BreitBurn Energy Partners L.P. (NASDAQ:BBEP)
Credit Suisse MLP and Energy Logistics Conference Call
June 26, 2013 09:00 ET
Hal Washburn - Chief Executive Officer
Brett Reilly - Credit Suisse
Brett Reilly - Credit Suisse
Next up we have BreitBurn Energy Partners. With us today is Hal Washburn, CEO of BreitBurn. They had a lot to talk about today with their recent acquisition from Whiting. So, with that, I will turn it over to Hal.
Thanks, Brett. I am Hal Washburn, CEO of BreitBurn Energy Partners. We announced on Monday a large and highly accretive acquisition of oil assets in the panhandle of Oklahoma, and I will talk more about that acquisition in this presentation, but we are excited about the acquisition. It’s the one we have been working for quite a while; one that we think is very positive for BreitBurn. Anyway, so let’s get into presentation.
Forward-looking statements, we cannot study those as we all are familiar. Anyway, as I said, I am CEO of BreitBurn Energy Partners. We are an upstream MLP. We went public in 2006. We have actually been in business since 1988. We recently celebrated our 25th year in business. We started the company with the strategy of acquiring interest in large, mature oil and gas fields, apply new technologies, optimizing operations, and creating long-term value through increases in production reserves and cash flow.
We have been doing this successfully for 25 years; currently have an enterprise value of about $2.7 billion. We have a high-quality base of MLP assets we’ve built over that 25 years, a balanced portfolio of oil and gas with operations in nine states. We have long lived oil and gas properties with an ROP of 17 plus years, which means our production decline is very low, very predictable, and very stable. None of the numbers I will show you now take into account the acquisition that we announced earlier today, but at year end 2012, we had about 150 million barrels of proved reserves, about 80% PDP, and about half oil and half nat gas with a small exposure to NGLs.
We have been in the acquisition and exploitation business for 25 years. We acquired serially and sequentially acquired each year. In the last year and 10 months, we have done nine acquisitions totaling just under $1 billion. In the 2012, we had a target of between $300 million and $500 million of acquisitions and we did about $620 million of acquisitions. So, we have been successful in the acquisition market. We are adding to that success with the deal announced on Monday. We are also committed to growing distributions. We have said publicly our goal is 5% per year distribution growth and we have exceeded that over the last few years. We have increased distributions each quarter for 12 consecutive quarters for a total of about 27%. When I look at last year versus the year before ‘12 versus ‘11, we had about 7% growth in distributions, all the while maintaining strong balance sheet and solid financial structure, we had again pre this acquisition debt-to-equity of about 32% and 2.4 times leverage ratio compared to peer group average of over 3.5 times.
We have a geographically diversified asset base and diversity is important to us. We don’t want to be tied to one commodity oil or gas, and we don’t want to tie to one play. We are not looking for super growth in any particular area. We are looking for sustained growth, sustained production. So, it’s important for us not to be tied to one play or one region. We are in nine states now, core business in legacy assets in California, high-quality oil fields that enjoy Brent pricing, so very high margin properties.
Wyoming, where we have been over a decade, we have both gas business and crude oil business; Michigan, where it’s primarily the natural gas, we’re the largest producer in the state of Michigan. Smaller business in Indiana, Kentucky, a business in Florida we are very excited about in addition to some new shale plays and unconventional plays that are throughout South Florida, we have some very strong conventional oil production from some world-class carbonate reservoirs. And most recently, we moved into West Texas. In 2012, we made a series of acquisitions beginning in the summer of 2012 to move into the Permian Basin. It’s become a core operating area for us in an area where we will spend a significant amount of our organic growth capital this year. And finally, the acquisition I will talk in more detail about in the Oklahoma Panhandle of oil properties from the Whiting Oil and Gas.
