Call it a debt trap.

The business model of L.A. oil and natural gas company Breitburn Energy Partners LP was to give investors consistent income with limited tax liability.

For the past 20 years, co-founders Randy Breitenbach and Hal Washburn have taken over proven oil and natural gas fields from more established industry players, making incremental technological improvements to keep the oil and gas flowing. That way, the company avoids the huge costs and risks of exploring for new reserves and puts most of its profits into payouts to investors.

That worked fine, at least until now. Falling energy prices and tightening credit markets have resulted in a money squeeze that prevents the company from making its promised payouts to shareholders.

“We had a level of debt that did not anticipate a 75 percent fall in commodity prices in six months and a near collapse of the banking industry globally,” said James Jackson, Breitburn’s chief financial officer. “We struggled with this because of our business model.”

Under a relatively new business model in the oil industry, called a master limited partnership, Breitburn returns much of its profits as payments to investors, instead of plowing the money back into exploration and production.

In the recent oil-patch boom years, the strategy worked well as Breitburn acquired oil and gas properties in Southern California, Texas, Wyoming, Michigan, Kentucky and Florida. Then, as oil prices soared in 2006 and 2007, Breitburn moved to take advantage by stepping up its acquisitions and technological improvements in older oil fields. But in order to do that, Breitburn had to increase its borrowing a move that has come back to haunt the company.

In the last six months, Breitburn, like all oil companies, has been hit by the double whammy of a drastically tightening credit market, and collapsing oil and gas prices. Breitburn, which posted $802 million in revenue in 2008, was especially vulnerable because it didn’t have huge cash reserves to fall back on; virtually all excess cash was paid out to investors.

In April, Breitburn’s lenders slashed its line of credit by 15 percent, from $900 million to $760 million. With Breitburn’s outstanding debt at $717 million, that move pushed the company’s debt to more than 90 percent of its credit line; under terms of the loans, Breitburn could no longer make cash distributions to investors.

The April 17 announcement of a dividend suspension sent Breitburn’s stock tumbling 40 percent to $5.33 per share as investors began bailing out of the stock. The stock has recovered somewhat since then, to $6.34 per share as of April 30.

Jackson and other Breitburn executives have spent the last two weeks trying to convince investors that the underlying business of extracting oil and natural gas is still sound, and that the company is focused on bringing its debt into line with its credit limits.

No guarantees

But they could offer no guarantees of when dividend payments may resume and have even predicted that Breitburn’s lenders will further cut the company’s credit line in the fall.

“Many in the exploration and production sector, including us, face borrowing base redeterminations every six months and we want to be prepared in advance for that event, especially in light of the continued expectation of low commodity prices,” Washburn, Breitburn’s chairman and co-chief executive, said in an April 20 conference call.

Analysts took that concern about Breitburn’s prospects even further. RBC Capital Markets analyst Scott Hanold downgraded the company to “sector perform” from “outperform,” saying the company poses “above-average risk” to investors and that the suspension of payouts could persist into 2010.

Michael Blum, a senior analyst at Wachovia Capital Markets, maintained his “market perform” rating, saying that Breitburn might be forced to reconsider its master limited partnership structure.

“We believe management teams and investors are questioning the viability of the upstream MLP business model,” Blum said in his April 21 report.

But Breitburn executives have given no indication that they are looking to revamp the business model. Jackson said that the company did look at other options before deciding to suspend dividend payments, including asset sales, monetizing its hedge portfolio, renegotiating its loans and raising additional capital.

“But in this marketplace, none of those options were available in acceptable terms that were in the long-term best interests of the partnership,” he said.

Instead, Breitburn will focus on “aggressively paying down its debt” so it can withstand another possible credit line tightening in the fall, Jackson said.

Dividend payouts would resume “as soon as it is prudent,” Washburn said in an April 20 conference call with investors.

Adding to investor uncertainty, Breitburn faces a lawsuit from its largest investor, Quicksilver Resources Inc., a Fort Worth, Texas, oil and gas company. Quicksilver, which owns 41 percent of Breitburn’s stock, claims in its October suit that Breitburn unfairly limited Quicksilver’s voting rights during Breitburn’s management-led $305 million buyout of a stake in the company held by Provident Energy Trust of Calgary, Canada.

Jackson told the Business Journal last week that Breitburn has attempted to resolve the dispute with Quicksilver. “But the signals we have received back have not been encouraging to date.”

In the meantime, the company is trying to cut costs to speed the paying down of its debt. Operating divisions have been consolidated, some positions have been eliminated and senior staff bonuses have been reduced by as much as 60 percent.

Jackson said the oil and gas fields remain reliable, with some capable of producing for up to 20 more years. Breitburn only extracts about 5 percent of its proven reserves each year; most other oil and gas companies extract a greater percentage of their reserves annually.

It is the underlying value of the fields that gives analysts hope that the company can recover once the current commodity slump and liquidity crisis are over.

“All of these headwinds could be offset by the intrinsic value of Breitburn’s proved reserves,” said Blum of Wachovia Capital Markets.