BreitBurn: Acquisition Of Oklahoma Panhandle Assets Creates Value By Reducing Earnings Volatility

| About: Breitburn Energy (BBEPQ)

Shares of BreitBurn Energy Partners LP (BBEP) continue to offer appeal among dividend investors after the oil and gas partnership announced the acquisition of the Oklahoma Panhandle assets from Whiting Oil and Gas.

Investors appreciate the deal which is executed at fair valuation levels, while boosting the production of oil, thereby reducing the volatility of its earnings. In the meantime, investors are receiving an unheard dividend yield exceeding 10% in this still low interest rate environment.

The Deal

BreitBurn announced that it has entered into a definitive agreement with Whiting Oil and Gas, which is a subsidiary of Whiting Petroleum Corporation (WLL), to acquire Whiting's interest in the Postle and north East Hardesty oil fields, as well as midstream assets in the Oklahoma Panhandle. Shares of Whiting Petroleum hardly reacted on the news of the deal.

BreitBurn will pay approximately $860 million for the assets which have a daily production rate of 7,400 barrels of oil equivalent per day, of which 87% is oil. Estimated proven reserves of the assets came in at 35 million barrels of oil equivalent, enough to maintain current production for 13 years.

The oil being produced trades at an average $8 discount compared to WTI, with lifting costs estimated at $18 per share. Control of the midstream assets guarantees the delivery and transportation of the production.

As a result of the acquisition, BreitBurn sees an immediate accretion to distributable cash flows. These are now estimated to come in between $135 and $145 million for the second half of the year, coming in ahead of the quarterly distributions by a comfortable margin.

The deal is subject to normal closing conditions including purchase price adjustments.


BreitBurn ended its first quarter with $7.6 million in cash and equivalents. The company operates with $840.7 million in total debt, for a net debt position of around $833 million. The company has increased its borrowing base of its credit facility to $1.5 billion. Consequently, the deal will boost the debt to adjusted EBITDA ratio temporarily above the 4 to 1 ratio.

The partnership generated full year revenues of $413.9 million over the past year, up 4.9% on the year before. The company did report a full year loss of $40.2 million compared to profits a year earlier.

Trading around $18 per share, the market values the partnership at $1.8 billion. This values the operations at 4.3 times annual revenues.

BreitBurn currently pays a quarterly dividend of $0.475 per share for an annual dividend yield of 10.6%.

Some Historical Perspective

The partnership went public at $18.50 per share back in 2006. Shares steadily rose to $35 in 2007, but fell back all the way to $7 at the start of 2009 as energy prices collapsed and the company skipped dividends. Shares have seen a rebound to levels around $20 per share in recent years, providing investors with fat dividends in the meantime.

Between 2009 and 2012, BreitBurn has increased its annual revenues by a cumulative 62% to $414 million. Net earnings have been really volatile as the company reported both profits and losses over the past recent years.


The deal is of great significance to BreitBurn as it could double the liquids output in the fourth quarter. First quarter production came in around 26,000 barrels of oil equivalent of which roughly half was produced in liquids. All this resulted in roughly $97 million in first quarter revenues, including hedge losses, and $64 million in adjusted EBITDA.

Yet investors are a bit worried about the impact of the increase in leverage as possibly the partnership has to issue new shares to keep the leverage ratios in place. Yet the deal is accretive to distributable cash flows per unit from the start, and flexibility with the banking syndicate gives the partnership help to bring leverage down.

Thanks to the deal, BreitBurn could produce 33,000 to 35,000 barrels of oil equivalent in the second quarter, ending the year with an estimated production towards the higher end of that range. Operating costs should come in between $18 an $20 per barrel, resulting in second half adjusted EBITDA of $235 to $245 million. The deal will boost the share of oil production to 63%, up from roughly 50% at the moment.

The deal could boost annual revenues by approximately $200 million given that the majority of production of the acquired assets is based in oil. The price tag of $860 million is fair in that light with BreitBurn's current valuation. The fact that the deal will add immediately to the distribution capacity is important, as the first quarter earnings report implied that cash flows being generated fell short of the actual $0.475 quarterly distribution.

All in all the deal looks solid. The transaction is executed at fair valuation levels as oil production has the tendency to be consistently profitable, operating with lower break-even levels compared to gas production. Total revenues of the partnership could increase toward $600 million per annum and the quarterly distributions of $0.475 per share should be reinforced, for an incredible high yield. Even if the dividend yield was to be cut, BreitBurn remains a really attractive investment despite the sizable debt position.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.