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Executives

Halbert S. Washburn – Director and Chief Executive Officer

BreitBurn Energy Partners, L.P. (BBEP) Citi 2012 North American Credit Conference Call November 15, 2012 9:15 AM ET

Unidentified Analyst

[Starts Abruptly]

Citi research team, I work with (inaudible) giving myself a little bit of a break today, because I think we had probably 10 or 11 E&P companies presented yesterday, so given your break from the fireside chat.

But with us here today, we have Hal Washburn from BreitBurn Energy Partners, and turn it over to you to give a similar presentation and then we’ll launch into some Q&A.

Halbert S. Washburn

Perfect, thanks. So I guess we have some technical glitches, and we’re running off with my iPod with presentation or iPad, so hopefully we’ll work. Why don’t we go to the first real slide page, if you guys can move it up to that to forward-looking statements we can give with that.

So I’ll give you brief overview of the partnership and then we can talk about kind of Q&A and answer questions. We are a midsized E&P company. As of the end of 2011, we haven’t disclosed reserves, obviously after 2012 we have about 150 million barrels of proven reserves.

Key component of that is that we’re very evenly balanced between oil and natural gas. Our production is about 50/50 today, and we’ve made several acquisitions this year that we’ll talk about a little bit that we’re primarily early. So it’s important to us to have a natural gas and oil component and it’s important part of our portfolio. Another important part of portfolio is that, we have a very high PDP reserve percentage. So we’ll produce 87% of our proved reserves by drilling an additional new well.

For an MLP it’s making distribution that’s very important. We won’t spend significant amounts of capital to boost 87% of our proved reserves. That’s important metric and something we focus on a lot. Equity market cap, pre the election was a little bit higher than it is today, it’s about $1.4 billion today and about $800 million in debt virtually all of that in high yield. I think we have less than $50 million drawn in the revolver today. We have a $900 million flex to a $1 billion borrowing base.

So we have significant amount of capacity under the revolver. We are an acquisition exploitation-based business. So you can expect us to draw that revolver down for acquisitions. In fact, since last summer, we’ve made about $650 million worth of acquisitions. Go ahead.

As I mentioned commodity diversification is important to us is MLP as this geographic and geologic diversification. We’re not tied to any one play, or any one region or basin. It’s important for us. We’re not looking for hyperbolic growth. It’s important for us not to be tied to the hardest new thing. So we have conventional reserves. We have unconventional reserves. We have reserves in the West Coast, we have reserves in the Rockies and in West Texas. We have natural gas and we have oil as I mentioned.

Very long reserve life for the partnership as a whole, almost 20 years and again almost 90% proved developed producing. We’re in eight states now. We made two relatively large acquisitions in West Texas earlier this year, prior to that we were in southern states including California, Wyoming, Florida and Michigan and smaller operations in Indiana and Kentucky.

We have significant businesses in both of those states. We are the largest natural gas producer in the state of Michigan. We’re a top five to 10 producer in California, top 10 I believe in Wyoming. I think we’re number one in Florida, it doesn’t say a lot, but we have a large business there, and we are starting to build the business in West Texas, go ahead.

So our business strategy was, we started the company 25 years ago. My partner and I were petroleum engineers at Stanford. We were out of school for few years and decided to start the business with an idea. And our idea was that oil and gas fields were being sold by the majors with a lot of oil remaining. And we believe the technology was going to allow us to get more oil out of the ground than what these sellers thought, and that was the thesis in 1988 and it remains the thesis today.

And we had no idea what that technology was going to be. At that point, you could drill a horizontal well maybe as far as this room is wide. People won’t drill in alternative water, but we knew the technology had always driven our industry and we thought it would continue to drive the industry, and so we built the business based on that. Based on basically buying an interest in large oil and gas fields, working very hard, being good operators, but also counting on innovations and technology to allow us to increase reserves, good option, cash flow, and therefore value, because we don’t explore, we have to acquire and that’s what we’ve been doing for 25 years.

We were in the acquisition business, it’s a core part of our business. We spend a lot of effort on that. We have a team that’s dedicated exclusively through acquisitions and we are very good at it. In the last, about 14 months now, we’ve done about $650 million worth of acquisitions. We said publicly our target for 2012 was $300 million to $500 million worth of acquisitions; we’ve so far done about $315 million. So we achieved below at a target, I hope we can get a little bit further along that before the end of the year. There are a lot of people concerned about what might happen next year, so there are a lot of properties on the market right now.

