When oil prices started tanking three months ago, BreitBurn Energy Partners thought it was prepared. After all, the L.A. oil and gas producer had hedged huge portions of its portfolio at fixed prices above $90 a barrel.
But that foresight hasn’t helped much with investors, who have hammered BreitBurn, sending shares tumbling more than 60 percent since Labor Day.
The stock closed at $8.78 on Dec. 11, its lowest point in more than five years, and BreitBurn executives are annoyed that the markets don’t seem to be taking their apparent prudence into account.
“Investors are very worried about the oil business and are not distinguishing between those with strong hedge books like ours and those without hedge books,” a frustrated Chief Executive Hal Washburn said last week.
Indeed, BreitBurn’s stock has been dropping pretty much in lockstep with oil prices, with both hitting key milestones last week. The benchmark West Texas Intermediate crude oil on Dec. 11 fell below $60 a barrel for the first time since 2009, closing at $59.75, while BreitBurn shares that day fell below $9, also for the first time in five years.
Even before hitting that new low, BreitBurn was the second-biggest loser on the LABJ stock index. Its Dec. 10 close of $9.62 left it down 18 percent for the week. (See page 28.) The company was also the biggest loser for the week ended Dec. 3, when it shed 20 percent.
This plunge comes despite BreitBurn’s massive price hedge. BreitBurn months ago locked in the price of the vast majority – 81 percent – of the crude it contracted to sell in the fourth quarter at $94.33 a barrel. That means less than 20 percent of expected production would be selling at the current depressed prices.
And for all of next year, 71 percent of BreitBurn’s oil production is fixed at $93.51 a barrel.
While price hedging is common among energy partnerships because of the notorious volatility of oil prices, BreitBurn has hedged more of its oil production than most of its peers, according to a Dec. 1 report from Kevin Smith, oil industry analyst in the Houston office of Raymond James & Associates Inc. Only one other oil company, Memorial Production Partners of Houston, has a substantially higher hedge rate for next year.
Distributed
But Smith’s report also noted a vulnerability for BreitBurn: its ability to cover the distribution payments it has promised to investors. According to the report, BreitBurn’s distribution coverage ratio – essentially the company’s available cash flow divided by its promised distributions – has hovered in recent months at or just below 1 and is expected to stay in that range through next year.
If the coverage ratio falls too much below 1, then distributions to investors would likely need to be cut.
Most of BreitBurn’s peers have distribution coverage ratios of just above 1. In an earlier report on BreitBurn, Smith said the company needs oil prices to be above $90 a barrel to nudge the distribution coverage ratio above 1.
As a master limited partnership, BreitBurn pays sharply lower state and federal taxes, but in exchange must pay out a majority of its profits to investors.
The company has a history of bumping up its distributions each quarter, which helped make BreitBurn attractive to investors. Just last month, the company increased its distribution as part of an acquisition it recently closed.
But just as rising distributions have made BreitBurn shares popular, the prospect of dwindling cash flow and, thus, smaller distributions could have the opposite effect and drive investors to sell.
Deflated
BreitBurn executives offered another reason for the size of the drop in the company’s stock. James Jackson, the company’s chief financial officer, told investors at an industry conference last week that BreitBurn’s stock had a significant run-up over the summer, following the announcement that the company was buying QR Energy of Houston for nearly $2 billion in cash and stock. When oil prices started tumbling, BreitBurn’s stock may have started from a somewhat inflated position, he said.
“So that skews how we look over the last two months versus our peer group,” he said.
Meanwhile, Washburn confirmed last week that the company in October pulled back a bond offering, proceeds of which would have been used to pay down its revolving credit facility. He would not give details on the size of the proposed debt offering, but said the market conditions were not conducive to seeking new debt.
Forbes Debtwire reported last month that BreitBurn was one of three energy companies that had pulled back bond offerings in recent months because investors had demanded excessively high interest rates.
Like many of its peers, BreitBurn carries a large debt load, the result of its ongoing acquisitions of oil properties. BreitBurn specializes in buying mature oil and gas fields, rather than new ones, and trying to squeeze remaining resources from them.
To keep production levels – and distributions – constant, it has to keep buying oil and gas wells to replace those with declining production. Over the past two years, the company has made more than $3 billion in purchases, nearly double its target. The company now has just more than $2 billion in debt on its books.
