Apparently, oil and gas in the ground is worth next to nothing. At least that’s what short sellers of BreitBurn Energy Partners L.P. (NASDAQ:BBEP) would have you believe after saying the company’s units are worth as little as two dollars apiece. Here’s the thing: Simple math shows that this isn’t the case at all.
Before we get to that, a little background is in order. This attack is really just a continuation by the same short-sale firm that’s been trying to take down Linn Energy LLC (NASDAQ:LINE) and LinnCo LLC (NASDAQ:LNCO). This company has gone on to say that BreitBurn Energy Partners L.P. (NASDAQ:BBEP) is really just Linn Energy LLC (NASDAQ:LINE) junior and that its distribution is “largely a mirage.” The problem is that, other than the fact that it’s just plain false, it’s not giving BreitBurn Energy Partners L.P. (NASDAQ:BBEP) much of any credit for the oil and gas it has in the ground. Those reserves are what matters most if you were to value the firm. That’s why for base value the company’s third-party-verified reserves are used, which total an estimated 149.4 million barrels of oil equivalent and are spread around the nation, as shown in the following map:
Source: BreitBurn Energy Partners investor presentation
The most basic way to value an oil and gas company is to put a number behind its oil and gas reserves. The simplest way to do that is to go to its latest annual report and take a look at its PV-10, which is the present value of its reserves discounted by 10%. For BreitBurn Energy Partners L.P. (NASDAQ:BBEP), that number is $1.99 billion, which you can find on page seven of last annual report (link opens a PDF). If you are an investor in BreitBurn, that number is really the one that you simply must know.
What that number means is that if oil and gas prices stay the same, and if BreitBurn Energy Partners L.P. (NASDAQ:BBEP) doesn’t discover any additional oil and gas reserves, that’s about what investors can expect the company to produce in future cash flow. It’s in a sense the worst-case scenario of the future because when its oil and gas reserves are gone, investors won’t be left with much else. It could be used as a rock-bottom valuation of the company, which makes BreitBurn worth much more than what short sellers would have you believe.
Here’s where the simple math comes into play. Take the net present value of BreitBurn Energy Partners L.P. (NASDAQ:BBEP)’s future cash flow and net out its debt of about $1.1 billion (as of the end of last year) and what’s left is just about $900 million in equity. Simply divide that number from the outstanding units, which were 84,668,000 as of the end of last year, and get a value of $10.50 per unit.
