Hal Washburn – Chief Executive Officer
Randy Breitenbach - President
Mark Pease – Chief Operating Officer
James Jackson – Chief Financial Officer
David Neuhauser – Livermore Partners
BreitBurn Energy Partners LP (BBEP) Q1 2010 Earnings Call May 10, 2010 1:00 PM ET
Welcome to the BreitBurn Partners first quarter 2010 earnings conference call. Today’s conference is being recorded. At this time, I’d like to turn the conference over to Jim Jackson.
Good morning everyone. On with me today are Hal Washburn, BreitBurn’s CEO, Randy Breitenbach, President, Mark Pease, BreitBurn’s Chief Operating Officer, and Greg Brown, our EVP and General Counsel. After our formal remarks, we’ll open the call for questions from securities analysts and institutional investors.
Before I turn the call over to Hal, let me remind you that today’s conference call contains projections, guidance and other forward-looking statements within the meaning of the Federal Securities Laws. All statements other than statements of historical facts that address future activities and outcomes are forward-looking statements.
These statements are subject to known and unknown risks and uncertainties that may cause actual results to differ materially from those expressed or implied in such statements. These forward-looking statements are our best estimates today and are based upon our recent expectations and assumptions about future developments, many of which are beyond our control.
Actual conditions and those assumptions may, and probably will change from those we projected over the course of the year. A detailed discussion of many of these uncertainties is set forth in the cautionary statement relative to forward-looking information section of today’s release and under the heading Risk Factors incorporated by reference from our annual report on Form 10-K for the year ended December 31, 2009, our quarterly reports on Form 10-Q, our current reports on Form 8-K and our other filings with the Securities and Exchange Commission.
Unpredictable and unknown factors not discussed in those documents also could have material adverse effects on forward-looking statements. The partnership undertakes no obligation to update publicly any forward-looking statements to reflect new information or events.
Additionally, during the course of today’s discussion, management will refer to adjusted EBITDA, which is non-GAAP financial measure when discussing the partnership’s financial results. Adjusted EBITDA is reconciled to its most directly comparable GAAP measure in the earnings press release made earlier this morning and posted on the partnership’s website.
This non-GAAP financial measure should not be considered as an alternative to GAAP measures such as net income, operating income, cash flow from operating activities or any other GAAP measure of liquidity or financial performance. Adjusted EBITDA is presented as management believes it provides additional information relative to the performance of the partnership’s business such as our ability to meet our debt covenant compliance test.
This non-GAAP financial measure may not be comparable to similarly titled measures of other publicly traded partnerships or Limited Liability companies, because all companies may not calculate adjusted EBITDA in the same manner.
With that, let me turn the call over to Hal.
Welcome everyone, and thank you for joining us today to discuss our first quarter 2010 results. Our year began on a great note with the reinstatement of our distributions and the settlement of the Quick Silver litigation, which we announced in February. Additionally, we had a very strong quarter from an operational and financial perspective with key metrics will within or better than our 2010 guidance.
Let me start by highlighting a few key accomplishments. During the first quarter we produced 1.595 million barrels of oil equivalent or 17,725 boe per day, which is well within our guidance range. Although we still see upward pressure on some of our costs due to rising oil prices, our operating team continues to pursue cost control strategies and our lease operating expenses excluding transportation fees and property taxes, came in below the midpoint of our guidance range at $19.12 per boe.
Adjusted EBITDA for the quarter totaled $51.1 million, which on an annualized basis, is above our guidance primarily due to better than expected differentials. We continued our debt reduction efforts in the first quarter and ended March with outstanding borrowings of $523 million, a $36 million reduction from year-end 2009, and a $213 million reduction from year-end 2008.
Based on 2010 public guidance and our units outstanding as of May 10, 2010, our 2010 distributable cash flow of approximately $120 million translates to a distribution coverage ratio at the high end of our peer group.