So, we have a proven business strategy. We have been doing it for a long time. We have been doing it successfully. We have a lot of experience. We have built this team from the ground up. We built our property base, made our acquisitions with the goal of building the strong MLP type asset base allowing us to continue to grow. We have a lot of commodity diversity. We have a large inventory of low-risk development opportunities, both gas well in excess of 1,000 infill drilling locations in natural gas properties virtually all held by production, and now hundreds of oil drilling locations throughout the portfolio.
And we have a very strong hedge book which I will talk a little bit about. So, we’ve said that we want to grow distribution 5% per year and we are asked how we do that, but we really do that building upon the back of first a very strong asset base, excellent MLP assets with very low decline and high predictability of cash flow. We layer on that organic growth opportunities, we hope to spend about $260 million this year drilling wells throughout our portfolio. Our goal with that as capital spend is just to hold production flat to grow slightly.
We have a strong hedge book and that is very important to our consistent distribution growth. We hedge aggressively and we have clean vanilla hedges. We basically swap our productions that we are ensuring our future cash flow. We add on top of that base business accretive acquisitions. We have been successful in making acquisitions for many decades and we continue to over the last few years. When we couple all of that and put it all together we have a strong growth in distributable cash flow and visibility towards being able to grow our business and continue to increase our distribution.
That said we have a great portfolio of MLP assets across nine states, some fields dating back to 1800s, so very long production history, very stable production and predictable decline. Before this acquisition about 5400 gross producing wells, large acreage position over 900,000 acres gross and about 500,000 net. We have exposure to [some exciting] [ph] plays. We have the [Rubble] [ph] Zone unconventional in South Florida. We have the Utica Collingwood at Northern Michigan. We have the A-1 carbonate also in Northern Michigan. So, while that’s not our core business strategy we do own acreage positions, large acreage positions in many cases overlaying what could be some very exciting plays.
We have operational control of most of our properties. In fact, in 2012, we operated 84% of our production. All of the production we are acquiring in the Panhandle is operated. And as I mentioned earlier we have an extensive inventory of low-risk development opportunities in our core areas.
In 2010, we had a gas focus and we made a strategic decision to move towards – more towards the oil business. Since then we have grown the liquids as a percentage of our proved reserves by over 50%. We expect to go from about two-thirds gas from 2010 to about two-thirds of oil in liquids this year. We have also expanded the PUD component. In 2010 we had gas PUDs and that was it we started to add oil PUDs in our portfolio both through acquisitions of properties of oil as well as future – as well as additional work on future opportunities in our existing portfolio.
So, I am going to talk a little bit the core states we are in and then I will jump to the acquisitions. First, Wyoming, in Wyoming we have been in for more than a decade, we have oil production in the Northern part of the state the Big Horn, the Wind River basins, the Powder River basin and we have dry gas production in the Southwest part of the state, Green River basin. A large acreage position, close to 1000 producing wells literally a core and legacy operating area for us and we made a nice acquisition of about $100 million last year in Wyoming to build that business. We deploy capital consistently there. In 2012 we spent a little over $30 million and drilled 20 wells, this year we will drill 18 wells and spend just under $30 million, so it’s an area where we’ll continue to grow and continuing to hope to grow through acquisitions and through the drill bit.
Texas, a new area for us, but an area that we have been focused on entering for many years. We made a series of acquisitions totaling about $420 million in Texas last year and we are ramping up the drilling program. There were very creative acquisitions and the acquisitions were really started by relationship we had with CrownQuest. And we had developed a relationship with CrownQuest with the idea of making acquisitions from them. CrownQuest was backed by Lime Rock here in New York. They have a joint venture in West Texas CrownRock that acquires acreage, de-risks the acreage by drilling up significant number of wells and then they generally try to sell before it’s totally drilled up, so that they can then redeploy the capital.