We also are focused on distributions and distribution growth. And we have grown distribution sequentially now for 10 consecutive quarters, and we’ve publicly said that our goal for distribution growth is 5% per year. We’re very conservatively capitalized. As I mentioned we have a very little drawn on the revolver, less than $50 million on a $1 billion borrowing base.

We are in the markets both on the equity side, as well as the bond side. In the last few months, we sold 11.5 million common units and we did a $200 million add-on to our one of our notes offerings. We have a low leverage ratio. We are in about 2.7 times EBITDA versus our peer group, it’s north of 4. So very conservatively capitalized, we believe it’s important in this business to be that way.

We’re also an exploitation company, and talked about acquisitions. We also a very much in the business exploiting the properties that we buy and using new technologies, drilling new wells, using new sensing and seismic capabilities to understand the reservoirs better. This year we’ve actually increased our capital program three times. We started the year with about $70 million capital program. We put our technical team to work on our oil producing properties and in May of this year added about $20 million to focus on drilling inflow wells, and almost 100-year old oilfield in Southern California. We’ve got one rig working continuously there. We hope to pick up the second rig there.

In August of this year, we added $50 million to our capital budget, an increase of $20 million on legacy properties, as well as an increase of $30 million on properties that we acquired this summer. And then just recently, we added another $15 million to bring our capital program for the year to $150 million again focused on Southern California oil producing projects. Very strong economics, especially in Southern California where our crude sales based on brunt and the last person who looked that was about $110 per barrel in the field, so very strong margins, very compelling economics today.

So I talked about acquisitions; acquisitions and exploitations that’s our business, we look about lot of deals and we closed very few of them, but we are very happy with the ones we do. So far this year, we did two deals in West Texas, Element and CrownQuest; and then we bought a deal in Wyoming right around our core operating area there is Wyoming if you go ahead.

Another important part of our business is hedging. We hedge aggressively, we hedge consistently, and we hedge around acquisitions. So when we make an acquisition, we’ll hedge four to five years of our expected production, and we’ll continually hedge our base production. If I’m at this presentation or at this conference last year talking to you, you would have seen a slide very similar to this one. In fact, the only difference would have been that – when you would have rolled off.

Our target is having about 80% of production hedged in the next 12 to 15 months. We step down slightly two-thirds in the three quarter, in the following 12 months, half to two-thirds, after that and then we are starting to build the book in years four and five. So what you see now is, we’ve got two-thirds to three quarter out in fiscal 2015 hedged today. Go ahead.

I actually don’t like this slide. It’s my least favorite slide in the deck. This shows our yield compared to our peers. And I think we had a deal that didn’t fall right; unfortunately we are towards the left anyway.

Today, our yield is about 10.3% on the equity. We believe that we should trade more in line with the guys on the right side of that. I’m sure every CEO that’s been here think if he doesn’t trade as well as they should, but anyway it’s a bit of attractive yield. Go ahead.

So anyway, highlights of the investment, we’ve been doing this for a long time. We’ve been in the business for 25 years executing on the same strategy, we acquire, we exploit. Our team has been together. We’ve added and grown world-class technical and operating people. We have critical mass in several very prolific basins. We have very large business in several states. We have a strong hedge book.

As we talked about earlier and that’s an important part of our strategy or it has been or it will be. But we don’t just grow through acquisitions. We have the ability to grow through the drill bit and we are targeting organic growth this year of a few percent. We are not going to grow at 30%, 40% or 50% like some of these guys in the Marcellus or Eagle Ford well, but we will go organically and we think that’s important.

We have grown and we are basically growing distributions and we are committed to growing distribution, and we’ve targeted 5% per year growth, we’ve actually grown a little faster in the last few years, but going forward we think 5% per year will put us in the top of our peer group. We have a strong liquidity position, again as I mentioned less than $50 million drawn on a $1 billion borrowing base. We have unfortunately an attractive distribution yield today.

So anyway my prepared comments, that was likely to come to an end, great.

Unidentified Analyst

Okay, correct, that would be great. Acquisitions have obviously been a very big part of your strategy and kind of their existence so far this year for the past kind of 12 to 14 months. Can you give us a sense of what some of that pro-action criteria as when your team of people are going out, looking in the field, what are they really counting in on and what makes you so selective of the 100 that you’re looking at, why would it be couple orders that are special about, there is a share how is really complementary to your portfolio?

