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Breitburn Energy Partners (BBEP), Still Undervalued

|Includes: Breitburn Energy Partners LP (BBEPQ)

 Overview:

Breitburn Energy Partners (BBEP) is an oil and gas company that owns/leases land to drill and sell energy products. To give a brief history, BBEP borrowed a lot of money to buy new energy assets before the economic collapse. In the subsequent market collapse, BBEP’s borrowing base was reduced in light of collapsing energy prices. They refocused on increasing financial flexibility via debt reduction. They reduced debt by suspending dividends and using cash from operations to pay back debt. By the end of 2009 they had reduced debt from about 70% of book value to roughly 45% of book value. In 2010 BBEP reinstated a cumulative annual dividend at about 10% of the present market cap. The per unit price of BBEP traded just under $6 at the low and now trades for $15. Production increased from 2008 to 2009 and BBEP has resumed capital expenditures for growth in production.

Reason for Mispricing:

We still feel the company is undervalued. We believe the company is being discounted due to bearish energy price sentiment and uneasiness about reported GAAP earnings. We believe that natural gas prices will normalize in the coming years. In addition, we do not look at GAAP earnings to determine unit value since it does not give an accurate picture of cash generation (especially with oil and gas MLPs).

Valuation:

BBEP generated about $160m of free cash in 2009. Most of that money was spent on debt reduction. BBEP projects that they will generate roughly the same amount of cash next year based on present commodity prices and hedges put in place (assumtion of $70 crude/$5 natural gas). Natural gas is priced lower than the estimate presently and crude is above. The NAV of their energy assets using the PV10 method (detailed in the Constellation Energy Partners post) is $760m ($3.87 natural gas, $61.18 crude oil in Michigan and California, and $51.29 crude oil in Wyoming). Presently, market value for BBEP is $787m, slightly above NAV. Stated book value of the company is $1.23B. A simple discounted cash flow analysis with zero growth and a 15% discount rate yields the following:

We believe that BBEP has an intrinsic value between $30-40, presenting a 50% margin of safety.

Risks:

If natural gas prices continue to stay at current levels over the next few years, BBEP will face problems. If crude oil declines materially from present prices over the next few years, BBEP will face problems. However NAV was calculated using conservative energy prices and provides a margin of safety from present levels.

Conclusions:

BBEP is an undervalued company that is producing significant cash. Market value is protected by a conservative NAV estimate. If energy prices normalize, we see significant upside. In the interim, we are receiving a 10% dividend to wait.



Disclosure: Long BBEP