The last 2 deals BBEP made were mostly oil. Even though this deal is 56% oil, the oil will account for something like 90% of the revenues and cash flow.
That being said, the deals were not cheap. They certainly weren't expensive, but they do imply that oil will continue to be priced at $95-$100/bbl range and that lifting costs will be in the $10 range.
They are accretive and they do make BBEP a better company as they are less dependent on gas and now have a lot more oil production...but BBEP needs to make sure they lock in hedges going out at least 4 or 5 yrs on the oil side.
If they can continue to modestly increase the distribution and continue to shift the balance away from gas and towards oil, they will continue to gain respect.
"We're not cheap, we're not expensive, so basically you are saying they paid a fair price... I agree. "
No, I didn't say they paid a fair price. I said what I said.
The Permian deal is 2100 boe/d (56% oil).
If we assume ZERO decline rate, and we assume a $15 lifting/transportation cost and oil is at $95/bbl, it would take BBEP 6 yrs producing 1,176 bbl/d and netting $80/bbl for them to recoup about $206 million. Keep in mind the transaction cost was $220 million.
Then, if BBEP sells the natural gas (5,544 mcf/d) and nets $1.75/mcf (a good margin) over 6 yrs, that would be an additional $21 million.
So, over the next 6 yrs, BBEP can essentially recoup its investment. That back of the envelop analysis did not take into account any money that would have to be set aside to offset natural decline, nor did it account for any financing costs (that $220 million will either be borrowed or units will be issued to raise tha cash).
One could argue that equity cost is by far the more expensive. If BBEP were to issue units, it would take approx. 12.5 million, which in turn would "consume" $23 million annually in disrtributions.
So, the deal is clearly accretive, but it also is heavily weighted on the price of oil staying very high. You can clearly see that the natural gas component of the deal does not materially impact the economics of the transaction. If oil goes to $80/bbl and lifting costs stay at $15/bbl, it doesn't look nearly as good.
Hopefully BBEP will layer on significant hedges to protect this cash flow.