Halbert S. Washburn

Yeah, so first off we’ve got a team that’s dedicated to acquisitions, that’s all they do.

Unidentified Analyst

Right.

Halbert S. Washburn

And they’re looking a lot of transactions. In 2011, I think they were able to just under 200 deals and we closed two.

Unidentified Analyst

Okay.

Halbert S. Washburn

Year-to-date this year we are looking about 400 deals and we closed three. So we get less than 1% of the deals that we look at. And we recently end up looking at so many as we understand that we are not going to get along again notwithstanding. So we got a team that tries to get to know very quickly. They don’t want to waste a lot of time on deals that are not going to be done.

So we look at a lot of deals, a lot of it sorted very quickly. We go, there is still big process on few dozen of the year. We make offers on 10 to 20 deals a year. We look to get three plus and so, and what we are looking at is very simple on our business actually, because we are a distribution-based business, we’ve got to be accretive to distributable cash flow, number one. But we also see it accretive to net and the net asset value. We can’t make an acquisition for the tremendous amount of cash that destroys value. So we have those two barriers, those two boundaries on every deal we are looking at.

We can’t go in and buy a huge non-cruise in acreage position in Bakken for example. So we are looking for deals that are accretive to NAV and accretive to cash flow and we’re trying to look down as we like to buy kind of 5 to 6 times EBITDA.

Unidentified Analyst

Okay.

Halbert S. Washburn

That’s really we looked on. We are looking at this kind of cash flow. We are looking at accretion NAV. We are looking at accretion to distributable cash flow.

Unidentified Analyst

Right. So you mentioned that and we heard from the some of the even the MLP companies yesterday that there are kind of big selection of assets out there, maybe taking a look at or may be 10, 11 or so that actually bidding for them. But what do you think for you guys really differentiate you versus some of those other companies in terms of getting in there and identifying them and then not only getting them into your portfolio, but then cultivating the assets once you have them, so the real differentiator?

Halbert S. Washburn

For us we create most of our value after the acquisition closes.

Unidentified Analyst

Okay.

Halbert S. Washburn

So it’s important for us to go well, but we pride ourselves on our operations. We pride ourselves from our technical team. We have a lot of people with advanced degrees from places like CalTech, Stanford and MIT.

Unidentified Analyst

Okay.

Halbert S. Washburn

That have a lot of experience in basins around the world. So we really create most of our value after we make the acquisition. But the acquisition is very important, because you can’t destroy a lot of value and we are looking at, the reason we look at so many deals and we focus on some few and closing the fewer is that, when we do focus on a deal that we decide we really want to understand that asset better than anyone else.

Unidentified Analyst

Okay.

Halbert S. Washburn

We’d like to understand it better than the seller understand, and often times I think we do. So we have the technical team that gets involved in this business from the very beginning, so it’s not just a business development group, it’s an industry group of engineers and geologists and business development people that really get in and dig into the assets and really understand the reserves, the production profile, the operating costs, and also marketing, which in this environment can be very difficult to get a chance.

Unidentified Analyst

Okay. This year you kind of made your entry into the Permian, how is that going so far I mean versus is it backing up versus your original expectations and kind of how do you view your company there going forward in that region and could you potentially see some more evolutions in that area activity?

Halbert S. Washburn

Exactly. Absolutely, I’ve seen a lot of deals now that we wouldn’t have seen without having a special step. The deal is working very well, the wells are performing where we expect them to. We have had some curtailment in the gap side, we shutdown some production that’s important part of the deal, that’s a temporary deal the gas process is working on expansion of this plant. But as far as the capacity from the wells, the wells are doing exactly what we expect them to. We did have a unique deal and the deal I’m very proud of. We had a relationship with the operator deal assets CrownQuest.

And CrownQuest has a number of projects going on in West Texas, and we talk to them for years about potentially joint venture especially doing something. And when their 50% partner in one of these projects decided to sell, we got a call. And we evaluated this non-operating position, lot of our competitors don’t really want to taken on our position, we generally don’t either. But we knew the operator and we expect the operator and thought this might be good entry into this area. So we were successful in buying the non-operating position and so we immediately went back to CrownRock. We now own 50% of 14, 15 wells and 50% of a 160 development wells we do operating.

