitBurn has already cut its distribution twice, there is a real chance it will suspend the payout when it reports second-quarter results. That expectation is largely based on the fact that upstream MLP leader LINN Energy (NASDAQOTH:LINEQ) suspended its payout when it reported second-quarter results. This leaves BreitBurn and other upstream MLP peers with little incentive to maintain their payouts.
That said, BreitBurn already is on track to generate $100 million in excess cash flow this year after paying its distribution, leaving it with one of the strongest coverage ratios in its peer group. So, it doesn't necessarily need to cut its distribution, but given the recent weakness in oil and the outlook that its price could remain weak for a couple more years, it would make sense to conserve as much cash as possible to reduce leverage. Furthermore, there is also a historical precedent as BreitBurn suspended distributions during the financial crisis to improve its balance sheet.
2. Better-than-expected cash flow
One of the positive developments over the past quarter in the oil industry has been the significant headway oil companies have made on reducing costs. LINN Energy's second-quarter results were a prime example of this as it was expected to report a $20 million shortfall in distributable cash flow. However, LINN was able to drive an 18% reduction in its operating expenses, which enabled it to produce $71 million in excess cash flow.
It's quite likely that BreitBurn Energy was also able to deliver a significant reduction in its costs, which should improve its free cash flow expectations not just for the quarter but for the full year.
3. Some discussion or action on improving its balance sheet
BreitBurn Energy Partners was very busy during the first quarter raising $1 billion in capital to improve its balance sheet as it paid down its worrisome credit facility. That said, the company has a ways to go as it still has too much leverage for the current operating environment. Because of this, it needs to take additional actions to improve its balance sheet.
One action it could take is to again follow in LINN Energy's footsteps and buy back its bonds. Over the past month, LINN Energy bought back $599 million in bonds at a 35% discount. Ideally, investors would like to see BreitBurn also use some of its excess cash flow to buy back bonds at a discount. In addition, it could also follow another of LINN Energy's leads and seek to sell or trade its acreage in the Permian Basin instead of developing it internally. Proceeds from the sale, or the additional cash flow from a trade, could then also be used to buy back outstanding bonds or further pay down its credit facility to improve its balance sheet.
Given the reports of its peers, there's an expectation that BreitBurn Energy Partners' second-quarter results will largely mirror those reports. As such, it wouldn't be surprising to see the company follow LINN Energy's lead and cut its distribution and use that excess cash to improve its balance sheet. While it's a move that will sting in the short term, it should help ensure that the company makes it through the downturn without ending up in bankruptcy should oil prices remain weak for a few more years.