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BreitBurn Energy's Growth Strategy Bodes Well for Shares

In 2013, the company spent $81.1 million as a capital expenditure on this asset and completed 34 new producing wells. Along with the new producing wells, it also re-completed six existing wells and 12 workovers in California last year, which will ensure long-term production stability. Workover wells are those where maintenance or remedial activity has been performed for improved production.

This year, to continue increasing its oil production the company plans to spend 92% of the total projected capital of $325 million to $345 million on oil projects, including California. About 85% of this planned expenditure will be diverted to drilling and rate-generating projects, which add reserve and increase production. While spending this capital, the company will drill 156 wells in Texas and California. So with 97% of estimated oil resources, the projected drilling of new wells should add a substantial amount in total production in the next few quarters.

Moreover, the oil produced in this region is priced on the basis of Brent, which is historically traded at a premium to Western Texas Intermediate (WTI). The Brent price is on the upper side and traded at around $109 per barrel as of February, whereas WTI traded at around$103 per barrel. It is expected that this year the Brent price will be around $105 per barrel on an average, and the WTI price will average $93 per barrel.

Thus, increased production in this asset could strengthen the company's top line, which in turn will help it to increased distributions to unit holders. With the pricing advantage and high oil reserve, the company should capitalize on its significant growth.

Impacts of Hedging

During the fourth quarter, BreitBurn reported total losses of approximately $17.2 million from a commodity derivatives instrument due to the low realization prices for oil, gas, and NGL. The realized price of oil in the fourth quarter excluding the effect of the derivatives instrument was $88.77 per barrel, lower than $100.94 per barrel of the previous quarter.

As in the current scenario, the oil price shows volatility in pricing and fluctuates frequently. However, to ensure its long-term sustainability and continue distributions to unit holders, BreitBurn hedged its projected total oil production at a weighted average rate of $93.70 for this year as shown above.

This will help the company to mitigate the volatility. The company has projected that approximately 24% of this year's total oil production will be sold based on Brent pricing and 76% will be sold based on WTI pricing. With this the company will reduce the effect of a lower realization price of oil and strengthen its top line.


A strong focus on increasing oil production and an effective approach toward acquisition helped the company sustain its financial performance. Although the company witnessed weak distribution in the fourth quarter of $0.46 per common unit, its focus on increased oil production could lead this company upwards.

At the time of publication, the author held no positions in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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