BreitBurn Energy Partners: Debt And Equity Prices Start Soaring

| About: Breitburn Energy (BBEPQ)

Summary

Hope rises for the formation of an equity committee. An equity committee still does not guarantee a return for equityholders, although the formation of a committee would be positive.

BreitBurn can be considered two companies for valuation purposes.

One part is its assets outside of the Delaware and Midland Basins. These assets have high operating costs and are of limited desirability.

The Midland and Delaware Basin assets are highly valued but may account for less than 15% of BreitBurn's production.

If the Midland and Delaware Basin assets are valued at $890 million, then the total value of BreitBurn's assets would be around $2.09 billion.

I haven't paid too much attention to BreitBurn Energy Partners (OTCPK:BBEPQ) recently since I haven't had a position in it for a while. However, the recent sharp rise in BreitBurn's equity and debt securities has caused me to take a closer look at the company again. It appears that the rise was likely caused by a letter supporting the formation of an equity committee from a Senior Bankruptcy Counsel at the SEC. This has increased the hopes for and odds of an equity committee being approved. However, even if an equity committee is approved, I still have a hard time seeing the common equity getting a recovery beyond perhaps some warrants. Horsehead Holdings is a recent case where the equity was wiped out despite an equity committee.

BreitBurn should really be considered two companies for valuation estimates. One part would be its Delaware and Midland Basin assets, which are quite valuable and would command a high multiple versus EBITDA, production and reserves. The other part would be its remaining assets, which tend to have high operating costs and low production margins. These assets are in quite limited demand and would fetch a relatively low price.

Competing Valuation Estimates

The debtors and equityholders have been battling it out over the value of BreitBurn's assets and there are at least a couple areas in the two valuations that I have different opinions on.

The valuation estimates provided by Lazard on behalf of BreitBurn appear to be partially based on estimated 2017 EBITDA numbers that are lower than BreitBurn is likely capable of reaching at current strip prices. BreitBurn's reported projections for adjusted EBITDA in 2017 is $183 million, while BreitBurn may be able to reach $252 million EBITDA at current strip prices (albeit while requiring it to maintain low lease operating expenses).

The valuation estimates provided by M.M. Dillon on behalf of the equityholders appear to use comparable companies that mostly have higher average production margins, making each BOE of production and reserves more valuable than BreitBurn's production.

2017 EBITDA Estimates

I have taken a crack at estimating BreitBurn's 2017 EBITDA based on its January 2017 estimated daily production average and current strip prices. This assumes that BreitBurn decides to maintain production at that level throughout the year, which is an option for it now that it is saving on interest costs.

Units

$ Per Unit

$ Million

Oil (Barrels)

9,100,000

$48.00

$437

NGLs (Barrels)

1,925,000

$18.50

$36

Natural Gas [MCF]

38,850,000

$3.40

$132

Other Revenue

$29

Total Revenue

$634

Click to enlarge

BreitBurn would make $634 million in revenue in 2017. If it keeps lease operating expenses down at $15 per BOE (which may be a bit optimistic in a $50+ oil environment), then BreitBurn is looking at around $252 million EBITDA for 2017.

$ Million

Total Revenue

$634

Less: Lease Operating Expenses

$263

Less: Production/Property Taxes

$50

Less: Cash G&A

$52

Less: Other Expenses

$17

Adjusted EBITDA

$252

Click to enlarge

Valuation Discussion

If we assume that around 6,000 BOEPD of BreitBurn's production comes from its Delaware and Midland Basin assets, then BreitBurn's estimated 2017 EBITDA from those properties may be slightly over $50 million. This leaves $200 million EBITDA for BreitBurn's remaining assets. Valuing these remaining assets at 6x 2017 EBITDA would result in an estimated value of $1.2 billion. This is on the lower end for an upstream company, but reflects the relatively low desirability of BreitBurn's assets outside of the Delaware and Midland Basins.

Valuing the Delaware and Midland Basin production at $40,000 per flowing BOE would result in that production being worth $240 million. The value of BreitBurn's Midland Basin primary development area block may be $325 million (based on the value of the SM Energy acquisition of Rock Oil at $31,500 per net acre, which was considered a somewhat high valuation.) BreitBurn's other Midland Basin acreage is rather scattershot in terms of its location, so perhaps that would only fetch $175 million. I am not entirely sure how much Delaware Basin acreage BreitBurn has, but I am plugging in a value of $150 million for it right now. That would give a total value of $890 million for BreitBurn's Midland Basin and Delaware Basin assets.

The combined value would therefore be $2.09 billion. BreitBurn has approximately $1.4 billion of secured debt (credit facility and EIG's second lien notes) after the hedging proceeds are applied to the credit facility. This leaves around $0.69 billion to cover $1.22 billion in unsecured claims (including accrued interest), or around 57% recovery if the preferred units don't get anything.

At around 50+% recovery, there is historically a decent chance for the next lower class in the capital structure to see some recovery, so it may be plausible for the preferred units to see a modest recovery (perhaps around 10% to 15%). Assuming that the second-lien notes get converted into equity, a potential split of the new equity would be 49% second-lien, 45% unsecureds and 6% preferreds, with perhaps some warrants for the common units.

Conclusion

BreitBurn's non-Delaware and Midland Basin assets probably aren't worth more than around $1.2 billion at the moment. That means that the recovery for Breitburn's unsecured debt and equity are dependent on the valuation for the Permian (excluding the Central Basin Platform) properties. There are some apparent gaps in public knowledge such as BreitBurn's production levels from the Delaware and Midland Basins (as opposed to the Permian as a whole), and BreitBurn's Delaware Basin acreage numbers, which could significantly affect BreitBurn's estimated value.

In general, I think that BreitBurn's unsecured debt and equity is getting overvalued with the recent spike. The best bet for equityholders is probably to draw things out as long as possible and hope that proposed OPEC and non-OPEC production cuts materialize in a significant way to help the price of oil go up a bit. I am still skeptical that there is value for the common equity in particular unless BreitBurn's Permian assets can find a valuation in the $1.5 billion to $2 billion range at least.

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Disclosure: I/we have no positions in any stocks mentioned, but may initiate a short position in BBEPQ over 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.

Additional disclosure: Keeping my options open to potentially short BBEPQ or BBPPQ depending on where they end up.

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