Now for some recent news; in April, two new directors joined the Board of Directors of our general partner. We’re pleased to welcome Walker C. Freedman and W. Yandell Rogers to our Board, and look forward to working with them. Our Board met late April and determined the first annual meeting of the limited partners of the partnership will be held on July 29, 2010 in Los Angeles California. The exact time and location will be distributed with our proxy materials.
On May 7, we completed the syndication of a new credit facility with our bank group. Our new credit facility, which will expire in May, 2014, has a borrowing base of $735 million, which is a small increase of our prior borrowing base, and includes terms that increase our financial flexibility, which Jim will address in his section. Given our current debt levels, we have approximately $210 million in borrowing capacity.
Finally, we’ve been closely monitoring the recent activity in the Utica Collingwood shale play in Northern Michigan. As the largest gas producer in Michigan, and the owner of significant acreage and extensive infrastructure, we’re well positioned to take advantage of this emerging play, and Mark will talk more about this shortly.
As I mentioned on our last call, the partnership remains fully focused on pursuing our core strategic goals. We’re focused on executing our capital program, maintaining and growing productions, and actively evaluating acquisition opportunities, although with our strong hedge portfolio, which Randy will expand on later, and our high coverage ratio, an acquisition near term is by no means necessary.
With that, I’ll turn the call over to Randy who will cover additional highlights, discuss selected results for the quarter and the year, and recap our hedging activity.
Thank you, Hal and welcome everyone. I’m certain you all remember that a year ago, facing a very tough situation, and we decided to spend the year focusing on liquidity by reducing our outstanding borrowings. We have certainly come a long way since then.
Our debt reduction has been dramatic, and although greater market volatility did not openly materialize, we would have been in a very good position to withstand it. Additionally, our successful debt reduction program allowed us to avoid expensive and/or dilutive financing options and contributed to our reinstating distributions earlier than expected.
With the settlement of the Quick Silver litigation, the reinstatement of quarterly distributions and now, the completion of our new credit facility, we have executed the final steps in the plan we initiated in 2009 to improve our financial flexibility and protect long term unit holder value.
Our commodity hedge portfolio has played a very important role during the market instability over the last year and a half and in that, it allowed us to maintain relatively stable cash flows despite volatile commodity prices. While commodity prices have stabilized considerably since, our hedge portfolio remains an important tool for the partnership.
Now let me move on to some details of our commodity hedging activity and the impact of these derivative instruments on our first quarter 2010 results. For the first quarter of 2010, crude oil and natural gas sales totaled $92.6 million, up slightly from $92.5 million in the fourth quarter of 2009.
Realized gains on commodity derivative instruments for the first quarter of 2010 and the fourth quarter of 2009, contributed $12.1 million and $17.8 million respectively to the sales total, which highlights the impact of our strong hedge portfolio.
Our realized oil and gas prices continue to compare favorably to WTI crude oil and NYMEX natural gas prices for the same period. For the first quarter our realized natural gas prices averaged $7.65 per mcf, which is significantly higher than the NYMEX natural gas price of $4.99 per mcf. Average realized crude oil and liquids prices were $72.79 per barrel, slightly lower than the WTI crude oil spot price of $78.81 per barrel for the same period.
We recorded non-cash, unrealized gains from commodity derivative instruments for the first quarter of $39.9 million, compared to non-cash, unrealized losses in the fourth quarter that totaled $54.7 million.
Consistent with our strategy to mitigate commodity price volatility, we continue to opportunistically layer in new hedges. Given rising oil prices, we have added significant oil hedges during the last four months, including new 2014 oil hedges above $90 per barrel.
So far in 2010, we have hedged an additional 1.74 million barrels, which covers oil production from 2011 through 2014 at a weighted average price of $86.92 per barrel. An updated presentation of the partnerships commodity price protection portfolio as of May 13, 2010 will be made available in the events and presentation section of the investor relations tab on our website.
