Energy debt specialist EIG Global Energy Partners has agreed to invest $1 billion in onshore explorer Breitburn Energy Partners LP, which the producer said it would use to repay debt and pursue "strategic opportunities as they arise."
The Los Angeles-based independent, structured as a public master limited partnership, operates assets across the U.S. onshore, including in the Permian Basin, Rocky Mountains, Midcontinent, Ark-La-Tex, California, Florida, Indiana, Kentucky and Michigan. Under the agreement, Breitburn would sell $350 million of perpetual convertible preferred units and $650 million of senior secured notes in private offerings to investment funds managed by EIG and other purchasers. The offerings are scheduled to close on April 8.
Net proceeds of about $938 million in part would be used to repay debt. In combination with the deal, Breitburn plans to reduce its distribution to 50 cents/unit/year to increase liquidity and "strategic flexibility for a potentially prolonged market downturn," management said.
"We view the investment as an endorsement of the quality of our diversified asset portfolio and future growth prospects," said Breitburn CEO Hal Washburn. The agreements "bolster our financial flexibility and align us with an experienced energy investor partner to help execute our vision and avail ourselves of strategic opportunities as they arise. This transaction provides valuable pro forma excess liquidity for Breitburn and gives us the ability to opportunistically pursue strategic acquisitions in the current depressed commodity price environment."
EIG has other sizable investments in the U.S. energy sector, including Cheniere Energy Inc. (see Daily GPI, Jan. 16). It was involved in financing arrangements for former Chesapeake Energy Corp. CEO Aubrey McClendon before he was forced out (see Shale Daily,Feb. 21, 2013).
EIG CEO R. Blair Thomas said the company plans to "work with Breitburn with the goal of creating significant value and distribution growth for unitholders given the substantial liquidity our investment will provide and the growth opportunities available in the current market environment."
Series B preferred units would be issued at a price of $7.50, representing a premium of around 27% to Breitburn's common unit closing price last Friday (March 27). The preferred units would pay monthly distributions at a rate equal to 8%/year, payable in cash or additional preferred units at Breitburn's option for the first three years, and in cash thereafter. After three years, the units would be convertible at the option of EIG. At the close of the transaction, the units would have a combined voting interest in Breitburn of about 18%. The senior secured notes due May 2020 would pay 9.25%/year interest and be "effectively senior" to Breitburn's existing 2020 senior notes and 2022 senior notes. The notes are callable at par beginning on the fourth anniversary of the closing date and do not include any financial maintenance covenants.
This dividend distribution reduction “is a very difficult, but prudent undertaking and an important component of our comprehensive liquidity, cash flow, and value management strategy," Washburn said. "We have spent the better part of the past four months carefully examining our playbook and rewriting it to deliver the highest unitholder value over the medium to long-term. The steps that we have outlined...along with additional actions underway including meaningful reductions to our operating expenses...will substantially increase our distribution coverage and better position us for long-term value creation, as we believe we can reinvest this additional liquidity at higher rates of return in the current environment."