Breitburn Energy Partners' CEO presents at IPAA OGIS San Francisco Conference (Transcript)

| About: Breitburn Energy (BBEPQ)

BreitBurn Energy Partners LP (BBEP) IPAA OGIS San Francisco Conference Call October 1, 2013 3:50 PM ET


Hal Washburn – Director and CEO


Rick Burleson – Burleson LLP

Rick Burleson – Burleson LLP

Good afternoon, everybody. Welcome to day two of OGIS San Francisco. I’m Rick Burleson, I'm happy to introduce our speaker today at the luncheon. Burleson is very delighted to host this luncheon as well, and it's great to see so many friends and clients here today. I like hosting these things because it gives us an opportunity to see a lot of those friends.

For those of you that don't know Burleson, we are a law firm headquartered in Houston. We're the largest law firm in the country devoted to the oil and gas industry. We work for probably two-thirds of the companies that are presenting in this conference today, and we're very happy to be part of this great industry. Our offices are located in Houston, Pittsburgh, Denver, San Antonio, and our newest office in Midland, and we're very active in the Permian Basin and all the resource plays around the country.

It's now my pleasure to introduce today's speaker, Hal Washburn, who's the Chief Executive Officer of BreitBurn Energy. Hal is the Founder of BreitBurn Energy, as the name would suggest, in 1988, and so the year dear to my heart, that's the year my first son was born. He was appointed as the Director of BreitBurn Energy Partners LP in 2011, has been CEO and co-CEO and Director of BreitBurn from 2006 through 2010. He currently serves as President of the Pacific Coast Energy Holdings, LLC as well. Interestingly, during the conversation, Hal told me that he was just named a Board member of Jones Energy in Austin as well, a new public company, so it will be interesting.

So, it's my pleasure now to introduce Hal. Thank you.

Hal Washburn

Thank you, Rick; and thanks to Burleson for hosting this lunch. I'm Hal Washburn and I am the co-Founder and CEO of BreitBurn Energy Partners, and we are proud to actually have celebrated our 25th anniversary in business this year. So, 2013 has been a big year for us. So we're happy to be here -- actually particularly happy to be here in San Francisco, I was born in this city and went to college down the peninsula. So, I love it when I get up here; I live in Los Angeles now, but I do love the Bay area.

So I'll talk a little bit about BreitBurn. Like I mentioned, we founded the Company in 1988 and went public with BBEP in 2006. We've had the same strategy for the 25 years we've been in business. We focus on the acquisition, exploitation, and development of oil and gas properties.

We have a very strong technical team, a very strong operating team that we've built over the years, and we've been unwavering in our belief that technology would allow us to continue to produce more and more oil and gas from the fields here in the United States.

When we started the business, that wasn't the conventional wisdom. When we started the business, the conventional wisdom was [around] (ph) North America that played out. The major oil companies were leaving North America looking for greener pastures internationally. And the first set of people leaving were in California. So we made a business in the first decade, taking large oil companies out of Southern California; Texaco, Unocal, Oxy, Chevron, and others.

We currently have an enterprise value of about $3.6 billion. So, we've grown the business significantly since its founding. We have high-quality MLP assets. We focus on assets with low decline, very predictable cash flow producing profile. We have long-lived reserves; the average reserve life is about 15 years. We have just under 200 million barrels of oil equivalent reserves, about 70% of that PDP and almost 60% of that oil and only about 35% to 40% natural gas. So, we've focused on growing the oil business over the last two years to three years and have been very successful.

We're an acquisition and exploitation company. We don't drill exploratory wells. So the only way we grow our business is through acquisitions. We've been a serial acquirer since founding the business in 1988. We've been very busy since July of 2010, closing 12 acquisitions totaling just about $1.8 billion.

In 2012, we told the Street to expect between $300 million and $500 million worth of acquisitions, we actually closed greater than $600 million worth of deals in 2012. In 2013, we upped that, expected at least $500 million worth of deals. We did about $880 million -- we've done about $880 million year-to-date in 2013.

