Oil and Gas Company Lights Investors’ Fire

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Oil and Gas Company Lights Investors’ Fire
Randy Breitenbach and Hal Washburn

Los Angeles oil and gas company BreitBurn Energy Partners was loaded down with debt, had suspended dividend payouts to investors and was in a legal battle with its largest investor. Its stock had tumbled to a four-year low.

That was only a year ago.

Today, the company has narrowed its debt and settled the lawsuit with Quicksilver Resources Inc. BreitBurn has also reinstated its dividend and plans to boost capital spending this year.

“We made debt reduction our No. 1 goal over the past year,” said Jim Jackson, the company’s chief financial officer. “We’ve paid down our debt and we were able to settle the litigation. We’re back in business now.”

That was the message that BreitBurn executives took to investors on Wall Street last week when they made a presentation at an investor symposium.

And investors have listened, rewarding BreitBurn by driving up the stock price to about $15 per share, its highest level in 18 months.

“BreitBurn’s liquidity and leverage positions have greatly improved since the fourth quarter of 2008 when it suspended its dividend distribution,” said Michael Blum, senior analyst with Wells Fargo Securities in a recent report on BreitBurn. Blum added that the settlement with Quicksilver “eliminates a yearlong litigation overhang.”

That said, the company still faces some challenges. It continues to carry considerable debt: $560 million, even after meeting a debt-reduction goal by paying down $177 million in 2009. However, analysts don’t view that amount as excessive, and company executives say it’s manageable.

In March, BreitBurn reported a larger-than-expected loss, much of that due to losses in its commodities hedging portfolio. Natural gas, which accounts for 53 percent of its production portfolio, is selling at historically low prices.

As a result, analysts are cautious in their outlook for BreitBurn for the rest of 2010 and have issued share price targets at or only slightly above the current $15 unit of stock value.

But the market likes the company much more than a year ago.

“Risk/reward seems balanced right now,” Blum said in his report.

Scott Hanold, an analyst with RBC Capital Markets Corp., concurred, setting his price target at $15 per share and classifying BreitBurn as “above average risk.” RBC is a market maker for BreitBurn securities.

The wild swings of the past year were hardly what investors had counted on. Unlike most other oil and natural gas companies, BreitBurn is a master limited partnership and its business model is designed to give investors consistent income with limited tax liability.

For the past 20 years, co-founders Randy Breitenbach and Hal Washburn have taken over proven oil and natural gas fields from more established industry players, making incremental technological improvements to keep the oil and gas flowing. That way, the company avoided the huge costs and risks of exploring for new reserves and could put most of its profits into payouts to investors.

Boom years

During the oil boom of 2006 and 2007, BreitBurn borrowed heavily to invest in extracting more oil and natural gas from its fields, and to acquire producing fields from other energy companies.

But then, in late 2008, both the energy and capital markets collapsed. In April 2009, BreitBurn’s lenders slashed the company’s credit line, forcing it to suspend dividends.

At that time, BreitBurn was trying to settle the suit by Quicksilver, a Fort Worth, Texas, oil and gas company. Quicksilver had sued BreitBurn in October 2008 over BreitBurn’s buyback of a stake that Provident Energy Trust of Calgary, Alberta, had held in BreitBurn. Quicksilver alleged that it was unfairly denied voting rights in the buyback.

The lawsuit, the debt problem and the dividend suspension presented a triple whammy: Investors bailed on BreitBurn’s stock, sending it to a four-year low of $5.33 per share in April 2009.

BreitBurn executives hastily convened meetings with Wall Street investors, attempting to explain that despite the cash crunch and the lawsuit, the company’s underlying business was sound. They pledged to spend the rest of the year paying down the company’s enormous debt, bringing it more in line with its credit limits.

To accomplish this, BreitBurn slashed its capital spending by $100 million in 2009 and continued its suspension of dividend payouts. The company also sold $70 million of its commodities hedging contracts, using the proceeds to pay down the debt. In addition, BreitBurn sold its holdings in the West Texas Permian Basin for $23 million, with the proceeds going to debt repayment.

“These were gut-wrenching decisions for us,” Jackson said. “As a master limited partnership, we are committed to distributions to our unit holders, so suspending those distributions was very painful. But as difficult as those decisions were, we firmly believed they were the right thing to do for the partnership.”

Meanwhile, BreitBurn executives stepped up their attempts to reach a settlement with Quicksilver. At first, those attempts were rebuffed, but eventually Quicksilver came to the table.

In February, BreitBurn agreed to pay Quicksilver $13 million and give the Texas company more representation on BreitBurn’s board. Also as part of the settlement, BreitBurn co-founders Washburn and Breitenbach agreed to leave the board and change their titles. The pair had been co-CEOs; Washburn became the sole chief executive and Breitenbach took on the title of president.

In return, Quicksilver agreed that it would not initiate any hostile actions against the BreitBurn partnership so long as its stake remains above 10 percent.

Stock surge

Also in February, BreitBurn announced it was reinstating dividend payments at $1.50 per unit of stock, with the first payout set for May 15. (As a master limited partnership, the company doesn’t label its stock as shares, but calls them units.)

Investors greeted these developments by sending BreitBurn’s stock price to $15; it has traded at about that level ever since.

The price declined slightly in March when BreitBurn reported a loss of $39.7 million during the fourth quarter, mostly due to its commodity hedging portfolio.

Jackson said that without BreitBurn’s extensive hedging portfolio to smooth out some of the volatility in the oil and gas markets, the company’s losses would have been far more severe during the past year.

“Oil and gas prices declined by 75 percent between mid-2008 and mid-2009, but our hedging portfolio only declined by 25 percent,” Jackson said. “So the hedging did its job and also allowed us to pay down our debt.”

For the rest of 2010, Jackson said that BreitBurn plans a modest increase in capital spending as it focuses on wringing ever more oil and natural gas out of its fields. The company is also on the lookout for more producing oil and gas field acquisitions.

Analysts Blum and Hanold have both expressed concern about the impact of depressed natural gas prices on BreitBurn for the remainder of 2010. But Jackson said that BreitBurn is less vulnerable to the impacts of low natural gas prices thanks to its hedging portfolio, which holds commodity stocks with values that rise when natural gas prices fall.

Now that the company has turned its serious problems into manageable challenges, it will work on producing natural gas and oil from fields in five states: California, Florida, Indiana, Michigan and Wyoming.

“This past year, we focused on getting our balance sheet in order,” Jackson said. “Now we have to focus on the nuts and bolts of our business.”

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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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