S&P Cuts Breitburn Energy Partners (BBEP) to 'B'; Sees Leverage Increasing Past Expectations

Standard & Poor's Ratings Service lowered its corporate credit rating on Breitburn Energy Partners (Nasdaq: BBEP) to 'B' from 'B+'. The rating outlook is negative. In addition, we lowered the senior secured issue-level rating to 'BB-' from 'BB' and the senior unsecured issue-level rating to 'CCC+' from 'B-'. The recovery rating on the senior secured notes remains '1', reflecting our expectation for very high recovery (90% to 100%) in a default scenario. The recovery rating on the senior unsecured notes remains '6', reflecting our expectation for negligible recovery (0% to 10%).

"The downgrade on Breitburn reflects our expectations that the company's debt leverage will increase to levels beyond our downgrade trigger for the remainder of 2015 as cost declines and efficiencies become harder to achieve," said Standard & Poor's credit analyst Aaron Mclean. "We believe leverage will likely remain elevated through 2017 as production growth levels off as a result of reduced capital spending," said Mr. McLean.

Our assessment of Breitburn's business risk as "weak" incorporates the company's relatively small reserve base and production levels, high operating costs, and limited organic growth prospects from its historical mature asset base. These risks are mitigated somewhat by a high proportion of proved developed reserves in its asset base, a long reserve life, low production declines, and a relatively high proportion of oil and natural gas liquids production, which receive favorable pricing relative to natural gas. We view Breitburn's financial risk as "highly leveraged" and we assess Breitburn's liquidity as "adequate."

The negative outlook reflects our view that leverage could continue to rise or that Breitburn could undertake a debt exchange that we could deem distressed, absent an improvement in commodity prices, a potential strategic transaction or capital infusion.

We could lower the rating if Breitburn does not take steps to reduce leverage such that FFO to debt falls well below 12% or if the partnership announced its intention to undertake a debt exchange we view as distressed.

We could revise the outlook to stable if Breitburn takes steps, which could include issuing preferred or common equity, completes asset sales, or secures external funding such that we expect debt leverage to stabilize below 5x debt to EBITDA, and FFO to debt about 12%.

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