BreitBurn Energy Partners L.P. (BBEPQ) recently reported rather solid second-quarter results thanks to strong cost-cutting measures. That said, the company has a tough hill to climb as the low oil price has forced it to take action. Here are four things CEO Hal Washburn said on the company's second-quarter conference call that details its recent steps and future plans.
1. We're performing well
One thing that has really been lost in the mess of plunging oil prices is that operationally BreitBurn Energy Partners has been performing well. According to Washburn:
I am pleased to report that we had another solid quarter with production, cost reductions, and adjusted EBITDA in line with our 2015 guidance. Of particular note was adjusted EBITDA which was 10% higher than the prior quarter due to higher oil sales revenue and lower lease operating and G&A expenses. We've now fully integrated the QR Energy assets into our operations and they are performing as we had expected.
In the midst of the market turmoil, BreitBurn has focused on getting its costs down by very quickly integrating QR Energy into the fold. It has also worked hard to meet its production targets and cost reduction goals to generate more cash flow to help mute some of the oil price impact. It has met all of its goals so far, which is an unnoticed accomplishment.
2. We see lower oil prices in the second half
That being said, the company still sees tough times ahead as it does not see an improvement in oil prices this year. Instead, Washburn said that the company has now "[...] reduced our WTI and Brent pricing assumptions by $10 per barrel to $50 per barrel WTI and $55 per barrel Brent and reduced natural gas pricing assumptions by $0.50 per Mcf to $3 per Mcf to better reflect current commodity prices."
In addition, he said:
Using our new pricing assumptions and our current distribution levels we expect our distribution coverage ratio to range between 1.92 times and 2.47 times for the second half of 2015.
The company is now forecasting a much lower oil price for the second half of the year, which at the moment is optimistic given that WTI is down to about $40 per barrel. It doesn't believe, though, that its distribution is at risk this year even in a more pessimistic scenario as it has a very strong coverage ratio. In fact, it expects to generate $100 million in cash flow after paying its distribution thanks to its strong hedge position.
3. We've stabilized our financials
One of the reasons the market continues to be worried about BreitBurn is because it has a large debt load, which is a real weight in the current oil price environment. This is not lost on BreitBurn as Washburn reminded investors that it secured a $1 billion investment from EIG Global Energy Partners, which enabled it to reduce the borrowings under its credit facility. As a result of that investment, it now has about $500 million in liquidity on that facility on a borrowing base set at $1.8 billion. Furthermore, that base won't be redetermined by its banks until next April. This, Washburn believes, gives the company plenty of flexibility in the current market environment.
Also, he pointed out that:
During our 27 year history we've managed through several downturns and know what it takes to succeed through these cycles. Our business plan has been to acquire, develop and produce mature oil and gas assets for the long-term benefit of our unitholders and we intend to continue successfully executing that strategy.
In other words, the company has been through tough times before and it has always made it through. It plans to do the same this time, which is why it is positioning itself to drive long-term returns to investors.
4. We intend to develop our Midland Basin acreage with some help
One of the ways the company plans to drive long-term returns is to develop its acreage position in the Midland Basin. While it has the option to sell or trade this position, Washburn said:
[...] We continue to believe that there is far more value to be created for our unitholders by developing our acreage position in a smart, capital efficient manner. We are in active discussions concerning the horizontal development of our primary development area. While there is no assurance that we will complete a transaction, we are excited about the level of interest shown in the development potential of our position which we believe will deliver attractive economics even in a lower commodity price environment.
Washburn believes that the company can create more value from this position by developing it with a partner than by simply selling the acreage position it built up. That's because the economics of developing this acreage are still compelling, even in the current environment.
BreitBurn Energy Partners' CEO is clearly not as worried about the company's ability to survive the storm in the oil market. He believes it is operating well and has plenty of liquidity. It's why he would rather develop the company's compelling Midland Basin position internally than simply sell it to pay down debt as he believes it's worth far more to the company over the long term as an oil-producing asset than a debt reduction tool.