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Note on Breitburn Energy Partners

June 16, 2011

Tuesday (June 14) after the market closed Quicksilver Resources announced that they would be selling 7 million BBEP units in a secondary offering. This is just under 50% of their holdings of BBEP, although with potential over allotments they could be selling an additional 1 million units. To be clear, these are not new units, they are units that Quicksilver received 3 years ago as compensation for properties acquired from them by BBEP. So why did BBEP shares open 6% lower the next morning? Mr. Market might have thought these were newly issued shares and this would mean dilution for existing shareholders. But, I can hardly believe Mr. Market was so simple-minded! So maybe he interpreted the sale as a vote of no confidence in BBEP management, though if he had been paying just a little bit of attention he would have known that Quicksilver has had a rather rocky relationship with BBEP management over the past several years, including an acrimonious lawsuit. Then again, maybe he thought that $58 million for the acquisition of operating oil wells announced Monday was exorbitant. The answer is that I don’t really know why Mr. Market got cold feet yesterday and offered the units to any willing buyer at 6% less than the previous day. I don’t think anything has changed valuation-wise at BBEP; my take on the Quicksilver sale is capitulation mostly due to their own liquidity needs.

How does Mr. Markets change in attitude affect me? Well, not really, except that, much to my dismay, I am still holding 3/4 of my initial investment in BBEP. Three months ago I announced I was reducing my holdings with an eye to exiting entirely if the units appreciated into the $23-$24 range. They barely touched $23 then promptly declined into the $19.50-$21 range. My initial thesis has been proved out; the dividend was reinstated a year ago and has been increased several times since. So I really shouldn’t be still holding these units in my portfolio (yesterday’s price drop is a reminder) but I just can’t see myself to exiting below $22. I’ll probably regret my stubbornness, but in the meantime I’m collecting an 8.5% payout… and waiting for the exit ramp.

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From → Positions Closed

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