What: Units of Breitburn Energy Partners (NASDAQOTH:BBEPQ) were down 20% at 11:00 a.m. EST Tuesday after the company suspended its monthly distribution. In first reducing and then suspending its payout, the upstream MLP appears to be following the blueprint set out by sector leader LINN Energy (NASDAQOTH:LINEQ).
So what: Citing the ongoing weakness in oil prices, Breitburn Energy Partners has chosen to suspend cash distributions to unitholders effectively immediately. While the company acknowledges that this will be difficult for the company's income investor set, it believes that this is a prudent move for the long-term viability of the company given its weak balance sheet and the current commodity price uncertainty. Breitburn plans to redirect the $111 million in annual distribution savings toward debt reduction or investments that will better position the company for the future, which is the same reasoning LINN Energy gave when it suspended its payout.
Despite the market's reaction, Breitburn Energy's decision to suspend its payout really comes as no surprise. First of all, Breitburn has suspended its payout in the past, with the company forgoing distributions from February of 2009 through May of 2010 due to the fallout of the financial crisis. In addition to that, after upstream MLP leader LINN Energy suspended its payout in October in order to preserve cash during the downturn, LINN made it much easier for its smaller rivals to follow suit without appearing to be the weakest link.
Now what: It could be quite some time before Breitburn Energy Partners resumes paying cash distributions to investors. Not only do oil prices need to rebound and stabilize, but the company needs to make some permanent adjustments to its balance sheet and business model. Until those changes are made, investors are better off watching this one from the sidelines.