Oil-Field Acquisition Fails to Pump Up Investors

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Timing is everything when cutting deals, as Breitburn Energy Partners learned early last week.

The L.A. oil and gas partnership announced Oct. 27 that it had acquired an oil field in the Permian Basin of West Texas for $122 million in cash and stock from Antares Energy of Perth, Australia. The oil field is next to acreage Breitburn already owns in the area.

Normally, for a company that relies on a steady stream of deals to keep payouts going to investors, such a deal would be good news. But this time, Breitburn investors hit the “sell” button, driving shares down 5 percent the day the deal was announced.

So what happened? In a couple of words: bad timing.

News of the deal hit during a downturn in the oil markets. Three months ago, West Texas Intermediate crude oil sold for as much as $102 a barrel; it sold last week for $87 a barrel with fears the price could drop below $80 in coming weeks as global growth forecasts continue to be trimmed.

Falling oil prices are bad news for oil production companies in general, but they’re especially problematic for Breitburn, which specializes in using new – and often expensive – techniques to pull oil out of old fields.

“The properties Breitburn acquired are primarily oil-weighted assets that require a lot of capital spending,” said Kevin Smith, energy analyst in the Houston office of Raymond James & Associates of St. Petersburg, Fla. “Given the negative market sentiment around oil prices, the market reacted negatively.”

Some investors, however, changed their minds upon closer examination of the deal; in the next two trading days, Breitburn shares regained all of their Oct. 27 loss, closing Oct. 29 at $16.98.

As a master limited partnership, Breitburn pays sharply lower state and federal taxes, but in exchange must pay out a majority of its profits to investors. Increasing revenues is key to making those shareholder distributions. But because Breitburn doesn’t explore for new oil, it must constantly acquire existing oil fields to offset gradually declining production at the fields it already owns.

Over the last two years, the company has made $3.9 billion in purchases, nearly four times its target. In July, Breitburn announced that it had agreed to buy QR Energy of Houston for nearly $2 billion in cash and stock. The deal, which is expected to close next month, will create the largest master limited partnership in the nation focused on oil exploration and production, with a pro forma enterprise value of $7.8 billion.

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Howard Fine
Howard Fine is a 23-year veteran of the Los Angeles Business Journal. He covers stories pertaining to healthcare, biomedicine, energy, engineering, construction, and infrastructure. He has won several awards, including Best Body of Work for a single reporter from the Alliance of Area Business Publishers and Distinguished Journalist of the Year from the Society of Professional Journalists.

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