BreitBurn Energy Partners L.P. (BBEPQ) reported its second-quarter results before the market opened on Thursday. The oil and gas MLP's results were right in line with its guidance as it cut costs in an effort to mitigate some of the oil price weakness. The company also provided updated guidance for the second half, which will see the company generate strong distributable cash flow enabling it to keep its distribution intact for the time being.
A look at the numbers
BreitBurn's production averaged 55,100 barrels of oil equivalent per day, or BOE/d, during the quarter, which was right in-line with its guidance. However, that did represent a slight decline from the first quarter when production averaged 56,000 BOE/d. Driving this decline was oil as production fell quarter-over-quarter as the company allowed some of its production to naturally decline.
Thanks to its strong oil and gas hedges and significant cost reductions BreitBurn produced $58.5 million, or $0.27 per unit, in distributable cash flow during the quarter. While that's down from the $60.7 million it produced last quarter, it's up from $52.7 million in the second-quarter of last year due to acquisitions. Given BreitBurn's current monthly distribution rate of $0.04166 per unit, the company's distribution coverage ratio was a very strong 2.16 times during the current quarter. This suggests the company is producing more than double the cash flow that it needs to support its current distribution rate to investors.
One of the key drivers propping up the company's cash flow is the cost reductions it has been able to capture. During the quarter its lease operating expenses fell 6% over the prior quarter and are now down 14% year-over-year. That's helping the company mitigate some, but certainly not all, of the oil price drop.
In addition to working to reduce costs, BreitBurn has undertaken several other actions to address issues stemming from the challenging market environment. One of the areas it addressed during the quarter was its balance sheet and overall capital structure by closing a $1 billion strategic investment. As a result of that transaction the company paid down and reset the borrowing base on its credit facility and now has $500 million of liquidity on a $1.8 billion borrowing base. Further, given that the company is generating excess cash flow after paying distributions its balance sheet should improve as it intends to use some of that cash to repay bank debt.
A look at the outlook
BreitBurn Energy Partners is taking a fairly conservative approach to the second half of the year as its planning on oil averaging $50 per barrel with natural gas averaging $3 per Mcf. However, it's worth pointing out that at the moment oil is at $45 per barrel and gas is $2.75 per Mcf with oil really growing weak over the past month. That said, 77% of its production is hedged for the remainder of the year so the downside is somewhat muted.
Given its commodity price expectations the company is planning for its production to be roughly flat to slightly down during the second half of the year. At that guidance range, the company expects distributable cash flow to be $135 million, or $0.62 per unit, at the high end and $105 million, or $0.48 per unit, at the low end. That works out to a coverage ratio of 2.47 times to 1.92 times, respectively. What this also suggests is that the company doesn't currently have plans to further cut or suspend distribution payments in 2015.
Investor takeaway
This has been a very challenging year for BreitBurn Energy Partners as the significant downturn caught it off guard. The company has been working to address its issues, namely its weak balance sheet, but still has work to do if oil remains weak. Further, if that oil price weakness does persist then it's still quite possible that BreitBurn's distribution could be at risk of being cut again or suspended until conditions actually do improve.