We did a very large transaction with Whiting; I understand Jim Volker was here yesterday. A great asset for us, the Postle field in the Oklahoma Panhandle and the associated midstream CO2 delivery infrastructure, and I'll talk more about that acquisition as we get into this presentation.

We are devoted to growing our distributions. Our public target calls for 5% per year distribution growth, and we've hit that consistently for 13 consecutive quarters of distribution growth. We've increased distributions about 28% over that period. We believe that's best-in-class, we know that's best-in-class on the E&P MLPs.

Overall, we maintain a very strong and conservative capital structure. We maintain low leverage ratios over time and we fund acquisitions very carefully. We're opportunistic in going to the equity markets and the high-yield debt markets to term out our bank debt.

Diversification is important to us, we're not looking for explosive growth, we're not looking to grow the business 50% or 60% per year. Therefore, it's not important for us to be tied to one basin. We can't be in just the Bakken or just the Eagle Ford. For us, we're looking for mid-single-digits distribution growth. Therefore, we don't want to be tied to any one particular area, and many of the vagaries that may occur in that area. Likewise, we have a diversification in commodities. As I mentioned, we have both natural gas, small amount of liquids, and crude oil. We also have diversification across the country. We're in nine states. We're not tied to any one state's fiscal regimes or problems.

Our largest single area is Michigan, where we're the largest natural gas producer. Chevron is a very close second, but we are the largest. We're not spending a lot of money today. We're harvesting the cash there, it's a very low decline, generates a significant amount of free cash flow.

But we're not deploying capital in Michigan, because it's primarily a dry gas province. A large area for us is Wyoming. We've been in Wyoming for more than a decade, we produce about 7,200 BOE a day there. We have almost 40 million barrels of proved reserves, and we're splitting Wyoming between both natural gas and crude oil. California, our legacy business, over 4,000 barrels a day, a great producing province for us, a lot of oil and gas in place, and an area that we really focus a great deal of technical and operating focus on.

Our two new, but very important areas are West Texas, where we did a series of acquisitions in 2012, and now Oklahoma and New Mexico with the acquisition from Whiting that closed earlier this year. So as I mentioned, we've been following the same strategy since 1988.

We have a very strong technical team. We have a number of technical engineers in geosciences with advanced degrees from Stanford, CalTech, MIT, UT, Oklahoma, et cetera. We have a strong operating team. We've built these teams over 2.5 decades. We've been in the acquisition business our entire history of the business as a company, so integration of acquisitions and operation of acquisitions are important to us. And in fact, from our perspective, we have historically made significantly more money, created more value; once the acquisition closed and we became the operator, then just buy right.

So our business is not dependent upon just buying right, we believe that we're best-in-class operators with a world-class technical team. So fantastic asset bases, low decline, fields with a tremendous amount of oil and gas in place, and a lot of development opportunities. We have a significant infill development program for oil. When natural gas prices, and I say, when natural gas prices strengthen, we have hundreds if not thousands of gas drilling locations within our portfolio.

And we entered into the entire thing with a very strong hedge book and I'll talk more about hedging, but it is critical to us because we are in an environment with volatile oil and gas prices, yet we're making steady and steadily growing distributions each quarter.

That said, our goal is to grow distributions 5% per year, and we've been delivering on that or more for the last 13 quarters. We really do that. It's based upon, first, a strong set of MLP assets and a strong operating team that draws predictable cash flow. We then have to drill wells. We drill significant amount of infill wells each year. While we don't drill prove uncut wells and we never expect to drill a dry hole, we do drill a lot of infill wells that allow us to grow our production slightly – small, [low] (ph) single digits that allow us to grow our production organically.

We hedge commodity prices, so we lock in cash flows. And then, we grow by making accretive acquisitions. If we're able to do these all well, then that leads us to our ability to continue to grow distributions at a growth rate of about 5%. And as you could see, in 2012, we did slightly better than now with about 7% distribution growth rate.

