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Further Dilution at Breitburn Energy Partners (BBEP)

February 3, 2012

Once again Breitburn Energy Partners is in expansion mode: they just announced a secondary offering of 8 million units priced at $18.80, raising around $144 million (potentially more with the underwriters option to place an additional 1.2 million units). Issuance of these units will dilute current unitholders by about 13.6% and obviously depress the unit price in the short-term (at least it did so today!). I assume the reason for this secondary is to bolster the capital structure after their $283 million purchase of oil and gas properties from Cabot Oil & Gas, announced in July and completed in last October. Their last capital raise was a 4.3 million unit offering last February priced at $21.25 per unit. In the interim there have been two other secondary offerings but of units owned by Quicksilver Resources (which traded properties for units in Breitburn in 2008). The first of these was a secondary offering of 7 million units at $19.78 last June and the second a 7 million unit offering at $16.52 last December. After the December secondary offering, Quicksilver no longer had any ownership interest in Breitburn.

I am a bit ambivalent about these secondary offerings. As you may remember I am targeting an exit from this position when the market price approaches book value (around $23 per unit). The problem is that these secondary offerings depress the market price (secondary units must be priced at below market price to assure a successful underwriting) with their additional supply of units and the time lag to generate returns on the additional capital. Furthermore, they also depress the book value when the offering is priced below book, as is the case with the current offering (though I don’t take this into consideration for my exit price). Thus, my exit from this holding is continually pushed off into the future even though most of the mispricing identified when I purchased the position was corrected with the reintroduction of the distribution some 18 months ago. This prolonged holding results in an IRR that erodes with time. On the other hand, I am being compensated for continuing to hold BBEP by the distribution; on my cost, BBEP has a current yield of close to 20% and this continues to grow: distributions have increased from $.4175 for the 1stquarter of 2011 to $.4225 for the 2ndquarter, to $.435 for the 3rd quarter to $.45 for the 4th quarter, almost an 8% annual increase. It should be remembered, though, that distribution levels still remain below where they stood in 2008 just before distributions were suspended.

There is, however, something of a potential ‘kicker’ with Breitburn; Something I didn’t know about (just like I didn’t know that the price of gas would be depressed for years) and haven’t independently corroborated as it wasn’t part of my original investment thesis. It has to do with potentially valuable properties owned by the company and is described in a post on seeking alpha (click here to view). I won’t hold my breath in terms of value realization, but if it helps BBEP to reach my target exit price I’ll be more than happy.


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