Is BreitBurn’s High Net Debt to EBITDA a Warning?



Net Debt to EBITDA

BreitBurn Energy Partners’ (BBEP) net debt to EBITDA (earnings before interest, tax, depreciation, and amortization) has been volatile, but has clearly been rising over the past several quarters. During 1Q15, BBEP’s net debt to EBITDA multiple was 7.7x, which is ~49.7% and ~123.5% greater than in 1Q14 and 1Q12, respectively.

Net debt to EBITDA reflects how easily a company can repay its debts from its operational earnings and available cash. BBEP’s peers Atlas Resource Partners’ (ARP) and Vanguard Natural Resources’ (VNR) net debt to EBITDA was ~5.9x and ~4.4x at the end of 1Q15, respectively.

BBEP’s net debt to EBITDA has been falling since 3Q13 and reached a low of 4.5x in 2Q14, but since then the partnership’s outstanding debt has almost doubled, leading to a jump in its multiple. Plus, as we saw in part three of this series, BBEP’s EBITDA has not been stable over the recent quarters.

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Total debt

BBEP’s outstanding debt was $3,377.2 million at the end of 1Q15 compared to $1,875.6 million in 3Q14, an increase of ~80%. The partnership has borrowed heavily using its outstanding credit facility in the last two quarters. BBEP’s indebtedness under its credit facility increased to $2,218 million as of March 31, 2015, versus $719 million as of September 30, 2014. The reason for this huge increase in the partnership’s debt can be attributed to:

  • The QR Energy merger: BBEP spent ~2.7 billion on the acquisition in November 2014, including debt assumed.
  • Costlier equity financing: With the increase in BBEP’s distribution yield over the past two quarters, its cost of equity has increased significantly, making equity financing costlier. BBEP’s distribution yield has increased due to the huge decline in the partnership’s unit price resulting from the decline in crude oil (USO) and natural gas prices (UNG).

In the next article, we’ll discuss BBEP’s distributions and coverage ratio.


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