throwerw (99.83)

Too Much Debt and Dividend Cut Can Mean Opportunity

September 09, 2009 – Comments (1) | RELATED TICKERS: BBEP

BreitBurn Energy Partners L.P. is an independent oil and gas partnership focused on the acquisition, exploitation and development of oil and gas properties in the United States.  

I was initially attracted to this stock when I saw it on a list of Seth Klarman's holdings.  The deal was, they had hedged most of their oil and gas production through 2012 at very favorable prices, and as a MLP, they were required to pay out all distributable cash flow each quarter as long as they met their debt covenant requirements.  A Lehman Brothers hedge fund that was forced to deleverage was dumping shares last fall at prices which were completely covered by the hedge portfolio over the next 4 years.  Furthermore, the shares were trading at about 1/3 of the value of proven reserves.

In April, they announced that they would have to suspend the dividend indefinitely in order to deleverage.  It can be scary to watch a stock you hold drop like a knife, and even scarier to step in the way of it and buy more... but an objective look at the situation would have concluded that that day was the best day to buy.  Nothing had changed about the underlying business, the hedges were still intact, and a reduction in debt would mean an increase in equity value.  Of course, on that day, jittery retail income investors would be doing the most selling, without giving much thought to the long term outlook.

You could  have bought shares for less than 6 bucks that day, now the price is closer to 11, there is significantly less debt, and they still haven't reinstated the dividend...