We made an acquisition in the first – it’s July of 2012 from Element which is one of their non-op partners in CrownQuest and that deal, is a very creative deal, our business development guys put together with CrownRock, we purchased 100% of 40 producing wells and we purchased 50% of 160 drilling – to be drilled wells, infill locations. CrownRock got what they needed which was cash to redeploy in some new projects as well as the ability to participate for 50% of future drilling on 160 wells. We got what we wanted. We got all the current cash flow as well as significant growth and we were aligned with an operator who would drill the 160 wells on our behalf. We didn’t need to jump into West Texas and pick up three rigs to frac strength and a bunch of people, where we are able to align ourselves as a high-quality operator who was going to continue to drill with a meaningful interest in those wells and then turn those operations over to us once they were drilled. So, great transaction for us; helped us move into Texas. So, last year, we just got started. We spent out $16 million drilling in Texas. This year we will spend just under $100 million. We predict about $96 million drilling 60 wells in West Texas. So, it will be a very important area for us and the area that we expect to grow.
California, our core area, we own properties in California that are over 100 years old. We received great pricing for the crude there. We sell at Brent based pricing. So, we receive well over $100 a barrel, and there is a significant amount of oil in place within the field boundaries, the fields that we own and operate. Our 2012 capital program was first year in California where we really fully deployed a rig in one of our fields full-time. I’ll talk a little more about that field, but it’s the first year we spent about $47 million we drilled 20 wells. We did the same thing in that field this year, maybe a little more and we were also going to drill more wells up to Belridge in the field we just acquired. So, we’ll spend about $84 million this year and we will drill about 40 some odd wells throughout the year.
I want to talk a little bit about the types of properties we have in California, because it’s [suggestive] [ph] of what we do. One of our fields, the Santa Fe Springs field in the center of the LA Basin was acquired by BreitBurn in 1999. We acquired this as part of a package of properties that Texaco was selling when they were exiting the LA Basin. It was a large property but it was only producing about 1,400 barrels a day when Texaco sold it to us. They let production fall. It should have been about 1,700 to 1,800 barrel a day field, which it was shortly after we purchased it and started to operate. So, we have the field up to about 1,800 barrels a day in the early part of 2,000 and we held it there. For over a decade, there are about 1,800 barrels a day; we are drilling anywhere from two to four, maybe six wells in an aggressive year and held production flat.
Well, when we started to look for oil opportunities, we thought one of the best places to look would be in the fields that we own, we started with our largest field. We permitted a 3D seismic survey, the first one done in the Santa Fe Springs field. And we began drilling based on its additional geology. It’s a very large target. The field was discovered in the early part of last century and that produced over 600 million barrels of oil. However, original oil in place was over 2 billion barrels of oil. Doing the math, about 1 billion to 1.4 billion of oil remained underneath our leasehold. Of real interest was our leasehold, which is the entire Santa Fe Springs field and the unit was 640 acres. So, this is a 2 billion barrel oil field compressed into 640 acres.
If you think about recoveries, 630 million barrels recovered from 640 acres. It’s over 1 million barrels per acre about 1 million barrels per acre recovered. So, really a rich, rich oil field, one of the richest oil fields you can imagine. Production starts from about 1,200 to 1,700 feet and goes down to 9,500 feet. And we really haven’t found the bottom of the oil column. We found the bottom of the good reservoir. Anyway, significant amount of oil in place, we started to work it very hard and put a rig to work last year and we haven’t laid it down yet. We have identified over 100% of locations. We drilled 20 last year. We will drill 20 more this year. I am sure we will have another 100 when we are done. We would like to pick up the second rig. We will see if we can do that if we can expand the facilities enough to do that, not super aggressive IPs, we have modeled this with 45 barrel a day IP yet given the oil price in the California and given the very low decline of these wells, we still generate an IRR well in excess of 50%. And we have been fortunate. We have done generally much, much better than the IP. And in fact, the first well that was drilled, helping 3D seismic came in with an IP of 650 barrels of oil per day, more than 10 times the 45 barrel per day IP in our tight curves.
