BreitBurn Energy Partners L.P. (NASDAQ:BBEP)
Bank of America Merrill Lynch Global Energy Conference
November 1, 2012 9:30 am ET
James Jackson - Chief Financial Officer, Executive Vice President
BreitBurn Energy Partners are second MLP after (inaudible) yesterday presenting in this conference. For most of you, BreitBurn Energy, BBEP, has been a very active MLP, E&P MLP in that space. They have done, what interest us and probably a lot of you, just this kind of balanced that portfolio with multiple oil acquisitions this year and guide tomorrow in the future.
I will ask Mr. James Jackson, the Chief Financial Officer to tell the story of BreitBurn.
Great, thank you very much. Good morning, everyone. First of all, I appreciate very much the invite, coming back and presenting to the BofA Merrill Lynch crowd, one of my alma maters along with Morgan Stanley many years ago. But what I would like to do this morning is, I give you an update on some of what we have been doing at BreitBurn.
As (inaudible) just mentioned, we have been very busy, over the last six months. We have particularly busy over the 14 months and I think it says a lot about where we are headed with the partnership, frankly, which isn’t too different than the way we have been running the business for the last seven years since going public and the way that Hal Washburn and Randy Breitenbach have been running the business for, call it the last 25 years, since starting it together back in the late 80s.
So, let me just start with a quick overview of the partnership. As I mentioned, we went public in late 2006. At that time, we were in two states. We were in California and Wyoming. The business was very much oil business, very, very high PDP. We have grown significantly and shaped the company in a pretty material way in the last six years.
We are focused as most of our peers on the acquisition and exploitation of assets. We do not explore. We have completed five transactions in the last 14 months totaling over $650 million. We will talk a little bit more about those. We have a very strong balance sheet. We have done just under $1 billion of public equity and debt financing in the capital markets in the last 12 months. So the balance sheet, frankly, has never been more stable and never been better than it is today.
We have two businesses, really. We have a northern division and a southern division. The northern division is principally seven basins in Michigan, Indiana, Kentucky and Wyoming. Then our southern division is the legacy business in Los Angeles where the company was started, as well as the Sunniland Trend, here in Florida. We are the largest producer here in Florida, as well as our operations in the Permian Basin which we acquired this summer.
In terms of overall statistics, year-end 2011, we were 151 million barrels. We were just under 80% proved developed and interestingly, we will finish the year with a balanced portfolio, at least in terms of production of 50% oil and 50% gas for the fourth quarter. We have very little, by the way, in the way of NGLs. So NGLs account for less than 3% of total production. So a very straightforward business. Right around $1.5 billion in equity market cap, $2.2 billion enterprise value and conservatively capitalized with under 40% debt to enterprise value.
This is a snapshot of where our operations are. As I mentioned, we started with two states when we went public. We have now expanded to seven. The biggest business we have is really in Michigan, Indiana and Kentucky where we produce about 11,000 barrels a day and these are year-end 2011 number, so a little dated but indicative nonetheless.
Our next biggest business is in Wyoming where we have legacy operations and we have recently acquired assets. We are producing about 7,000 barrels a day in Wyoming. Just over 3,000 barrels a day in California. We will talk a little bit more about what's going on there that’s very interesting and then the smallest business is here in Florida at around 2,000 barrels a day.
We have an 18-year reserve line. We think that compares very favorably with our peer group and then we will talk a little bit more about the asset mix in terms of PDP and PUD opportunities going forward.
Let me catch-up on a few of our core strategies and our highlights year-to-date. One thing that is different for BreitBurn in this year as in the past, we have really focused, not only on acquisitions but on developing opportunities to drill organically. That is very important, although less talked about, we think, in the E&P MLP space but it should be because while the business is good today, access to capital markets is very good today, there are times where there are either going to be dislocations in the capital raising process or there are going to be periods where, for whatever reason it is difficult to execute on acquisitions and we think it is important to have a fair amount of organic. I will call it low risk organic growth opportunities inside the portfolio.
This year, we started with a capital program of $68 million. Through three increases during the year, we have increased our capital program to just over $150 million. That $90 million increase, two thirds of it, has been focused on low-risk development opportunities in our legacy assets. The remaining one third of that increase, or about $30 million, is targeting recently acquired properties and the development opportunities there.
So, good organic growth prospects, good acquisition driven growth prospects. On the acquisitions side our budget, if you will, for acquisitions early in the year was $300 million. By the middle of the year, we have completed $320 million in acquisitions. We have now upped our target for the year to between $300 million to $500 million and we are likely next year, in 2013, to be more focused on the higher end of that range, i.e., plus or minus $500 million in transaction next year.