Assuming the midpoint of 2010 production guidance is held flat, our production is hedged at 84% in 2010, 81% in 2011, 70% in 2012 and 56% in 2013. Average annual prices during this period range between $79.3 and $87.88 per barrel of oil and $6.92 and $8.25 per Btu for gas.
Our hedge portfolio has proven successful in mitigating commodity price volatility, stabilizing revenues and cash flows, and supporting our borrowing base in the past, and it will continue to play an integral role in our overall business strategy. We are in a strong position going forward because a significant portion of our oil and gas volumes are well protected at attractive prices through the next four years.
We will continue to evaluate our portfolio as we grow and add new production, and we intend to hedge accordingly. With that, I’ll turn you over to Mark Pease, who will provide you with additional details of our operating performance.
As Hal mentioned, operationally, 2010 is off to a good start. I’ll begin by running through the results at the partnership level, and then discuss some of the details by division.
During the first quarter, we produced 1.595 million barrels of oil equivalent, which equates to 17,725 beo per day. This volume is essentially flat with the prior quarter’s production of 17,740 boe per day and is within our 2010 guidance range.
Our production split for the quarter was approximately 54% natural gas and 46% crude oil and NGL’s. Lease operating expenses and processing fees excluding transportation expenses and property taxes came in at $30.5 million or $19.12 per boe for the first quarter 2010, which is slightly lower on a boe basis than the $19.31 per barrel we incurred during the fourth quarter of last year.
Our operating teams continue their efforts to lower service and material costs, although rising oil prices continue to cause upward pressure on some of our expenses. Some materials and services where we saw increases are tubular, which increased between 25% and 60% depending on which region we were in. Fuel costs were up 5% to 10% and chemical costs were up about 5%.
Total capital expenditures in the first quarter were $8.7 million. On an annualized basis, this is below our guidance of $72 million to $78 million, but was consistent with what we had planned for 2010 given the weather constraints for some of our key projects in Wyoming and Michigan.
As I mentioned in our fourth quarter and full year 2009 earnings call, the majority of our capital program will be executed in the second and third quarters, which enables us to much better control costs.
Moving on to first quarter performance in our two operating divisions, in the eastern division, production was above expectations due in part to better production surveillance and to the milder than expected winter weather. Controllable lease operating expense in the eastern division was lower than forecast due to our continued strong focus on costs and lower than normal winter weather related expenses due to the relatively mild winter.
Capital spend in the eastern division mainly consisted on a re-completion in Michigan, which added incremental production of about 120 ncf per day.
There has been a lot of news in the past few weeks about the Utica Collingwood shale play in Michigan. BreitBurn holds a significant acreage position in Northern Michigan of more than 470,000 net acres. Additionally, we own and operate more than 150 miles of high pressure gas gathering lines over 1,000 miles of low pressure line, more than 100,000 horsepower of compression, three gas processing plants and four NGL recovery plants.
With what we know about the play today, we have more than 90,000 net acres in areas where we believe the Utica Collingwood is prospective. The vast majority of our acreage position is held by production, which gives us the flexibility to monitor industry activity and determine the best course of action to capture that volume.
Moving to the western division, production was slightly lower than expected due to weld downtime in Florida. Controllable lease operating expense was higher than expected due to higher than normal well pulling activity in Florida and California. We do not expect that level of low work to continue on an ongoing basis.
During the quarter, we drilled the first of two wells at our Raccoon Point field in Florida. The well has just been completed and is coming on production this week. We’re encouraged by what we have seen to date on the well and we will know more about that over the next few weeks. The drilling rig has been moved and the second well was spud last week.
Additionally, during April, we commenced our drilling program in Wyoming which will consist of 11 new wells and two deepening’s. We’re looking forward to the increase in our activity and are very excited about the new potential that we’re seeing in some of our areas.
With that, I’ll turn the call over to Jim.