We've been expanding. As I said, we've done $1.8 billion worth of acquisitions over the last couple of years. But very common in what we're looking at, we're looking at large oil and gas fields. We're at mini basins that have been producing for decades, in some cases for over 100 years. We have low-decline, long-reserve lives. What that gives us is the opportunity to take advantage of new technologies as they become available, take advantage of the strength in the commodity prices as they become available, to allow us to get more and more oil and gas out of the ground in each of these acquisition.

We have a large base of assets; we have over 5,600 gross producing wells. We have large acreage position, over 900,000 gross acres and over 0.5 million net acres. A significant amount of our production, all of our California production is tied to the world oil prices, price begins Brent, which means we sell at a premium to WTI for our well. We also have exposure to early-stage exploration plays, two of the largest are in Michigan.

We have well over 130,000 net acres in the Utica Collingwood and about 85% of that is held by production, Encana has been working Utica Collingwood now for a few years. We have an option on their success in that play. In addition, we have about 75,000 acres, much of the same acreage that overlays the A-1 Carbonate, several operators including Devon have been working out.

So, while I wouldn’t own right for an exclusivity for the exposure for these plays, they are exciting plays that could create a significant amount of value for the partnership. What I (inaudible) a low-risk development that I will talk about more.

So, about three years ago, we decided to focus more on oil. We have a large inventory of natural gas, but we did needn’t to drill the wells. Virtually all of our acreage in gas country was held by production. We've turned our technical teams to our oil-producing provinces and said guys and ladies, we need to look at these assets and we need to go from drilling a handful of wells a year to really exploiting these oil-producing properties more aggressively.

Through acquisitions and internal development of organic growth opportunities, we've grown our liquids significantly. Liquids made up about 35% of our asset base in 2010. Today, they make up about 62% with oil making up about 56% of that, and we've grown the PUD component. PUDs made up less than 10% of our proved reserves in 2010. Today, they make up more than 20%, and those PUDs are almost exclusively crude oil PUDs. We have very little in the way of proved undeveloped reserves and natural gas. We do, however, have significant opportunities for natural gas if prices were to rebound, when they rebound, I guess, is the proper way to phrase that.

I’ll talk a little bit about some of our core operating areas. Wyoming is a core area for us; we've been there for over a decade. We have oil production in the Big Horn and Wind River basins and in the Powder River basin; we have dry gas production in the Southwest part of state in Evanston and Green River. We have a large acreage position of over 200,000 gross, 100,000 net acres, significant low risk in-fill drilling opportunities.

In 2012, we spent about $32 million to drill 20 wells, in 2013, I believe we'll drill 18 wells and spend about $27 million. So we'll drill. So that's a number of infill wells for oil here in Wyoming. Low risking cost while we did selling oil at discount to WTI because the low lifting costs, our net facts, our margins are still very strong in Wyoming. There've been like a lot of growth that acquisition a couple years ago the paddle basin and we made a – both on acquisition in the Big Horn last year.

Texas is one of our newest operating areas, we set for many years and we plan to get into West Texas and we successfully did in 2012 for the series of acquisitions from Crown quest and our non-operated partners in the Permian Basin. That's an area that will grow significantly. We will drill 60 wells I believe in Texas this year, just under $100 million on top of the 18 wells, we drilled in the last part of 2012 following our acquisition.

Here we like a lot, very low lifting cost of about $6.20 per BOE. So very high margin production for us and we've teamed up with a great partner in Crown Quest. And our legacy production areas you're here. We have an interest in there, some very large oil fields we produced about 97-98% royalty only gas is California associated gas.

On large accumulations, we produced 1.2 million barrels last year. We expect to grow that production. It's an area we make acquisitions, we did about $100 million transaction in the Begrudge Field last year and there opportunistically looking to grow. But the very near focus because it's a natural in place, and if you like about our technical teams and what they do.

A little presentation about oil and gas companies, you didn't get a log and a map, so here is the log. The key thing to get in these logs, but you can understand not that truly mentioned here, quite a lovely log. But the key to get out of logs is green is good.

Well, – so this is a log in Santa Fe Springs. The Santa Fe Springs is almost 100 years old. It was discovered in the teens, 1913, 1915, it's about ten miles east of Downtown Los Angeles in industrial portion of the City of Los Angeles. The field had 2 billion barrels of oil in place and has produced about 650 million barrels to-date.