So, we are very excited about Santa Fe Springs, very excited about what our technology and what our technical teams are able to do there and are doing today. We are excited about expanding that to other properties that we have in California, including our Rosecrans field and up in Belridge new acquisition we made last year. So, lot of opportunities within the existing portfolio that we continue to add to. So, I mentioned we are in the acquisition and exploitation business, and we don’t drill exploratory wells. So, the only way for us to grow is to acquire and exploit. We do it well and we have been doing it for long time. It’s a core part of our business. We look at a lot of deals. In the typical year, we get about 1% of what we look at. 2011, we looked at 300 deals and got three. In 2012, we looked at 500 deals. We fully evaluated 34 of those, bid on 20 of those exposing $1.9 billion in bids, and then ended up closing seven for the $620 million roughly that we discussed. So, we look at a lot of deals were rigorous and disciplined in our approach. We have been doing it for long time. We know it works for our business. We know it works for our technical teams and operating teams, and we focus on those acquisitions.
We look at every bid situation, but we also try to get into one-off deals or deals that are very limited in the negotiating pool. In fact, in the deals in the bottom of this page, the only one that was really a true bid was Neiman. However, we had a very strong advantage. We had a big competitive advantage and that it was a bolt-on for us. Their fields were across the lease line in many cases from our fields in Northern Wyoming. And in fact, their sales brochures use BreitBurn fields of analogs saying if you develop this field and if you fully capitalize this field, this is what we look like and that this was the BreitBurn field. So, we have a very strong competitive advantage in that deal.
The other deals we are all really on negotiated deals, where we were talking to them with maybe one or two other competitors. AEO was the family business in California. It’s been running for decades. They were worried about what might happen to Texas in 2013, turned out there right, but they were worried about what might happen to Texas in 2013 and they approach two or three companies that they knew well. Our General Counsel has been their outside counsel for years prior to joining us, and we had an inside track in the deal that was just under $100 million, in which only about a third of the transaction in cash, they wanted the BreitBurn units and they received BreitBurn units on the deal. So, that gave us a competitive advantage that no one else had.
And then in Texas, as I mentioned, we established a long-term relationship with CrownQuest. That allowed us to do the deal in July that you described as well as they too were worried about Texas in 2013 and approached this right toward the end of the year and said we would be interested in doing a follow-on deal in the same area that we have done a deal and would you guys be able to do something by the end of the year. We said, yeah, we have already negotiated the purchase sale agreement if you will. We know the assets. We would love to do something by year end. We were the only people I talk to, because we were the only people that could get a deal done. So, we did nice add-on to that transaction. So, we spend a lot of time developing relationships. We have 15 people in our business development team in all disciplines. We have rainmakers. We have petroleum engineers. We have geologists. We have landmen. Everybody is focused on finding, sourcing, and closing transactions which leads me to the most recent transaction which we believe will be a really great deal for the company. It’s highly accretive and it’s large and scale.
We are acquiring Postle and North East Hardesty Fields in Oklahoma Panhandle, and plus a significant midstream infrastructure from Whiting Oil and Gas. We are acquiring from Whiting the fields and their interest in midstream for $860 million. We are spending additional $30 million to acquire their partner’s interest in one of the fields in some of the midstream infrastructure. So, the financing is still in place. There is no financing contingency. The only customary closing conditions we have are governmental approvals. It’s a good acquisition, large acquisition. We are requiring about 35 million barrels of proved reserves in significant amount of probable and possible. About two-thirds of the reserves are proved developed. We produce about 7,400 barrels a day of primarily oil. It’s only about 2% gas from about 11% NGLs in this.
The low lifting cost, the large acreage position over 30,000 acres on 100% of the sale by production. And we have a large working at just 96% and we operate 100% of 244 producers and 164 injectors, so a large operation, high-quality assets. Whiting has done a tremendous job with Postle units the far larger field of the two fields has been under CO2 since 1996. Whiting has really done an excellent job developing that. We aren’t banking on taking this asset and clean it up and increasing operational efficiencies. What we plan to do here is to follow the roadmap that Whiting has laid out and they continue to implement their reserve development program.
