Investors in Breitburn Energy Partners have been riding a gusher of rising oil prices that have pushed shares of the L.A. oil and gas partnership to three-year highs. But challenges now dot the horizon.
After several boom years, signs are emerging of a tougher operating environment for Breitburn and its peer oil field companies. The number of older fields that could be bought and revitalized has been winnowed down so the fields are now more expensive. And with so many older wells now in production, it’s tough to find enough skilled workers to keep them in shape. Also, environmental regulations hinder the company in the All that makes it more challenging for Breitburn and other similar energy concerns to produce the consistent and increasing returns that shareholders have grown to know and love.
“The entire space has been weak this quarter,” Kevin Smith, analyst with the Houston office Raymond James & Associates, said in a May report to investors on Breitburn.
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. Breitburn has increased its shareholder payouts for 16 straight quarters, which is one reason it’s been so attractive to investors. Breitburn shares closed at $22.24 on July 2, the highest level in more than three years.
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 $1.8 billion in purchases, nearly double its target.
The question is whether Breitburn can maintain its record of increasing shareholder payouts, given the toughening situation for oil-related master limited partnerships.
Breitburn Chief Executive Halbert Washburn believes the company can keep on track, even during what he conceded has been a “challenging operating environment.”
“We’ve shown over the last four years the ability to grow the business consistently,” he said. “That has made investors comfortable with us, maybe more so than some of our peers.”
Last year, Breitburn had a record year for deal value, closing two deals worth $1.2 billion, the largest being an $846 million acquisition of Oklahoma oil properties from Whiting Petroleum Corp. of Denver. That shattered the target acquisition level of $500 million for the year.
Acquisition shutout?
Breitburn set a more aggressive target of $600 million for this year. Yet through June 30, Breitburn’s total acquisition value was zero.
That prompted a writer on website Motley Fool to take a skeptical look at Breitburn. Matt DiLallo wrote late last month that the company is getting outbid by competitors.
“Breitburn’s goal is being upset by smaller rivals like Atlas Resource Partners (Pittsburgh) and Memorial Production Partners (Houston), which are the ones making all of the distribution-fueling acquisitions in 2014.”
DiLallo’s comments were based on what Washburn said to analysts in Breitburn’s first quarter earnings teleconference call May 8. Washburn acknowledged that the overall deal flow appears to be down slightly from last year. He then said the company has looked at a lot of deals, but “we haven’t been a successful bidder. … We have looked at some properties that some of our peers have acquired recently and we’re in those processes, but obviously weren’t willing to pay what they pay.”
Just last week, Linn Energy, a Houston master limited partnership, acquired a portfolio of properties in six states from Devon Energy Corp. of Oklahoma City for $2.3 billion.
Washburn told the Business Journal last week that he is not worried about the company’s ability to close deals, despite the intense competition.
“Look, as of mid-June last year, we hadn’t made any deals either and look at what happened by the end of the year,” he said. “We looked at over 400 deals last year and ended up closing on only two. We know we’re not going to get every deal; in fact, we know we’re not going to get 99 percent of deals we look at. We’re very picky about what we choose.”
Washburn said that even though the overall number of deals in the market may be down a bit, the company is evaluating roughly the same number as last year.
“The competition may be tough, but it’s been tough nearly every year. We still manage to make quality acquisitions,” he said.
Industry analyst Ethan Bellamy at Robert W. Baird & Co. in New York said he doesn’t see a problem in the short term.
“If Breitburn is missing out on auctions, that’s OK,” Bellamy said. “It means they are sticking to their guns on valuation and not overpaying for assets. … I’d be concerned only if I saw a three-year drought (of deals). We’re a long way off from that bogey.”
Production delays
Motley Fool’s DiLallo pointed out another concern: delays in bringing at least one recent acquisition to full operating capacity. That means Breitburn missed out on some oil revenue during the first quarter.
In his conference call, Washburn said that the conditions at the company’s recent oil field purchase from CrownQuest Oil and Gas in Midland, Texas, were worse than expected; more wells needed repairs.
“Due to activity levels in the Permian Basin, it took some time to secure additional work-over rigs to return those wells to production,” Washburn said.
Also, he told the Business Journal last week that the company had trouble finding enough workers for the repairs.
“On most of these wells, minor repairs were needed, but it doesn’t matter how major or minor, if you can’t get the rigs and the workers, you simply have to wait,” he said.
But the company has since solved those problems and the field is fully operational.
Washburn said he’s more concerned about stricter environmental regulations and the spread of fracking bans in California, a promising market that he said the company can’t exploit as much as it would like.
“The potential for more oil production is huge in California,” he said. “But we’re continually dealing with governmental actions that make it more costly or even outright prohibit drilling activity. That’s why of the $1.8 billion in acquisitions we’ve made over the last two years, only $100 million of that is in California. Our investment dollars are simply going elsewhere.”