But what's remarkable at it is that the entire field is 640 acres. Our field was a square mile, yet we have 2 billion barrels of original oil in place, over that and 600 million barrels recovered, over a million barrels per acre. We own an entire field, we own most of it in sea. We have basically 99 plus percent working interest and 98% net revenue interest.

When we bought the field in Texaco, it was the core asset in a package that was – actually in Southern California, but it was a key asset and it was a PDT play, it was producing about 1,400 barrels a day when we bought it in 1999. We were able to raise production to about 1,800 barrels a day within about six months. And we’ve between 1,800 and 2,000 barrels a day from 1999 to about 2010. And we did that by drilling anywhere from one to five wells a year.

Our geologists would, every year, develop three, four, five projects, we're drilling. We get production up, we hold production flat, they come back next year and they do the same thing. Whereas from 2010, we decided to focus on over well assets and see what we could come up with. We started drilling and we had a rig running non-stop since then. We think, we probably have 100 locations in the field that designed 100 years old and has produced over 600 million barrels.

And it's really fascinating. We thought we understood this field, it's a very gentle sloping at decline. You barely can see the surface depression. Where sands – oil sands beginning about 1,700 feet and going down to – productive going down to about 9,500 feet. It’s below the depth of bottom of the oil, we know the depth of the bottom of reservoir, you lose reservoir quality beyond about 9,500 feet. Just a big old stack and what the original geologic interpretation was, it's really kind of a stack of giant pancakes that were weighing on top of each other with a very small incline on a very gentle slopping on picture.

Well, we did a lot of reservoir modeling, we did a lot of geologic modeling. We did the first 3D seismic survey ever done on the field. And what we found out of was first it wasn’t nearly simple as they thought. Your original model showed these large pancakes. But we really found was instead of just a series of large and chase whatever pop each other, it was really like a whole bunch of server dollar pancakes that’s just been thrown onto these states.

So when we did reservoir simulation and couldn't understand why certain wells was funny several water rejection others would if all, it led us to say, “Well, there has to be some discontinuity between these two parts of this giant pancake.” Or as we got into it deeper and deeper and found out instead of having a continuous pancakes, we had the silver dollar also that makes sense.

Producing from this silver dollar pancake or injecting into it was not going to allow production from this. And some come along the way in each other. So, there were some communication. In other faces, they were totally disconnected. So that insight gave us a lot of understanding of the field.

In addition, it wasn’t in the field with map with mill hole. Now, we're in Southern California, the oldest [INDISCERNIBLE] but for 80 years, we were certain there were no faults in the field. We have to look at the field and I’d say, “There are lot of faults in the field.”

So instead of these large pancakes, we had a much of silver dollar pancakes that sometimes connect with other points that were also faults. So it made for a very complicated puzzle but what was great about it was it made also for a lot of inefficient oil production.

So the fact that there were 63 million barrels have been produced, it hadn't been produced efficiently and it was a tremendous amount of upside left and a tremendous amount of oil. So that's what our technical teams have been doing is finding these pockets, these pools that haven't been swept, haven't been produced and increasing the production from that.

As I said, we drilled 20 wells in 2012, we drilled 20 wells this year. We think there's about 100 locations. We now think grew in wells; 35 barrels a day is type curve, but there is a very low decline and they generate greater than 50% rate of return. In many cases well in north of 100% rate of return.

So fantastic area, large field, something that I’m proud off, because that's what our technical teams have been focusing on for decades. It's a great MLP asset, we'll be produce in this field for 50 or 100 years.

So, our capital plans; my seven (ph) built explores very wells. That doesn't mean, we don't drill wells. We've drill lot of well. We're going to drill about 145 wells in six states. This year we'll spend about $270 million. We expect them double our liquids production between the fourth quarter of 2012 and fourth quarter of 2013.