We have demonstrated our ability to grow prudently via acquisitions. As I mentioned, in last 14 months we have done five or six deals totaling just over $650 million. Organic growth opportunities and acquisitions support our distribution growth. We know that’s very important to our investors. We are targeting 5% year-over-year distribution growth. That is probably an aggressive goal but that is our goal and we think if we can do that year-in and year-out, over time we will compare very favorably to our peer group. We have increased distributions in each of the last 10 quarters and are currently paying at $1.86 per unit on a run rate basis.
We have done this while maintaining a tremendous amount of financial flexibility. As of about a week ago, we were less than $50 million drawn on our revolver. It is a $900 million borrowing base. We actually have the option to increase that to $1 billion, if the situation arises but we have been very active in the debt and equity markets. We have capitalized ourselves very well year-to-date. If you look at where we are vis-à-vis our peer group that also has high yield debt outstanding, because not everyone in the peer group has that, but if you look at us versus all of our peers with high-yield debt outstanding, we are the least levered.
Based on the Wells Fargo High-Yield Research we are 2.7 times debt to LTE and EBITDA, the average of our peer group, four of the companies is 4.3 times. So very conservatively capitalized. The balance sheet and our liquidity position has never been better.
We talked about acquisitions. I thought I would hit on a few a few things here. The acquisition strategy for BreitBurn really is unchanged in the last 25 years. Hal Washburn and Randy Breitenbach started with acquiring two wells. We now have several thousand wells and that has been through a disciplined acquisition process, literally since 1988. So when people ask us, how is the acquisition market today versus two years ago, there is 25 years of perspective on how to get deals done and we try to be very prudent about that.
We have been successful. We added assets in Wyoming, where we have a great business. We added both oil and gas assets there in Wyoming. Then we recently entered the Permian. That is an area that we had been looking at and focused on for obvious reasons for more than two years. Finally we were able to get something done that we thought was very attractive from our perspective and the seller's perspective. We will talk a little about that later.
In terms of overall activity there is a lot for sale right now. We looked at right around 200 acquisition opportunities in 2011. Our A&D team which is 10 plus people strong has now screened over 400 deals year-to-date. So it is not surprising if there continue to be things that happen in the E&P MLP space going into the fourth quarter for a whole host of reasons, whether it is tax oriented, election oriented, financial situation changing but we are very well positioned to take advantage of what lies around the corner through the end of the year and early in to 2013 as well.
I talked a little about our legacy business and driving our capital program. This slide which illustrates how the capital program has increased over time is notable mostly because of where we have been spending the money. It was very typically in the E&P MLP space if companies are increasing their capital program, it's really drill recently acquired assets. That is not the case with us.
We have a balanced portfolio of oil and gas opportunities. We like being balanced in commodity price environment like this. That gives us opportunity to look up and down the portfolio for low-risk ways to continue to build the business and most of what we have been doing in the legacy businesses, actually in California, that is a very attractively priced market right now. The marginal barrel comes in off the water. We receive Brent-based pricing with very small differential to posted prices and that compares very favorably to current WTI prices. But as I mentioned of the $85 million increase in the capital program, the majority of it has been in to low-risk development opportunities in the portfolio on acquisitions.
We have been active, however. As I mentioned, we have recently acquired in Wyoming and in the Permian Basin in Texas. Let me talk a little bit about the Wyoming asset. It was the smaller of the two. Right around 6 million barrels of reserves, 100% oil, not a broadly marketed situation but a unique situation. It was actually a public company that was dissolving and we bought the assets of the company. So, novel structure, which we are not opposed to and we did something similar with respect novelty in Texas.
We bought two businesses in Texas that are essentially adjacent. One of them from Element, which was a high PDP business and another from CrownQuest which has CrownRock as the operator. That is more of a PUD oriented opportunity, more drilling opportunities there. But those businesses together are predominantly oil and liquids rich gas and some additional PUD opportunities. So those two businesses combined, about 50% of the reserves we bought were PUD which help change our mix a little bit and again give us running room in terms of the existing portfolio.
These are additional highlights on the Element and CrownRock acquisitions. I will hit a few points here. As I mentioned, we were targeting the Permian for some time. These two deals combined came in at just under $220 million. We have very strong relationship with a strong partner operating with us in the Permian now. It is oil oriented and liquids rich gas oriented. There are a number of drilling locations, 160 drilling locations in the area. The mix here, in terms of what this does for costs is very attractive, $6 lifting cost compares very favorably with the balance of the portfolio and we are starting to see that in our LOE statistics about quarter over quarter, but a very good business and one, an area that we were obviously looking to do more in over time.
