Feeling The “Burn”…..A Potential Buy

• ToddSullivan
• September 10th, 2009

This potential pick really might pay off big….Breitburn Energy Partners (BBEP) just 2 years ago was trading in the mid $30 range. Then came the combined collapse in natural gas (UNG) and oil prices (USO).  Add in halted distributions and a lawsuit by a 40% owner and now we have a $10 stock. We also have a potential ValuePlay.

About:

We are an independent oil and gas partnership focused on the exploitation, development and acquisition of oil and gas properties in the United States. We are a Delaware limited partnership formed on March 23, 2006. Our general partner is BreitBurn GP, a Delaware limited liability company, also formed on March 23, 2006, and our wholly-owned subsidiary since June 17, 2008. The board of directors of our General Partner has sole responsibility for conducting our business and managing our operations. We conduct our operations through a wholly-owned subsidiary, BOLP and BOLP’s general partner BOGP. We own all of the ownership interests in BOLP and BOGP.

Prior to June 17, 2008, the membership interests in our General Partner were held by BreitBurn Management. In addition, prior to that date, 95.55 percent of the membership interests in BreitBurn Management were held by Provident and the remaining 4.45 percent of the membership interests in BreitBurn Management were held by BreitBurn Energy Corporation, a California corporation wholly-owned by the Co-Chief Executive Officers of our General Partner. On June 17, 2008, we, BreitBurn Corporation, BreitBurn Management, Provident and certain of its subsidiaries completed a series of transactions (the “Purchase, Contribution and Partnership Transactions”), pursuant to which, among other things, our General Partner and BreitBurn Management became our wholly-owned subsidiaries, the economic portion of the General Partner’s 0.66473 percent general partner interest in us was eliminated and our limited partners were given a right to nominate and vote in the election of directors to the Board of Directors of the General Partner. The General Partner has no other economic interests, does not conduct other operations, and has no assets or liabilities. See Part I—Item 1 “—Business —Ownership and Structure” in our Annual Report for a further discussion of the Purchase, Contribution and Partnership Transactions.

BreitBurn Management manages our assets and performs other administrative services for us such as accounting, corporate development, finance, land administration, legal and engineering. See Note 5 for information regarding our relationship with BreitBurn Management. In connection with the acquisition of Provident’s ownership in BEC by Metalmark Capital Partners, Greenhill Capital Partners, a third party institutional investor and members of senior management, BreitBurn Management entered into the Second Amended and Restated Administrative Services Agreement to manage BEC’s properties for a term of five years. In addition, we entered into an Omnibus Agreement with BEC detailing rights with respect to business opportunities and providing us with a right of first offer with respect to the sale of assets by BEC.

Here is the organization of the company:

Let’s look at each element:

1- Oil/Gas prices:

Our revenues and net income are sensitive to oil and natural gas prices. Our operating expenses are highly correlated to oil and natural gas prices, and as commodity prices rise and fall, our operating expenses will directionally rise and fall. Significant factors that will impact near-term commodity prices include global demand for oil and natural gas, political developments in oil producing countries, the extent to which members of the OPEC and other oil exporting nations are able to manage oil supply through export quotas and variations in key North American natural gas and refined products supply and demand indicators.

In the second quarter of 2009, WTI averaged $60 per barrel, compared with approximately $124 per barrel a year earlier. In the first six months of 2009, WTI averaged $52 per barrel, compared to $111 per barrel a year earlier. The average price for WTI in July 2009 was approximately $64 per barrel. In 2008, the NYMEX WTI spot price averaged approximately $100 per barrel. Crude-oil prices remain volatile and have decreased significantly since they peaked at approximately $145 per barrel in the middle of July 2008. Since January, crude oil prices have rebounded, but they remain significantly lower than the 2008 average.

Prices for natural gas have historically fluctuated widely and in many regional markets are more closely aligned with supply and demand conditions in those markets. Fluctuations in the price for natural gas in the United States are closely associated with the volumes produced in North America and the inventory in underground storage relative to customer demand. U.S. natural gas prices are also typically higher during the winter period when demand for heating is greatest. In the first six months of 2009, the NYMEX wholesale natural gas price ranged from a low of $3.25 per MMBtu to a high of $6.07 per MMBtu. The average NYMEX wholesale natural gas price in July 2009 was approximately $3.55 per MMBtu. During 2008, the monthly average NYMEX wholesale natural gas price ranged from a low of $5.79 per MMBtu for December to a high of $12.78 per MMBtu for June.

While our commodity price risk management program is intended to reduce our exposure to commodity prices and assist with stabilizing cash flow and distributions, to the extent we have hedged a significant portion of our expected production and the cost for goods and services increases, our margins would be adversely affected.

2- Distributions:

On February 13, 2009, we paid a cash distribution of approximately $27.4 million to our common unitholders of record as of the close of business on February 9, 2009. The distribution that was paid to unitholders was $0.52 per Common Unit. During the three months ended March 31, 2009, we also paid cash equivalent to the distribution paid to our unitholders of $0.7 million to holders of outstanding Restricted Phantom Units and Convertible Phantom Units issued under our Long-Term Incentive Plans.