We’d like to talk to you about a greater deal where you get what we think you want, your private equity batch you’re looking for growth. We get what we want, it’s just the cash flow. So we have the fine, in addition to the half that was non-op, the other half that’s just in the existing well. So we owned a 100% of the current production, 100% of 40 wells and we kept the half additional future drilling and let than operative.

So the benefits to us are we continue our significant growth in the assets and we have all the current cash flow, which is important for CrownQuest. And we are partnered with the really first grade operator, so we don’t have to immediately jump into Permian Basis and build an operating team.

So we have people underground, we’re learning from this operator, but we are benefiting from somebody who had eight or nine different projects going. They can move rigs around, they can move frac streams around. So basically they are in a position of doing a lot, such as the new entrance into basement, it’s tough for us to do from outstanding conference.

Unidentified Analyst

Okay. First of all, I mean you guys had a pretty high percentage of newer operating in south of course doing this, but still kind of around that or…?

Halbert S. Washburn

I mean even though that’s important deal, of course couple hundred dollars are still relatively small to the portfolio.

Unidentified Analyst

Okay.

Halbert S. Washburn

So we are an operating company and we’ll expect to operate in West Texas. It’s just nice not to have to be able to jump deep in immediately, it’s nice to start and waiting forward in that.

Unidentified Analyst

Okay. So as you mentioned, your CapEx budget a little bit this year and kind of how you fully taken it up, things were kind of breaking out the color where those incremental dollars were allocated towards. But as you look forward into 2013, where do you see that mix kind of going, and what are the highest rate of areas that you want to be focused on would it still be a little bit more towards incremental dollars to California or oily versus gas assets and kind of where you’re thinking for next year?

Halbert S. Washburn

No, we haven’t announced our capital plans. But I would say that they are not likely to be very different than this year.

Unidentified Analyst

Okay.

Halbert S. Washburn

You will see us focused on oil. We are looking at some gas projects with gas where it is today with the strip, there are some decent returns, but it’s hard to walk away from 50%, 60%, 70% oil, rate of return oil project to the gas project. California has the most compelling economics today just because of the Brent-based pricing.

Unidentified Analyst

Right.

Halbert S. Washburn

We’re seeing great return of 50%, 60%, 100% a lot of this projects. So we’ve reduced many of those as our technical team can up with opportunity. We took last year, about at this time last year we moved a lot of our geologists, geophysicists and engineers from our gas areas to work on the oil areas. And that was what allowed us to increase our capital budget once through the year.

Our technical team was able to come up and accelerate projects that has not been either fully developed, fully baked, or even in some cases just wording on the books, because we’re won’t working on gas. So right now we’ll continue to do that. I’d love to drill some gas wells to economics work.

Unidentified Analyst

Okay.

Halbert S. Washburn

I do value the balance, but right now the economics are so compelling on oil.

Unidentified Analyst

Right, you kind of brought me into one of my later question, it should be economics kind of gas, do you tend to have some operating leverage there, should prices come back, (inaudible) where this would be flat for where prices need to be three to one and make that move to get back and where does it makes sense, because you do have a pretty healthy reserve base and…

Halbert S. Washburn

Yeah, and let me just give you some color on the reserve base to model that question.

Unidentified Analyst

Yeah.

Halbert S. Washburn

So as I mentioned we’re the largest gas producer in Michigan, Chevron claim must be largest, but they ignored one of wholly-owned subs, so we’re number one.

Unidentified Analyst

Okay.

Halbert S. Washburn

But anyway, that we probably got somewhere between 500 to 1,000 driven locations in Michigan.

Unidentified Analyst

Okay.

Halbert S. Washburn

We also are the largest natural gas business in Southwest Wyoming, where we have probably 600 to 800 locations. We’ll start drilling gas wells I think if we’re convinced the gas is going to be north of $4. If we start to see you guys $5 or $6, you’ll see us picking up a lot of rate.

In Michigan, our cost structure is very, very low. I think are all-in delivery costs, because almost the infrastructures well under $1.50, so very strong operating margins there. Southwest Wyoming, a little bit higher cost, but still well under $2 on lifting and delivery. So the economics work at $4 and $4.50. So just start to see as a core convince of gas as north of $4 and $5 of picking up drilling rate.

