BreitBurn Energy Partners (BBEP) announced that it will be issuing 13 million additional units to its current float. The issue price per unit will be $19.86. This means the partnership expects to receive net proceeds of approximately $248.2 million (or approximately $285.4 million if the underwriters exercise their option to purchase additional shares). The proceeds from the issuance will be used to pay down borrowings on its credit facilities. This is a poor strategy by management.
With interest rates fairly low, its hard to understand why management would want to dilute current unit holders. Keep in mind that the cost of capital of issuing units is fairly high since shareholders are basically considered partners due to the MLP tax structure.
These new units will be entitled to royalty payments from the MLP. Why would management choose to issue units instead of looking into cheaper alternatives?
Management has not taken advantage of the low rate environment. The company's corporate bonds have yields close to that of its units. Debt, which carries lower risk than equity, should have cost of capital lower than the units. The fact that management is issuing units instead of debt is confusing.
By issuing equity, current unit holders will own less of the partnership, thus royalty payments will decline. To current unit holders it may seem that the company is trying to deleverage its debt load, but in the end cheaper debt is what will benefit unit holders, not dilution.
I believe BreitBurn is a great company, but management's choice to issue units, which have a higher cost of capital, to pay down debt is a terrible strategy. Investors should stay clear until more is know about BreitBurn's future plans regarding further dilution.