Our credit facility restricts our ability to make distributions to unitholders if aggregated letters of credit and outstanding loan amounts exceed 90 percent of our borrowing base. With the borrowing base redetermination in April 2009, our borrowings exceeded 90 percent of the reset borrowing base and therefore, we did not declare a distribution for the first quarter of 2009, which would have been paid to unitholders in May 2009. Although we were not restricted from making distributions under the terms of our credit facility for the second quarter of 2009, we elected not to declare a distribution.

While it sucks, for lack of a better word for then unitholders, it will end up being for the best down the road. It preserved cash as gas prices collapsed this summer and precipitated the following event:

Seth Klarman, who owns 16% of the went active in a 13D filing after the distribution was cut saying:

The Reporting Persons initially reported Baupost’s investment on a Schedule 13G filed on October 9, 2008. Baupost acquired the Common Units for investment in the ordinary course of business because it believed they represented an attractive investment opportunity. Based on an evaluation of the current market conditions and the Issuer’s press release filed on Form 8-K with the Securities and Exchange Commission on April 20, 2008, which announced that the borrowing base under its credit facility had been redetermined at $760 million and that as a result a temporary suspension of distributions to unitholders would be required, the Reporting Persons determined to file this Schedule 13D to reserve their right to take steps to bring about changes to increase unitholder value which may include changes in the board composition of the Issuer’s general partner, strategy and future plans of the Issuer as well as the pursuit of other plans or proposals that relate to or would result in any of the matters set forth in subparagraphs (a)-(j) of Item 4 of Schedule 13D, and to discuss such issues with the directors’s of the Issuer’s general partner, the Issuer’s management, unitholders, creditors and other parties. From time to time, the Reporting Persons have engaged in constructive dialogues with the members of the Issuer’s management and board of directors of the Issuer’s general partner.

Except as set forth herein, or as would occur upon completion of any of the actions discussed herein, the Reporting Persons have no present plan or proposal that would relate to or result in any of the matters set forth in subparagraphs (a)-(j) of Item 4 of Schedule 13D.

The Reporting Persons intend to review the investment in the Issuer on a continuing basis and, depending on various factors including, without limitation, the Issuer’s financial position and strategic direction, the outcome of the discussions and actions referenced above, actions taken by management and the board of directors of the Issuer’s general partner, price levels of the Common Units, other investment opportunities available to the Reporting Persons, conditions in the securities market and general economic and industry conditions, the Reporting Persons may in the future take such actions with respect to the investment in the Issuer as they deem appropriate including, without limitation, purchasing additional Common Units through open market purchases or otherwise, selling some or all of its Common Units through open market purchases or otherwise, engaging in short selling of or any hedging or similar transactions with respect to the Common Units and/or otherwise changing their intention with respect to any and all matters referred in Item 4 of Schedule 13D.

It should noted here that when Klarman entered in Oct. 2008, share traded in the $12-$13 range of 20%-30% higher than today meaning today’s potential buyers have significantly more upside.

3- Litigation:
Here is the basis for the lawsuit:
103108 BBEP Lawsuit

Here is Breitburn’s latest response to the litigation:
BBEP News 2008-11-3 General

Now you are asking, after all that, why own it?

1- Oil/Gas prices:
So, yes, the price fluctuations in oil and gas were hedged but it is the dramatic fall in production that hurt margins/profits. An improving economy both in the US and globally that increases oil and gas production then has the opposite effect.

Since we seem to have passed the bottom in that regard, there would seem to be no place but level to up to go. Either will help.

2- Distributions:
In the last 10Q they did say:

While we have not reinstated distributions to unitholders and elected not to declare a distribution for the second quarter of 2009, we have made progress towards our goal of reinstating distributions. We reduced our outstanding bank debt by approximately $67 million in the second quarter and continue to believe that maintaining our financial flexibility by reducing our bank debt should remain a priority. We plan to continue applying a portion of our cash flow generated from operations to repayment of that debt.

My comment: Debt has been reduce $123m or 16% YTD in 2009.

3- Litigation:
Overblown. In the six weeks following the filing from Quicksilver, Breitburn’s share price fell 60% and still has not recovered. This simply comes down to a battle for control and board seats. Now, Quicksilver does want damages. But, being a 40% owner of Breitburn, one has to assume that they do not want to hobble their over $2o0m stake in the company (that investment equates to 11% of Quicksilver’s market cap). That being said, damages will be token should they prevail. What they really want is voting rights for the Board of Directors. Fortunately for those looking at this as an investment, a Quicksilver win will not materially change the value proposition in shares.

Best part? Distributions ought to resume very soon (early 2010, announced late 2009). As of 7/21 BBEP had $613m of debt outstanding vs a credit facility of $735m. It means their current ratio is only 78% of the total debt (remember 90% is the level that cuts off distributions). The new cap is set this October. At this level anything over $675m will allow BBEP to resume distributions. For the first 6 months of 2009, cash flows from operation actually increase over 2008.

While an immediate resumption to the $.52 a quarter distribution is unlikely as one should assume some will be retained to further pay down debt, a hefty payment to unit holders ought to be in the cards.

Should that happen and yield hunters pile into the stock, expect a quick rise in the price.

Most Recent 10Q:
filing

blog comments powered by Disqus