Unidentified Analyst

Okay. I guess kind of bring me over to thinking a little bit deeper into your hedging strategy, away from kind of how the percentages that you like to be how you’re looking at three years out. Do you have preference within your sort of overall hedge philosophy of what type of contracts you likely to be one and what percentages swap there, callers are fixed rate versus kind of what’s your preference and also in terms of counterparties, your diversification across different counterparties for hedging?

Halbert S. Washburn

So we’ve been hedging pretty aggressively for a long time. And that means we are exposed to run, unfortunately we exposed to leave. So counterparty risk is something we take it very seriously.

Unidentified Analyst

Yeah.

Halbert S. Washburn

We only hedge with bank Citigroup, we only hedge with bank where we have a business allowed for a lot of offset. So if we got a contract within the money, and they go bankruptcy as our contracts side of the money, we don’t have some churn out of that course by this honor, so they will monitor that. We had a lot of exposure at JPMorgan at one point. We were concerned about that. It was probably a pretty good bank of lot of exposure to it.

So we do look at a lot. We trade a lot with Citi. So it’s something that we think it’s a lot about and we exclusively trade with banks and bankruptcies, as far as what we used, it’s pretty plain to know. We’re not out to try to make a lot of money with hedge book. We really view it as maturing our cash flow.

So in our longer slide presentation we break out what the hedge book looks like, it’s primarily swaps, okay. We occasionally will do collars. We occasionally buy floors, but frankly what we’re looking for certainty of cash flow and that’s what we do the hedge book as be there for.

Unidentified Analyst

Right; just kind of take a look through some of that, how do you have ongoing out in terms of natural gas pricing, it’s does seem to start to tick down a little bit, if you get into those later here. How do you guys think about balancing that between let’s say your target were 5% distribution growth per year, as you kind of see some of those rolling up managing EBITDA, EBITDA growth, distribution growth kind of how do you done those two?

Halbert S. Washburn

We had very high gas through this year.

Unidentified Analyst

Right.

Halbert S. Washburn

I mean over $7. We didn’t build the business based on $7 gas.

Unidentified Analyst

Right.

Halbert S. Washburn

So next year they stepdown just under $6, they following years to about $5 and then out in 2015 or 2016, I think they’re in $4.30.

Unidentified Analyst

Okay.

Halbert S. Washburn

So that’s built into our modeling. We understand that, we understand what those cash flow units will be with those hedges and we’re very comfortable with our targets. Now we cannot grow the business, grow the cash, grow the production, grow the distribution without operating well, we need to operate we need to live our production goals, we need to deliver on cost containment.

Unidentified Analyst

Right.

Halbert S. Washburn

We need to deploy capital well. We’re just under $152 million with the drill bit and although in capital projects, those have to be successful. And we have to acquire well. We can’t just not acquire, we kind of like Apple, Apple doesn’t come up with an iPad 5. Their business is going to go down.

Unidentified Analyst

Right.

Halbert S. Washburn

Yeah, so if we don’t make acquisitions over time, our business isn’t going to grow. So we have to do things well. We have to operate well. We have to pour our capital well organically and we have to acquire well. But we’ve done all three of those historically well. We’ve done it for 25 years and we have no reason to think we won’t continue to do that.

Unidentified Analyst

Okay. On that same subject of operating well and kind of managing your cost, you mentioned that some of your regions I guess Texas and Wyoming has kind of well per unit cost. I think you mentioned that on your last quarter call. Can you kind of walk us through in some of your different areas, what’s of different costs are and maybe also to what’s the different pricing dynamics are? And what really drives those differentials in the different areas?

Halbert S. Washburn

Sure. It’s kind of interesting. In our oil producing areas, while our operating costs are higher both in California to Florida than they are in Wyoming or West Texas, our operating margins aren’t that different.

Unidentified Analyst

Okay.

Halbert S. Washburn

And the reason for that is in West Texas we get WTI minus about $3, Wyoming will probably $8 to $10 below that. Our lifting costs are probably about $8 to $10 lower in those areas than they are in for example in California. I think California we are getting Brent, so which is effectively WTI plus $15.

So we are getting much higher revenue, when we look at the margins the margins aren’t that different. In Florida, we get LOS based pricing, so it’s little better than WTI. So even they would cost there higher than anywhere else, we still get a good margin. So it’s kind of interesting, the margins are very strong in all the areas.

Unidentified Analyst

Okay.

Halbert S. Washburn

But California is the strongest.

