The other shoe finally dropped for shareholders of Breitburn Energy Partners last week. The L.A. oil and gas drilling partnership made a long-expected announcement that it is suspending shareholder distributions, effective immediately; shares then plunged 35 percent over the next two trading days.
In all, Breitburn shares were down 37 percent for the week ended Dec. 2, making the company by far the biggest loser on the Business Journal’s Stock Index. Over the last 52 weeks, Breitburn’s shares have lost nearly 90 percent of their value as the company has been rocked by the prolonged collapse in crude oil prices.
The company’s distributions, similar to dividends, were 50 cents a share. That equated last week to payout of more than 24 percent of the stock price – the highest on the Business Journal index. And that was after the distribution had been sliced 75 percent over the past year.
While the entire oil industry has suffered as crude oil prices have collapsed, Breitburn has been hit even harder. That’s because just weeks before prices started plunging, it made a $2 billion acquisition, financed almost entirely with debt that continues to loom over the company.
Breitburn had tried to take steps to protect itself from an oil price drop by hedging its oil property portfolio. This year, more than 70 percent of its portfolio is locked in at $93.50 a barrel. (West Texas Intermediate crude oil closed Wednesday just under $40 a barrel.) But the hedges fall off sharply next year and disappear almost entirely by 2017, leaving Breitburn exposed if oil prices don’t rebound by then.
In addition to slashing its shareholder distribution by 75 percent, the company has pared back expenses and laid off workers. In April, Breitburn secured a $1 billion investment in preferred stock purchases and new debt from EIG Global Energy Partners, a Washington, D.C., private equity firm. That allowed Breitburn to continue shareholder payouts for a few months, giving it time to see if oil prices would head back up.
Instead, oil prices continued trending down. In October, larger rival LINN Energy of Houston suspended its shareholder distribution, giving cover to Breitburn and other oil drilling partnerships in the process. Analysts then expected Breitburn to immediately follow suit.
That announcement finally came after market close Nov. 30.
Breitburn Chief Executive Hal Washburn said, “In light of the ongoing weakness in commodity prices, and crude oil prices in particular, and after careful consideration, Breitburn has decided to suspend cash distributions on its common units.”
Washburn continued, “While the decision … is a difficult one, we believe it is in the long-term best interest of the company and will allow us to save approximately $111 million annually, which we can redirect to reduce debt or invest in the business and better position Breitburn for the future.”
One investment columnist said Breitburn might have waited too long to suspend its distribution.
Breitburn really has just five quarters by which it can make a difference on its big pile of debt before its oil price hedges end, said market blogger Casey Hoerth, writing for the Seeking Alpha website. “I wish that Breitburn had just eliminated the dividend six months ago. It could have started chipping away at its debt pile much earlier.”