This is a quick summary of the recent transaction in the Rockies. We have a lot of experience and a very strong operating history in Wyoming. This is a classic bolt-on transaction even though the structure was a bit novel. Around 500 barrels a day, 100% oil, 6 million barrels of reserve, a very long reserve life and low LOE. So a classic MLP asset in an area we know very well.
We do have some other assets that are in the portfolio which we were not actively drilling. There are two. The first is the Utica Collinwood Shale. One of our bigger businesses is in Michigan, in the Antrim Shale. We have about 130,000 net acres in the Utica Collinwood. Principally, if you look here on the map the overlay of our acreage.
Let me illustrate that. So this, on the map, our acreage, BreitBurn is here in yellow. This is the extent of play and this slide which is a little hard to read. This is the wet gas window and this is the oil window. There are two folks, two companies that are looking actively at this area, Devnon and Encana. We are watching closely what they do. We, I think, are in a position to be very patient here. 85% of our acreage is held by production. We think we are very well situated if this place starts to emerge in to something that we or others want to focus more on but we will do it in a way that's MLP friendly in terms of exploiting the opportunity. So not an area where you are likely to see us drill an area of extensive wells so low but we will continue to monitor this.
Also in Michigan, we have a presence in the A1 Carbonate. Our presence in the A-1 is about 75,000 net acres. This is a little less advanced in terms of others looking at this area. Our position is nevertheless significant. So we are keeping an eye on what's developing in the A-1 Carbonate as well.
I will talk a little about the business. Maybe just hit on some of the key financial policies which are pretty straightforward other than, I think, we are a little more conservatively capitalized than most of our peers. We have not historically outspent our cash flow. That is number one.
Obviously we want to fund operations, maintenance capital, interest expense and distributions out of it EBITDA. We will outspend cash flow a little bit this year by about $50 million which is relatively modest basically because we have a number of attractive drilling opportunities in California on the oil side where the economics are just very compelling. These are however flashy, high declined wells. They are very typical E&P MLP wells, less than 100 barrels a day with reasonably low declines. So nothing that will skew this climb rate in the portfolio too dramatically.
In terms of leverage, we have always said we want to run the business between 2.5 and 3 times leverage which is LP and debt to EBITDA. From time to time we do go north of three times in the context of an acquisition and then invariably you will see us go to the equity market or finance an acquisition with the units. We have done that historically with the Quicksilver folks back in 2007 and bring that leverage level back in to 2.5 to 3 times range.
Right now, we are at the low-end of that range. Based on our calculations, pro forma for acquisitions, we are just under 2.5 times levered, which again compares very favorably for the balance of the growth. When we think about financing acquisitions, we underwrite them assuming we will ultimately finance with 60% equity and 40% debt with the vast majority of the debt being term debt. We have done four high yield transactions now of 10 years or longer in the marketplace. So our financial profile on the balance sheet is very consistent with how we have been talking to equity investors, debt investors and other constituents, equity rate agencies in terms of financing strategy.
We also hedge very aggressively. Our hedge portfolio, which I will talk about in a minute, we generally look to be 80% hedged in year one, 70% hedged in year two, 60% hedged in year three et cetera but we actually hedge acquisitions more aggressively than that. So on a typical acquisition, including all three of the transactions I mentioned earlier, we basically hedged 85% of PDP for all of five years when we either signed or closed each deal. So that will push our hedge percentage up as well.
We are not 100% hedged. That is, we think, very expensive. You either have to put real capital up to get to the 100% hedged position or you are in a position where if oil and gas prices take off and your cost take off, you are not protected. So we like, based on 20 years of doing this, we like that 80%, 70%, 60% hedge position.
Then finally in terms of distribution coverage. We look and we said on our recent conference call, we look to share of between 1.1 and 1.2 times coverage. We think that is a comfortable place to be, particularly given the fact that we are so well capitalized at this point and have as much liquidity as we do.