Unidentified Analyst

Fabulous, okay, I got it. One other things that (inaudible) sorry if I lost again. But tell us a little bit about why do you think that is, why does that differential exist, is the market whether they’re not seeing and how do you close it?

Halbert S. Washburn

Well, essentially there is bond, right that have no peers, so that the bond investors are smart indicative.

Unidentified Analyst

We like to stay.

Halbert S. Washburn

I don’t know. If I knew, we will be giving it. We’re working on it everyday. We’re committed to grow in distributions. I think that’s important for our equity investors. We’re committed to be in conservative, capitalize. I think that’s important for the equity holders. We’re delivering on what we said we’re going to do. There was I think a perception that we will be more gassy to some of our peers and that’s kind of the way down a little bit of us and I’m just not sure whether or not...

Unidentified Analyst

Okay.

Halbert S. Washburn

I think they’ll be just in our financial…

Unidentified Analyst

No, I agree. Moving over to the balance sheet, when you think about what is right size it, where are you comfortable being long-term? Do you have any target rating or leverage metrics that you like to look at and how much is your back and forth with the rating agencies due to the extent that is important if you want to move up. What sort of guidelines and parameters do they give you on a regular basis for you to work that?

Halbert S. Washburn

Sure. Even size is important. Leopards touched very important, when we look at acquisitions, we pro forma our acquisitions to run our metrics around a pretty simple capital structure. It’s 50% to 60% equity.

Unidentified Analyst

Okay.

Halbert S. Washburn

40% to 50% debt, and about three quarters of that debt is bonds. So it was more than amount drawn in the revolver, really view the revolver as acquisition financing. We don’t look at those as permanent capital. And then when we look at metrics, really the one we would focus on the most.

It’s not really dollars per barrel on the ground or anything. It’s really kind of EBITDA margin. And we love to drive our sales down to about 2.5 times. We’re 2.7 now. We never look at there, it is in the context of acquisitions, we’re always stepped that up.

But if you see us get to 4 times, that start to make us a little bit uncomfortable. Our peers are running north of 4 and we just are little more conservative than they are, but we kind of 2.5 to 4 times works for us, four we’re working very hard to get it down to 2.5, when we get to 2.5, we are ready to make more acquisitions.

Unidentified Analyst

Okay. And on the same front in terms of your liquidity if you kind of had the right value, most of the revolver undrawn right now in fact that’s going to be used to go into acquisitions, if you kind of had what is the right amount of liquidity to run the business and the right mix between having availability in cash on your balance sheet?

Halbert S. Washburn

Well, we never have much cash on balance sheet. So we really don’t, we used our revolver. I think it’s actually sub $20 million strong right now, but it kind of varies somewhere around $50 million or so. That’s not enough. Bank debt is very, very expensive, if we weren’t in the acquisition business, if we didn’t think we would be growing, we would have more drawn in the revolver. But we did go out in the fall and we did $200 million deal, both $200 million equity deal and add-on bonds in anticipation to future growth.

One of my early directors said raising capital from his perspective is lot like being in a cocktail party and when the women comes by with the appetizers and grab this miniature can because you don’t know when she is going to come back again.

Unidentified Analyst

Okay.

Halbert S. Washburn

We really do raising capital has been an opportunistic thing and the capital markets we found over 25 years and not this open.

Unidentified Analyst

Okay.

Halbert S. Washburn

When they are open and you know you’re going to need the capital. We think it’s important to rise.

Unidentified Analyst

Right.

Halbert S. Washburn

So when you see this in the market consistently, and not just around in acquisition. This year is in a marketplace anticipation of the acquisition and trying to keep the capital structure in the right position to allow growth.

Unidentified Analyst

Okay, very good. You think in your presentation, you alluded to a couple of time there’s been election and the results, can you kind of tell us your reaction? How you see that affecting the business going forward? It’s mostly from an Investor Day there was a lot of conversation around just overall tax implications, regulatory environment, how do you see it being a negative or positive over the next four years now?

Halbert S. Washburn

Well, I’ve been told that our industry has always done better in Democratic President, so I’m hope that’s the case continues to be the case.

Unidentified Analyst

Right.

Halbert S. Washburn

I don’t know if I knew I’d probably be doing something different. But I’ll be talking something on the Sunday morning show there’s ideals going to happen.

Unidentified Analyst

Right.

