Facing a maxed-out corporate credit card, L.A. oil firm BreitBurn Energy Partners last week obtained a lifeline: a $1 billion private equity investment that allows it to keep paying shareholders while continuing to pursue oil field deals.
The investment, a mixture of preferred stock purchases and new debt, comes from EIG Global Energy Partners, a Washington, D.C., private equity firm that sees BreitBurn as well-positioned to snap up additional oil properties from distressed sellers and wants to be part of that action.
“We think BreitBurn has exceptional assets now and is the best-positioned master limited partnership in the nation in the oil and gas sector,” said Bill Sonneborn, president of EIG.
But industry analysts and the markets were not as impressed, focusing less on the investment than on another move BreitBurn announced the same day: a decision to further slash the company’s annual distribution to shareholders. With this latest cut and another announced two months ago, the company’s distribution has fallen 76 percent, from $2.08 a share to just 50 cents.
Within hours after the moves were announced March 29, one investment analyst downgraded BreitBurn to “sell,” and that’s precisely what happened. The company’s share price tumbled 6 percent March 30, the first trading day after the announcements. BreitBurn closed April 1 at $5.46 a share, down 11 percent for the week, making it one of the biggest losers for the week on the LABJ Stock Index. (See page 32.)
“Despite the significant distribution cut and capital infusion, BreitBurn would have a high leverage, which, along with its liquids-heavy portfolio would keep the stock under pressure until oil stages a convincing recovery,” analyst Abhishek Sinha of Wunderlich Securities in Houston said in his report downgrading BreitBurn stock.
Debt laden
Still, the EIG deal gives the company’s balance sheet some breathing room. BreitBurn expects to use the net proceeds from the deal – about $938 million – to pay down its credit line. The company’s lenders, a syndicate of 35 banks led by Wells Fargo & Co., were likely going to cut the size of that credit line, which could have forced BreitBurn to further reduce shareholder distributions or left the company without the ability to borrow for acquisitions. BreitBurn’s business model relies on a steady stream of acquisitions to offset declining production at the mature oil fields it owns.
After this deal, BreitBurn will be able to borrow up to $575 million more on its credit facility, allowing the company to do some bargain hunting for oil assets put up for sale by financially distressed competitors, said Chief Executive Halbert Washburn.
Analysts said the EIG investment was a welcome and necessary step given the deepening crisis that BreitBurn has faced over the last six months. Since late September, when shares traded at more than $21, the stock price has plummeted 75 percent, a deeper slump than most other oil companies have seen.
The reason BreitBurn has been hammered so hard can be summed up in one word: debt. In a case of extraordinarily bad timing, BreitBurn closed a $2 billion acquisition – its biggest deal in years – in August, just before crude prices began tumbling. Prices are down about 60 percent since then.
BreitBurn issued $350 million in new debt and took on additional $1 billion in debt from acquired firm QR Energy, roughly doubling BreitBurn’s debt load and making it one of the more debt-laden oil partnerships.
The trouble, analysts say, is that low oil prices make it that much harder for BreitBurn to repay its debt. However, Washburn told the Business Journal in December that most of the company’s expected oil sales through this year are locked in through price hedges at more than $90 a barrel, nearly twice the current benchmark crude price of $48.
Ironically, the same deal helped draw EIG to invest in BreitBurn, Sonneborn said. The Texas oil fields that BreitBurn acquired when it bought QR, combined with the company’s existing assets there, should serve as a platform from which to invest in more Texas oil fields as they become available.
“We think BreitBurn has exceptional assets, especially with major purchase of QR Energy, which added some very interesting and appealing assets,” he said.
The deal with EIG, a spinoff of downtown L.A.’s TCW Group, is in two parts: $350 million of convertible preferred stock and $650 million in senior secured notes. The preferred stock will be issued at $7.50 a share and will pay EIG monthly distributions of 8 percent per year. The senior notes, due in 2020, will pay 9.25 percent interest.