Let me spend a minute on what we all our Commodity Price Protection Portfolio. This illustrates the effect of hedging the business month-to-month on an ongoing rolling basis as well as hedging aggressively with acquisitions. Our average hedge price for the portfolio on the oil side is around $94 over the next five years and the average price on gas side is north of $5, actually $5.40 over the next five years. We do have very attractive hedges in 2012 that come off in 2013. That creates a little bit of headwind in terms of distributable cash flow but with our 2013 hedges at just under $6 that still is a very good comparison to, I think, many of the other hedge books you will see, whether its in the E&P MLP sector or in the C-corp sector. We will continue to look at 2016 and 2017 hedging as we move into the end of this year and early next year.
This is a snapshot of our crude oil hedges. I think what's notable here, since we have already talked about percentages and prices, is really two things. We hedge both WTI and we hedged against Brent. As about 30% of our production is Brent-based oil production. So we hedge both but our approach is very straightforward. There is not a lot that is particularly esoteric in the hedge book whether it’s a three-way structure or PUD. It's pretty much of swaps and collars storing.
Same thing on the gas side. We are, I think, even less exciting on the gas side, in terms of what kinds of hedges we use. We will continue to add into 2016 and start to work on 2017 in the quarter ahead but a very straightforward hedge portfolio. Not surprisingly, it really works. This is an illustration. Actually it's not an illustration, its historical fact of how commodity prices have changed and how our profitability has changed quarter-over-quarter since 2008.
What is notable here is that in an environment where in the middle of 2008 commodity prices went from $140 oil and $14 gas down to $40 oil and $4 dollars gas. You have commodity prices down in the course of six months, over 70% and our worst comparison from (inaudible) in terms of profitability, i.e., EBITDA. EBITDA was only down by 25% and that included us not starting a lot of wells that had gone off-line because the economics were uncertain. So this works.
It is also important to see how our distribution has been growing over time as commodity prices have on the oil side, in particular, have increased. Another benefit of not being 100% hedged. This is indicative of the stability that a hedged portfolio provides. The outcome of that is consistent distribution growth. We have increased distributions in each of the last 10 quarters, from early 2010 to the day we been growing distributions at around 10%. That obviously is the benefit of commodity price rising. We are now targeting 5% distribution growth. Again we think that compares quite well to our peer group and it's supported by ongoing acquisition, organic development opportunities and a very aggressive hedging profile in each of the next few years.
In terms of the value proposition at BreitBurn. This is probably the easiest way to illustrated it and it's our yield versus the yield of our peer group. The peer group has broadened pretty substantially over the last three years but it's still generally pretty small with less than 15 players. We are currently trading or were, as a few days ago, just above the 10% yield and this is not adjusted for tax yield. This is just cash-on-cash yield. We are in the higher-end to the middle of the pack. We think that is something that compresses over time. We have a very good story. We have sequential distribution growth.
We have capitalized the business in a way that is very conservative. We are very well positioned for what we think frankly will be a lot of uncertainty, whether it's on the tax side or the acquisition side or the commodity price side going in to the end of this year and into 2013. We have demonstrated that our ability to acquire and find attractive opportunities inside the portfolio gives us a lot of running room on the business. So we think, a very attractive value proposition versus not only treasuries where spreads are now 800 basis points, and they have generally been 200 basis points but with the similarly sized peers in our sector.
Maybe just to wrap up. We have a very high-quality asset base. We have built it over the last 25 years. The management team has been together since the IPO and each of us has plus or minus 20 years in our respective disciplines. We are in selected basins and we are in basins where we have a critical mass. There are obviously benefits to doing that and you should expect us to continue acquiring and entering new areas where we will have critical mass and can put our knowledge to work. We have hedged the business very aggressively but we have not done things that I would deem to be expensive or complicated. We have grown distributions almost 24% in the last 10 quarters and we are targeting 5% growth going forward.
As I mentioned, we are very, very well-capitalized. The liquidity position at BreitBurn and the debt management has never been better with 95% of our debt being eight year debt or longer. That is a very, very strong balance sheet. Finally, we have a very attractive distribution relative to the peer group.
So that concludes my remarks. Why don’t we go and take questions. Okay, great. Why don’t we go ahead and open the floor for questions. I will be happy to answer whatever questions you have.
Thanks, James. Let me take the first one and I will urge everyone else to ask a few questions if possible. We have a roaming mind (inaudible) do that. James, when I look at BreitBurn and what you have done in the years, you have guided to a $300 million to $500 million acquisition. So will that be the run rate for 2013? If you can talk a little bit about the CapEx guidance for '13. Then, broadly on the acquisition front, you have done bolt-on, you have done entry into a very a hot play but as the management thinks about stepping on the acquisition front, what would you prefer? What do you prefer? Would you adding on assets in Wyoming or would you prefer entering into plays that are on the horizon, if you could?