Halbert S. Washburn

I think that the energy business is a very important business and I think the President is recognized that. And I think that a few reduce something to MLPs to have a very negative impact on infrastructure and energy, delivery and energy development in United States and I hope that there is smart enough not to see that.

Unidentified Analyst

Right.

Halbert S. Washburn

That’s one of the few bright spot in the economy. I mean everyday I wake up and see that we’re going to be producing more in Sunday radio or that we’re going to be exploit nature gas or whatever it is. So they’re not in the industries now where there is good news. So I would hope that tax policy says that’s not to touch better, that’s not tough it very much. But you never know what’s going to come of Washington. I guess we’ll prepare for it. Our business runs very well. We’re not concerned about issues if things change. We’ll make it appropriately change.

Unidentified Analyst

Okay.

Halbert S. Washburn

We’ll response.

Unidentified Analyst

Okay, thank you. Well, I think I’m going to back to floor for questions, anybody else has any, and want to feel free to ask, while others participate?

Halbert S. Washburn

She has got a microphone right, it’s danger. So people here on the webcast.

Question-and-Answer Session

Unidentified Analyst

You talk about how all the joint Powder, you talk about acquisitions done this year, assets on the capital market and remains talking about factor team elections what have you, real or founding a lot of assets are coming to market, coming with your expectations are closed at the end of the year largely or undrawn borrowing base, but to a pretty good competitive advantage to shape with that a little quickly.

That being said, there are a lot of your peers are doing the same thing as well. Do you see a little bit of over-exuberance in shaping asset that are Omnicom right now, given the impeding closing deadlines or do you see more rationale behavior and you feel that on the shaping feel that will make sense stepping away for more than that you would normally?

Halbert S. Washburn

Yeah there’s more latter, there are some of the deals out there, I got a call two days ago, when bankers saying we’ve got a third generation logo that’s just setup, if you condense themselves whatever they got different and they wants to sell, recall it three people that we now to close, which we like to talk.

we’ll get a lot of those calls. we’re looking a lot of deals. we’re able to maybe a little more tricky right now just because there is just kind of pent-up for guys getting things done. So I think it’s kind of if anything we’re able to look at deals and kind of walk away from deals more quickly right now, and because we know we got to get to the finish line very quickly. So we’re excited, we may not get anything before the end of the year or we may get one or two or several of those. there are a lot of people out there want to sell.

Unidentified Analyst

You talked about having strong margins, as we look at 2013, what are some of the efficiencies that you could do to mix it even stronger?

Halbert S. Washburn

We now are asking our new President Mark Pease that question everyday. Now we are looking a lot kind of just operating efficiencies what can we do, we are large enough organization, what can we do across the entire organization that will help all of our areas. Can we procure better, can we contract those rigs and services better by having a larger reach and a larger volume.

We went from having kind of $60 million to $80 million per year capital budget, having doubled that with the acquisitions and the organic structure. So can we do things better by just contracting better, that’s one of the areas we’re focusing a lot this year. And as you increase volume, a lot of your costs are fixed in many of our fields so you just tend to drive your overall cost down, because variable costs are pretty well. So as we increase volume especially in California, you’ll see, I hope our operating costs will come down in that region just throughput.

Unidentified Analyst

I have to ask just one more, I know it’s not really a care question, but we ask everybody else today so in your little crystal balls where do you see you said if you were to switch back in a little bit more to take out your assets 4 to 4.50 range in that gas, do you have any commodity outlook in the mid-term in gas, oil?

Halbert S. Washburn

Gas is going to go up.

Unidentified Analyst

Okay, all right.

Halbert S. Washburn

I’m not sure when, I think five years then gas will be, I’d shocked if five years from now we don’t have north to $5 gas.

Unidentified Analyst

Okay.

Halbert S. Washburn

I do believe that there is increased demand I think boon is going to get a lot of stuff done. Natural gas would go up. I think the WTI would trade up towards Brent as it has historically. I think it’s that our peers in the midstream are doing a lot to build infrastructure, the new builds around United States, and I think they are going to do that well. So it wouldn’t surprise me obviously 100 WTI trading very close to that kind of long-term goal, if I have to within crystal ball those are my answers within five years WTI will trade around 100.

Unidentified Analyst

Okay. Thank you. I think if there are no further questions, we can wrap up. Thank you so much for being with us today. I appreciate it.

Halbert S. Washburn

Thank you. Thank you all.

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