The upside for us is expanding into new areas. They have been expanding and turning to production probable and possible reserves. So, it’s a large deal as I said. About 25% - they will increase the company size by about 25% total liquids production. In the back of this in our organic drilling program, we will more than double from year end last year to year end 2013. And we will have made a full swing from 2010 when we were two-thirds nat gas, for the end of 2013 we expect to be just about two-thirds oil and liquids. Very strongly accretive to BCF in ‘13 and ‘14 and thereafter, strong accretion to EBITDA earnings reserves production and NAV.
Great entry into Oklahoma and New Mexico gives us some area to continue to grow. Mark Pease, our President, it has been closed to 30 years in Anadarko and significant part of his career was working in this area, he knows number of these fields very, very well. We would hope to be able to expand our business as we move into these areas. In addition, we are hoping to bring the entire Whiting technical and operating teams that operate these assets on to the BreitBurn – in the BreitBurn which will help strengthen our Permian operations. There are five technical members sitting in Midland who are our officers and then they have 40 field people in Guymon, Oklahoma.
So, great acquisition for us, very quickly will be much more a presentation about a map to the left and so the CO2 supply source. The yellow was the CO2 pipeline which will own 100%, the green is the oil pipeline which we also own 100% and the two grey areas are the two fields, the larger field parcel is more a field Northeast Hardesty. In addition when we made the offer to Whiting made a contingent upon them putting in place certain hedges which we’ll be acquiring and those were laid out at the bottom of the slide. Again very large operation and number of units and producing for several years and we are excited about continuing the operation. Whiting, one thing to know, Whiting will continue to operate the properties under a transition services agreement until October 31 of this year.
As I mentioned earlier the acquisition is fully financed. We have underwritten deal led by our lead bank Wells Fargo and our Syndicate of 22 banks. Prior to the deal we had $1 billion facility with a $900 million committed borrowing base and the ability to opt up $2 billion. In conjunction with the transaction that’s been raised $1.5 billion of which we will take about $1.4 billion of commitments. When we close the deal we will $1 billion roughly outstanding, so we’ll have about $350 million to $450 million worth of liquidity under the commitment, so significant liquidity. We will have leverage slightly higher than we like to run the business. We said we like to run the business at 3.0 times, we’re running about 2.5, little under that right now. So, you will see us bring that down over time to that 3.0 range, but we don’t have the need to do it right away. In fact as part of this transaction, in our credit facility we’ve raised the amount of total leverage from 4.0 currently to 4.75 and that’s gone gradually until the end of 2014. So, we have no need to go into the capital markets to lower leverage, but over time we will, we’ll use operating cash flows as well as access the market opportunistically to bring up the leverage ratios back down to where we run at more normally.
So, talking a little bit about our operating and financially, we’ve grown a lot since the IPO about 30% compound annual growth rate at both production and adjusted EBITDA. We’ve done that while maintaining a strong and disciplined financial statement. We have strong liquidity. We target our leverage ratio less than three times. We finance a typical acquisition and when we model our acquisitions we pro forma them for 50% to 60% equity, 40% or 50% debt and we expect to turn out the majority of that debt very soon. So, we really view the revolver a short-term acquisition financing. And by example we had a $900 million borrowing base, before this acquisition we had a $100 million outstanding. So, we had $800 million available that was the reason we can get the deal done with Whiting. Whiting knew that we can basically write a check for this acquisition and that we wouldn’t need a financing contingency. Very important to us to have that liquidity and have that capability and we will continue to expect to have that.
We also hedge a great deal and got a few slides on hedging, so I will jump over that. And just some recent coverage we said we’d like to run the business 1.1 up to 1.2 pro forma for this deal. The coverage ratio for the second half of the year will be closer to 1.4. In fact we expect it to be above 1.4. Distribution growth is important to us and we know it’s important to you. We’ve proven over the last three plus years that we will continue to grow distributions. This sort of acquisitions what allows us to do that, our target is 5% distribution growth per year.
