BreitBurn Energy Partners: $50 Oil Ain't Gonna Cut It

| About: Breitburn Energy (BBEPQ)

Summary

BreitBurn's common units likely need $80 oil to have more than minimal value.

At $50 oil, its proved developed reserves have undiscounted lifetime cash flow that is nearly $1 billion less than its debt.

It takes nearly $70 oil to cover both its debt and preferred units with the undiscounted cash flow from proved developed reserves.

Recent asset sales indicate that BreitBurn's producing assets are worth less than half of its debt.

A transaction done with expectations of $70 oil in 2017 valued production at $50,000 per flowing barrel, leaving the common units $900 million underwater if BreitBurn sold all producing assets.

The reason that I am negative on BreitBurn Energy Partners (NASDAQ:BBEP) and other companies in a similar situation is that their debt levels make it very hard for them to recover. I do think that there will be a significant recovery in the price of oil in the future, but BreitBurn needs more than a significant recovery.

Take $50 oil as an example. At $50 oil, BreitBurn's proved developed reserves still won't generate enough cash flow to cover its debt at par value, even with a 0% discount rate and no other expenses. It takes roughly $60 oil for its proved developed reserves to cover its debt and nearly $70 oil to cover both the debt and the value of the preferred units.

Based on the value of recent transactions, BreitBurn's producing assets are worth less than 50% of its net debt currently. Even if there was an expectation for $70 oil and $3.75 natural gas in 2017, BreitBurn's producing assets would be worth less than its debt. The common units appear to only have long-term value with $80+ oil.

Undiscounted Cash Flow From Proved Developed Reserves At $50 Oil

BreitBurn had 194 million BOE in proved developed reserves at the time of its last update. Based on Q3 2015 production, this would be approximately 55% oil, 10% NGLs and 35% natural gas. At $50 oil and $2.50 natural gas, BreitBurn would end up with approximately $6.27 billion in revenue from those 194 million BOE in reserves after factoring in the differentials.

Units

Realized Price

Revenues ($ Millions)

Oil (Million Barrels)

107

$46.00

$4,922

NGLs (Million Barrels)

19

$16.00

$304

Natural Gas (Bcf)

408

$2.56

$1,046

Total

$6,272

Click to enlarge

With lease operating expenses of $18.75 per BOE (at the low end of BreitBurn's 2H 2015 guidance) and production taxes equal to 8.5% of revenue, production expenses for the proved developed reserves would equal $4.17 billion. I have not included any G&A overburden in this calculation.

$ Millions

Lease Operating Expense

$3,638

Production Taxes

$533

Total Production Expenses

$4,171

Click to enlarge

This means that the undiscounted cash flow for BreitBurn's proved developed reserves is estimated at $2.1 billion with $50 oil and $2.50 natural gas. BreitBurn has over $3 billion in net debt, so the undiscounted future cash flow from its proved developed reserves would not even cover its debt at $50 oil and $2.50 natural gas.

Undiscounted Cash Flow From Proved Developed Reserves With Various Prices

If we take a look at the undiscounted cash flow from BreitBurn's proved developed reserves under a variety of pricing scenarios, we find that it only covers the net debt at around $60 oil and $2.50 natural gas. To cover the net debt plus preferred units (combined total of around $3.6 billion) would require $60 oil and $4.00 natural gas or close to $70 oil.

Undiscounted Cash Flow From Proved Developed Reserves ($ Million)

Natural Gas/Oil

$40

$50

$60

$70

$80

$2.00

$953

$1,909

$2,865

$3,821

$4,778

$2.50

$1,144

$2,100

$3,057

$4,013

$4,969

$3.00

$1,335

$2,291

$3,248

$4,204

$5,161

$3.50

$1,527

$2,483

$3,439

$4,396

$5,352

$4.00

$1,718

$2,674

$3,671

$4,587

$5,543

Click to enlarge

BreitBurn does also have 58 million BOE in proved undeveloped reserves, but it will take money to develop those reserves. As I've noted before, the borrowing base redetermination is likely to squeeze BreitBurn's liquidity, and even if it doesn't restructure soon, it will likely have declining production.

As well, the above calculations don't include any G&A overburden and don't include BreitBurn's continuing interest costs.

Value Of Assets Based On Recent Transactions

Potential asset buyers would assume higher oil and natural gas prices in the future than current spot prices. However, they would also pay much less than the undiscounted cash flow according to their price assumptions.

Some recent transactions show the current value of oil and gas properties. Devon Energy purchased Powder River Basin oil assets (85% oil) in December and it valued current production at $30,000 per flowing barrel. WPX Energy sold its natural gas Piceance assets for approximately $10,920 per flowing BOE. BreitBurn's assets are approximately 55% oil and have high operating costs, but if we were to value them at $20,000 to $25,000 per flowing BOE, the value of BreitBurn's producing assets would only be $1.1 billion to $1.4 billion. Even doubling the value would not result in BreitBurn's debt being covered, and it would take around triple the value to result in both BreitBurn's debt and preferred units to be covered.

Conclusion

BreitBurn's assets likely have less value than its debt at under $70 oil. At $70 oil, the undiscounted cash flow from its proved developed reserves would cover its debt and preferred units, but no buyer would pay close to NPV at a 0% discount rate. Recent transactions indicate that BreitBurn's assets are worth less than 50% of its debt and around 35% of its debt plus preferred units, leaving its common units well out of the money.

WPX Energy paid $50,000 per flowing barrel for Delaware Basin assets (53% oil) in July, when it had 2017 pricing expectations for $70 oil and $3.75 natural gas. A similar valuation would result in BreitBurn selling off all its producing assets and still leaving the common units around $900 million underwater.

Thus, BreitBurn's common units only really have potential value as a short-term trading vehicle. Long term, even a recovery to $60 or $70 oil doesn't appear to suffice for its common units. It will probably take $80+ oil for the common units to have more than minimal value in the long term.

Disclosure: I am/we are short BBEP.

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.

Additional disclosure: Short via put options.

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