And it’s going straight up. As I said, diversification is important to us. We're going to drill 60 wells in Texas, 46 in California, 10 in Oklahoma on 18 in Wyoming and we are going to spend money in those areas. Almost $100 in Texas and about 84 million in California.

So, it's a robust capital program. The capital program focused on growing our liquids production and the capital program with have lot of success so far this year and I was excited about it. Consider the acquisitions are a core part of the business, I need to talk a little bit about how we look at acquisition because that's something we've done well, we've done for 25 years and I believe we've done it well.

We look at a lot of deals. In 2012, we looked at 500 opportunities. And in closing seven transactions. In 2011, we've looked at 300 and closed 3. So we look at a lot of transactions. We have a dedicated team of 15 people running from business when engineering geosciences. We look at virtually every transaction out there, almost all the data rooms. And as well as a lot of privately negotiated deal.

As I mentioned a lot of deals in 2012, we've done one large deal in 2013. The transaction in 2012 are differentially know because while we participate the auctions. We don't plan to be successful in the auctions. We see somebody is willing to spend a little bit more money than us. So what we have really try to focus on those areas where we have a competitive advantage. And then the transactions that we did in 2012, it's interesting that it usually worked out that way. The only one that is really in auction was Wyoming deal with Nimin Energy with $95 million transaction and it was probably marketed.

Our competitive advantage there was that this was a true go funds. These field weigh in the fields that we have in the Big Horn Basin. We were the offset operators in that case.

In addition our fields were further along the development. We have been the Point Capital for many years and Wyoming; 9.5 as a result, a lot of good development potential with 9 in we’re selling what 50 foot [INDISCERNIBLE] and in this field or across this slide. This is what this development can look like.

Certainly we have a better knowledge of what these fields could do than anyone else. For you this is better but we have inside information. The AEO transactions though which may be one or two others, but our General Counsel have represented AEO family-owned business, prior to joining us full time. When they decided the sell the other in 2012, because they were worried about taxes of in 13 the approach was one on other.

We have the inside track relationship or we were able to do that transaction, they knew, we can crawl. We also have something, the others didn’t have. The other, where in the business non dollar equity. Some just wanted $35 million in cash but others didn’t, so we were able to structured transaction with the others, we see units in the tax-free transaction and a sudden why we see cash. So we were able to be very competitive in that transaction in any while it appears.

And importantly, in Texas, we establish relationship with CrownQuest, CrownRock, about a year and half, we did our first deal. We spent a lot of time in middle of talking different operators and believe the CrownQuest, CrownRock with some of we could do business with.

It's been a long time trying to construct the deal that would make sense for them as well. CrownQuest formed a joint venture with Lime Rock at New York to develop the world’s very – another projects in North Texas. They formed this joint venture with CrownRock and they come in early-stage, they grow acreage positions throughout the properties and then they want to sell those, once they get to a certain actuation and redeploy that capital.

So we stuck our first deal with them for a little over $200 million that allowed us to purchase a 200 well project from them; 40 wells have drilled, 160 yet to be drilled. We purchased 100% of the then existing wells, so we have got all of the cash flow and we purchased 50% of the 160 infill location, less CrownRock, CrownQuest with the operator.

So we've accomplished a lot. Perhaps, you got the cash flow, we partnered with great operators that need to move into West Texas and jump into the deep end immediately trying to line up rates facts streams, equipment, people, etc. And they've got a big chunk of cash data that we deploy.

So we got that transaction in summer. We brought their non-operated partners. They came to us late in the fall 2012, in fantastic turned about 2013 and said, “We'd like to do another transaction, you're the only people we can talk to, because we have a PSA negotiated with you both guaranteed. We know you can close. Would you like to structure another deal?”

They brought us a package of property, our engineers went back and forth with them for about a week, we crafted something that we’re about to do the second transaction. So we got about $220 million of deals under relationship that we established over time with CrownRock.

We did large deal with Whiting this year. Great assets for an MLP and the Oklahoma Panhandle with the primary asset the Postle field. We predict or we expect this asset to produce the same amount of oil 10 years from now that's producing today. So great cash flow, all oil large CO2 field, low-lifting cost, great acreage position.

