Contrary to management’s optimistic guidance, an assessment of Breitburn Energy Partners' (BBEP-$18.18) recent financials strongly suggests the oil & gas MLP cannot continue to simultaneously fund day-to-day operations, cap-ex, interest payments and dividend distributions with cash flow from its operations. Fundamental weaknesses include falling net income and free cash flow, lower return on equity, and increasing debt leverage.
To some extent, the company has mitigated crude oil and natural gas price fluctuations with an active hedging program: In 2013, 78% of anticipated production has already been contracted, with oil and natural gas volumes fixed at $92.80 per barrel and $5.96 per mmbtu. The downside to this “price protected” portfolio is an ugly – and unspoken – truth at Breitburn Energy: cash flow growth is dependent on hitting the production target, which in turn, is tied to spudded wells and acquisitions, funded with more and more debt and by secondary stock offerings, which increases the amount of units outstanding and subsequent cash distributions paid out, too....
Editor David J Phillips does not hold a financial interest in any stocks mentioned in this article. The 10Q Detective has a Full Disclosure Policy.
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