We have a strong hedge book targets about 80% in first year, stepping down to about 50% by the fifth year. In this slide we show in green hedges that come with the acquisition of Whiting, grey that’s the other hedges that are also swaps, so virtually all of our hedges are swaps, small, small portfolio of collars and even smaller portfolio of puts, it’s a very clean oil book much the same on natural gas in fact even more clean than natural gas virtually all swaps in the portfolio, very strong hedge book, very strong prices but not way out of the market.
And this is the reason why we hedge, we are in a business of making consistent distributions yet we are also in the business where commodity prices can be very volatile and what we’ve done here is we have put adjusted EBITDA on the bars from the first quarter of 2008 through the first quarter of ‘13 on a graph overlying oil and gas prices during that same period. And I point you to the second half of 2008, oil prices fell from $140 a barrel to less than $40, gas prices fell from $14 to $3.50. Also $100 a barrel during six months, it’s hard for me to believe that. Yet at the same time our EBITDA fell 15% and held rock steady throughout the crisis of 2009. Hedging is important to us, hedging will continue to be important to us and this is why. I don’t like this slide particularly. This compares our yield to our peers. Consensus price target for BreitBurn is $22, if we were trade at $22 with our current distribution we would – that will be an implied yield of 8.6%. Today, we traded up quite a bit yesterday, but today we are still around just north of 10%, like to see us down at 8% or so, but anyway.
In summary, we have been doing this for a long time, we have been in the business 25 years executing on the same strategy consistently and efficiently and successfully. We have a high quality asset base, long life production, predictable cash flow generation. We have a critical mass in several large basins that allow consolidation opportunities. Our recently announced deal just straightens the business from many perspectives. We have consistently grown distributions from the first quarter of 2010. We have a strong acquisition track record just under $1 billion for the deals before this $900 million deal was announced in the last two year. We have a very strong hedge book and again we have a very attractive yield. So, thank you very much. I believe we have a minute or two for questions. Yes.
So, you mentioned your target coverage ratio in the second half is 1.4 times?
That’s, You know taking the mid-point of our guidance, that’s what we expect, yes.
Does that account an issuance of the common stock to bring under…?
No, it doesn’t. One thing to keep in mind now is that we did an equity deal in the first quarter of this year as well as a debt deal. Both of those were pre-funding of our expected acquisition activity for this year. So, when I say that we have a target of 50% to 60% equity you shouldn’t expect us to go out and do a deal for 50% of this acquisition, because a significant part of this acquisition was funded by the deal that we did in the first part of this year. Yeah, (inaudible)?
Sure. The profile actually shows it’s kind of growing somewhat, but what we’ve – what we are modeling is basically flat production or I should say that we are modeling that growth but what’s nice about this acquisition is it’s roughly flat for the next decade. And that’s what makes it really great MLP asset as we are going to generate flat oil production for ten years or maybe more. Yes.
In the chart comparing your distribution yield versus (Question Inaudible)
Yeah, my least favorite chart?
I have lot of respect for lot of those guys, but we have been in this business 25 years and I think that’s probably the longest tenure by far for any other guys on this page as a company. We have been doing the same thing for 25 years. We always acquire – we acquire well. We are very disciplined in it, but we have historically made almost or we made the vast majority of our money after the acquisition. We operate extremely well. We have very strong technical and operating teams. I mean our technical team is filled with guys and women with advanced degrees from places like CalTech, MIT, Stanford University. Smart, smart people with a lot of experience in the industry and we really believe that we add value after the acquisition. So, we want to acquire well, we will acquire well, and I think they’ve got the hooks for me, but that we really differentiate ourselves once we made the acquisition.
Thank you all very much. I will be available for questions if you have any further. Thanks.
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