We bought some Whiting, their interest in the Postle unit. We also bought from their partners, their non-op interest in the North East Hardesty, as well as CO2 pipeline and other infrastructure.

So we basically own 100% of this business. And now large amount of oil in place, over 400 million barrels in oil sands, strong accretion to drive cash flow, to drive reserves, the earnings and production. It will, as a result gain a 100% oil, lift our production, so that liquids will make up almost two-thirds of our net production here in 2013.

We'd also provide additional diversity, we like the continent a lot and moving into Oklahoma in a big way is important to us, so we produce about 7,200 barrels a day there. And with also the platform with the CO2 expertise within that land.

Overview the large field, the Postle field as well as the North East Hardesty field, the smaller field, which will come under CO2 flood later this year or early next year, as well as the Trans-Pecos pipeline, we own 100% of 120 miles. We put 35 million cubic feet a day of CO2 through its deck, has 175 million cubic feet of capacity.

So we think there's a lot of value in the excess capacity in that pipeline. We also blocked up CO2 supplies through not just the 1P, but also enough CO2 to produce 1P, 2P and 3P reserves associated with this asset.

There is obligatory map, I won't spend much time, I would say it is a large deal, significant amount of oil and gas in place. Finance the transaction by drawing down our revolver. We view our revolver as acquisition currency. In fact, we had a billion dollar borrowing base, we finally made the acquisition and had about between 50 and 100 million drawn.

So we were able to go to writing on a negotiated basis, say we don't have a financing contingency on this transaction. We can write with a check and we believe that is what allowed us while some of our peers are in the back out allowed us to get this transaction.

We do have pro forma debt to EBITDA of about 4.0 times, which runs approximately like to in the business long-term. And you will see us opportunistically going into the equity markets, we don't need to go in the equity markets immediately. We've built a lot of flexibility into our revolver. We'll go into the equity markets opportunistically as well as probably term out a significant portion of this debt over time.

Financial overview, I'm running out of time. So I'd say that we've grown production and EBITDA by about 30% compounded annually since our IPO in '06. We focused on maintaining our debt-to-EBITDA of about 3.0 times. As I mentioned, we're at about four today, so you'll see us stepping that down both through growth in EBITDA as well as the natural reduction in debt through cash flow and opportunistic equity financing, and we have a strong hedge book and I hit that. I love this slide, sequential distribution growth for 13 quarters.

But here is the hedge book and our hedge book is very strong. We've about 80% of current year's production hedged, 75% of the following year two-thirds, 50% thereafter. And it was a very clean in our hedge book, these are our oil hedges, the base is swap, the dark blue is costless collars and the light blue is puts. As you can see, we basically have virtually no puts in hedge book on either oil or natural gas.

And this is one of the slide I do love that; this shows why we hedge. And what we've shown in the bars is our quarterly EBITDA beginning with the first quarter of '08 and we’ve also related in oil and gas prices during that same period. And what you can say is that when oil and gas prices collapsed in the second half of 2008 and oil fell from 140 to 35 and gas from 14 to 3.15, our EBITDA fell 15% and held rock steady at $50 million per quarter through the depth of financial crisis.

This slide I like a lot less. This shows our yield compared to our peers in the E&P space and we're in the middle of that. We'd like to be part of over the right. We are committed to growing distributions and we believe that our unit price should reflect that over time.

So to close, we have an experienced management team, we've been following the strategy for 25 years. We have a high-quality asset base diversified across the country and diversified across commodities. We have moved our focus toward oil just given the relative valuation of oil and natural gas today. We've grown our distributions consistently over the last 13 quarters and are committed to continuing that growth. We have a strong acquisition track record. We have a strong hedge book and our yield at 10% is, we believe very attractive.

So with that, I guess, we have time for maybe one question and then I'll have a breakout in the Posidial (ph) Room. Is that right?

Question-and-Answer Session

Rick Burleson – Burleson LLP

[Posidial] (ph) Room.

Hal Washburn

Thanks, Rick. [Posidial] (ph) Room. So, we have time for one question if – all right.

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