The pledge of two college roommates in the early 1980s to one day go into the oil business together has hit black gold for Randy Breitenbach and Hal Washburn, whose Breitburn Energy Partners LP has seen its unit price more than double since going public nearly a year ago on the Nasdaq.
Breitburn Energy Partners is a master limited partnership focused on the acquisition, exploitation and development of maturing oil and gas properties particularly in the Los Angeles area and Texas. While the bulk of investors remain institutional, the company is structured to appeal to retiring baby boomers who want exposure to the energy sector and are ready to shift from asset appreciation to tax-advantaged income generation.
In late 2001, Fortune magazine photographed the partners, now 47 years old, lounging outdoors next to oil pumps they owned adjacent to the UCLA campus in Westwood. The photo illustrated an article about a number of promising young oil entrepreneurs who had spent the 1990s poking around dusty oil patches instead of launching Silicon Valley dot.coms.
“Randy and Hal have been in the Southern California market for a long time and not only acquired stable, producing assets but attracted a lot of good technical people as (larger oil) companies pulled out of California,” said A.G. Edwards analyst Jack Collins. “For a company their size, their talent pool is deep and people have bought into that expertise.”
Breitburn’s niche remains essentially unchanged from what the two Stanford University-educated petroleum engineers first envisioned two decades ago during a post-graduation trek across Europe employing high tech to squeeze the last bit of oil out of the type of older fields larger exploration companies often abandon after extracting only about 40 percent of their potential.
“We buy large old accumulations that are very complex, analyze them closely, see what jumps out, and then work them really hard,” said Breitenbach, whose master’s thesis was a two-dimensional fluid-flow simulation computer program used to probe old oil fields. These days the company uses 3-D geologic models and other sophisticated software to pinpoint drilling sites and maximize yield.
Following their 1982 graduation, the friends gained experience working for a variety of energy companies for several years before finally deciding to incorporate Breitburn Energy Company in 1988. Their first investor: a Nevada casino owner they met during a Vail ski trip.
“It was a very difficult time to start an oil company then because oil prices were low, but you could acquire assets cheap if you could raise the money,” said Breitenbach. Oil companies were unloading assets in the Los Angeles Basin considered the nation’s most productive oil field on a per-acre basis due to falling energy prices at the time that made the fields a better real estate development play.
One of Breitburn’s first acquisitions in the early 1990s were L.A. fields once owned by Occidental Petroleum Corp. Other early acquisitions included the Alamitos leases near the U.S. Naval Air Station in Seal Beach, Occidental’s Sawtelle lease adjacent to UCLA’s baseball field, and a then underperforming field at Pico Boulevard and Doheny Street. Around half of its 300 employees today are still based in Southern California.
Time for Transition
By 1994, Breitburn Energy was ready to expand to a level where it needed much larger and longer-term capital than the bank debt and private equity they had been using. So Breitenbach and Washburn sold a majority interest to Provident Energy Trust, a Canadian royalty trust whose tax-advantaged structure was well established in Canada. Breitburn became Provident’s vehicle for acquiring and exploiting assets in the U.S.
Breitburn now owns leases in the Wind River and Big Horn Basins in central Wyoming, the Sunniland Trend in Florida, and the Permian Basin in West Texas.
Provident, along with the two partners, decided in March of 2006 to spin off Breitburn as the master limited partnership an established structure in Canada but only recently introduced to the U.S. because it lends itself well to the company’s operations.
The partnerships are exempt from corporate income taxes and pay out most of their earnings to investors in tax-advantaged distributions. That fits with developing established oil fields that have relatively predictable production over a long period of time. Still, Breitburn has hedged with other investments to offset the usual volatility of oil and gas prices.
This past July, the company increased its second quarter cash dividend to $1.69 per unit, even though a month later it reported a 4 cent per unit net loss on paper due to increased acquisition and development costs. “In this space, the cash you generate from operations is the thing investors focus on,” Collins said.
The company announced last month that it would triple its reserves and output and diversify into natural gas by spending $1.45 billion in cash and stock to acquire the Michigan, Indiana and Kentucky assets of Quicksilver Resources Inc.
When the deal closes, Quicksilver will become Breitburn’s largest shareholder at 32 percent, with Provident dropping from 49 percent to 23 percent. But Provident will continue to control Breitburn through its ownership of the general partnership.
While applauding the partnership’s success over the past year, some analysts expressed concern that despite the diversification comes with Quicksilver acquisition, there may be limited upside for the unit price with increased competition in the space. While Breitburn the only the third energy MLP in the U.S. market, there now are seven.
But Collins, who unlike other analysts based his model for Breitburn’s income growth on existing properties rather than anticipated acquisitions, changed his “hold” recommendation on Breitburn units to a “buy,” calling the Quicksilver acquisition transformative because it expands the universe of energy assets the company can scout.
To help finance the Quicksilver acquisition, Breitburn made a $450 million equity private placement with institutional investors. And with the IPO set to celebrate its first anniversary in early October the company will be eligible to file a shelf registration for future secondary offerings accessible to individual investors. Proceeds would fund additional acquisitions.
“We’re not really an institutional product,” Breitenbach said. “We believe that this is a retail product geared toward the long-term, buy-and-hold investor, just as we intended years ago.”
