Breitburn Energy Partners LP Digs In for a Tough Year

Image source: Flickr user Jonathan C. Wheeler.

With the downturn in the oil market worsening as it heads into its second year, it's taking a big toll on upstream MLPs, which have seen their unit prices obliterated. That's certainly the case at Breitburn Energy Partners (BBEPQ), which is down more than 90% over the past year. That said, operationally the company is actually doing a solid job thanks to strong oil hedges and its cost reduction efforts. The concern, however, is with its balance sheet, which is weighed down by debt, especially bank debt. It's the company's ability to address that situation that will make or break it should the downturn continue to rage on.

Breitburn Energy Partners results: The raw numbers

Data source: Breitburn Energy Partners.

What happened with Breitburn Energy Partners this quarter? 
Breitburn's operating and financial results were actually very strong, all things considered:

• Breitburn's production increased over last quarter with the company delivering solid growth in oil, natural gas, and NGL production. This was primarily due to very good drilling results as well as the fact that capital costs have gone down enabling the company to drill more for the same amount of capital.
• Earnings increased due to higher commodity hedging gains, lower operating costs, and higher production volumes, which more than offset weaker commodity prices.
• Breitburn received $141.8 million in commodity hedging gains, which was 40% of total revenue during the quarter.
• Lease operating costs dropped to $17.74 per barrel of oil equivalent, or BOE, during the quarter, which was 10.5% lower than last quarter and at the low-end of its guidance. Meanwhile, general and administrative expenses fell 9.4% to $2.84 per BOE, which was the lowest level in company history.

What management had to say 
CEO Hal Washburn, commenting on the company's results, said:

We were very proactive last year in adapting to a volatile commodity price environment. We had strong operating and financial results, with production coming in at the high end of our guidance and our capital, operating, and G&A costs performing in line with or better than our guidance. We were also one of the first oil and gas companies to raise significant capital last year, and through our financing and cost cutting efforts, we were able to reduce our bank borrowings by nearly $1 billion in 2015.

Operationally, Breitburn had a good year in 2015. Production not only increased, but was at the high-end of its guidance range. Meanwhile, costs came down, which when combined with its very strong oil hedges enabled the company to generate a lot of free cash flow. Further, that cash flow, as well as its ability to raise substantial capital early in the year, enabled the company to significantly reduce its bank borrowings.

Having said all that, with oil where it is right now, and no visibility that prices will improve, Breitburn remains in a tight spot because it still has a significant amount of bank debt. As of this week it had borrowed $1.2 billion of its $1.8 billion bank credit facility. That's a concern because its banks are scheduled to redetermine that facility in April and Breitburn expects its available credit to be significantly reduced. The question that remains to be answered is how much it will be reduced and in particular if that cut is below the $1.2 billion the company has already borrowed. If that's the case the company would need to quickly repay the difference, which might cause it to unload assets at fire sale prices or even be forced to declare bankruptcy.

Looking forward 
That looming credit deadline is really limiting the company's flexibility. As such, it has significantly cut its spending plan for 2016. Washburn noted that,

In light of the ongoing weakness in commodity prices, we are cutting our 2016 capital program by 60% to approximately $80 million, but because of our quality, long-lived, low-decline assets we only expect a 9% reduction to our 2016 production.

In reducing spending to such a degree, Breitburn will continue to generate a lot of cash flow in 2016, due in part to the fact that it has a hedge portfolio that was valued at $666 million at the end of last year. While that's an ominous number, that's cash the company can expect to receive should oil remain depressed. Whether that's enough to see it through to the other side remains to be seen.