Okay, so a couple thoughts there. At the beginning of the year, what we communicated to investors was that our target acquisition budget, if you will, for the year was around $300 million. We were very successful. We were very active. As I mentioned, through the first half of year, I think, we looked at north of 175 transactions. We bid on a couple. We won three. So by the end of the summer, we basically had the $300 million acquisition target achieved. Not surprisingly, we moved the range to $300 million to $500 million for the year.
So one comment there, given our size, $300 million to $500 million of acquisitions a year moves the needle of BreitBurn. That is the result of having a balance. You can't do $500 million of acquisitions unless you are reasonably sized and have demonstrated access to capital. Doing a $500 million in acquisitions or $300 million to $500 million in acquisitions really doesn’t matter if you are a $5 billion, $6 billion, $7 billion entity.
So the key is finding that balance where "the model works" between your legacy assets, the decline rate, where you buy, in terms of multiples and valuation, and how that really delivers or supports, what we view as our distribution growth goal. Given where the size of the business is today, given where we have demonstrated our ability to buy in terms of valuation which is sort of in that five to six times forward EBITDA range, okay, transaction value of forward EBITDA that "that model works", when you remain conservatively capitalized, underwrite the acquisitions the way we talk about doing them and are targeting 5% growth.
Obviously as we get bigger, this $300 million to $500 million range will increase. I would expect although we haven’t formally set down and done the budget for 2013, but I suspect our target for 2013 in terms of acquisitions is towards the higher-end of the $300 million and $500 million range, not the lower end, and where the balance sheet, we are very well-positioned.
You also asked about the CapEx guidance. Interestingly, the end of the 2011 calendar year, if you recall, gas prices really started contracting and we moved very quickly to retool the budgeting process and do, originally planned very little in the way of natural gas drilling for 2012. Our capital program was pretty small for a company our size. Our original capital program was $60 million when we announced it in February but the economics on the oil side were very attractive and because we have a balanced mix in the business of reserves and production, we spent a lot of time looking more at the oil opportunities in the legacy business and found a lot to do there.
So we took the capital program up by $19 million. Then we took it up by another $50 million and then finally we took it up by $15 million. So, I think, in terms of delivering on expectations with respect to the capital program that is a very good place to be. We are in the middle of our 2013 capital budget process. We don’t have a number for 2013. So it’s a little bit premature but I will say that we continued t find a lot of opportunities in the existing portfolio to drill, particularly on the oil side. So that’s what you can expect, I think.
Then, just trying to dig versus bolt-on?
We really do not want to be everywhere. First of all, we like operating. That's really the history of BreitBurn. So moving into doing a transaction in multistates where you are not an operator that is a little less interesting to us, I think. We are in great states now, in terms oil production. I can see us spend a little more time, being in Texas, Oklahoma, et cetera. We like California a lot and most notably because it's generally out-of-favor from every other oil company almost every other oil company's standards and we know the market very, very well.
So I don’t think we would go out and do a multistate deal where we have largely a non operated position. You are more likely to see us do what we did in the Permian which is $100 million to $200 million, $300 million in a traditional oil-producing state, oil and gas producing state where we can operate and have a real presence there as opposed to being spread too thin.
James, if you could talk a bit about what constraints you from stepping it up in California? If could give us an inroad in to the play? What do you see? What are the drivers there? What are the skill factors, if you could?
Well, California is very mature area. One of our principal assets is the Santa Fe Springs oil field which has been producing for a 100 years. When we bought it, we bought it with 10 million barrels of reserves. It has been producing plus or minus 1,800 barrels a day for 10 years and it still has 10 million barrels of reserves. From the field, add 1.3 billion barrels of original oil in place and this is in, right in Southern California. It has produced 300 million barrels. So there is a billion barrels of oil there. Who knows how many we can ultimately get out but we feel pretty comfortable that in that field we will be able to continue drilling like we have been drilling recently.
In terms of dealing with California, if you are trying to get a new area, convert it to an oil field. That is a challenge but in the State of California now with some recent changes on the regulatory front and the administrative front, if you are operating inside your existing oil fields, you are operating inside the boundary and you have been very diligent, have a very good record environmentally and work constructively with the State it is a process, but it is a process we understand pretty well. So we have been less constrained by regulatory processes in California than we have been by just our ability to work through what is a pretty big presence there.
Unless somebody else has any other questions, thank you.
Okay, thank you. Thank very much for hosting us and happy to answer any other questions.
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