Let me start by reviewing some more specific financial results and then summarizing our quarter. As Randy mentioned earlier, oil and natural gas revenue including realized gains and losses on commodity derivative instruments rose in the first quarter to $92.6 million, $92.5 million in the fourth quarter of 2009 as a result of higher commodity prices and better than expected crude oil differentials offset by lower realized gains from commodity derivative instruments.
First quarter adjusted EBITDA was $51.1 million, up from $49 million in the fourth quarter and above the high end of our 2010 EBITDA guidance range of $190 million to $200 million. This results as Hal indicated, was primarily due to better than expected differentials.
General and administrative expenses, including unit based compensation expense are trending toward the lower end of our 2010 guidance at $6.4 million or $4.00 per boe in the first quarter versus $6.2 million or $3.79 per boe in the fourth quarter of 2009.
Production and property taxes totaled $5.6 million in the first quarter as compared to $6.1 million in the fourth quarter 2009. Net interest and other financing costs excluding realized and unrealized gains and losses on the swaps for the first quarter were $3.6 million compared to $4.1 million in the fourth quarter of 2009.
Cash interest expense, which includes realized gains and losses on interest rate swaps, but excludes debt amortization expense and unrealized gains and losses on interest rate swaps totaled $5.7 million in the first quarter of 2010 versus $6.8 million in the fourth quarter of 2009, reflecting the impact of our first quarter debt reduction progress.
We reported net income of $57.9 million or $1.02 per limited partnership unit for the first quarter versus a net loss of $39.7 million or $0.75 per unit for the fourth quarter of 2009. Unlike the prior quarter in which we recorded at $54.7 million unrealized loss on commodity derivatives, in the first quarter of this year, we had an unrealized gain on commodity derivative instruments of $39.9 million.
Now I’d like to comment on our liquidity position. We reduced outstanding borrowings by $36 million in the first quarter from $559 million at year-end 2009 to $523 million as of March 31, 2010. As we mentioned, since 2008 we have reduced outstanding borrowings by $213 million, which translates to approximately $4.00 per unit.
Outstanding borrowings as of April 30, were $525 million, which includes the $13 million payment related to the Quick Silver settlement. As we’ve stated before, we expect this amount to be reimbursed by our insurers and discussions with them are ongoing.
As Hal mentioned, we are very pleased to report that we recently completed the syndication of the partnerships new bank credit facility with our group of lenders. This facility included 15 banks, and has a borrowing base of $735 million, which is slightly higher than our prior borrowing base of $732 million.
This new four-year facility expires on May of 2014, and includes a number of important provisions giving us additional financial flexibility as compared to our prior facility. Our next borrowing base determination is scheduled for the fourth quarter of 2010.
While the new facility does call for higher LIBOR margins of between 75 and 100 basis points depending upon the amount of the facility utilized, the rates and terms and dramatically better than what we would have achieved had we elected to renegotiate the credit facility last spring at the height of the credit market’s stress. We’d like to thank our bank group for their ongoing support in this process and over the past year.
In summary, the partnership had a very strong start to 2010 both operationally and financially. We will be paying our first quarter distribution on Friday, May 14 to record unit holders as of today, May 10 in the amount of $0.375 per unit. We will continue to execute on our business strategy for the remainder of the year.
This concludes our formal remarks. Operator, you may now open the call for questions.
(Operator Instructions) Your first question comes from David Neuhauser – Livermore Partners.
David Neuhauser – Livermore Partners
There’s not too much. Actually I’ll just comment on the quarter. It was a real strong quarter and you did a really good job. I guess my question would be what are some of the uncertainties that you see in the year that maybe could blindside us at this point and are you looking to change up in terms of hedging facility looking at natural gas prices lower than obviously the oil. The oil at this point, are you looking at hedging more oil at these levels than at gas?
I think the big macro issues that we face along with everybody else in our space are kind of the volatility in commodity prices and uncertainties in the capital markets. The volatility last week in the equity markets highlights that we’re not through this yet, so I think those are probably the big picture issues that we face and I think that everybody is aware of those.
As far as hedging, yes we have focused our hedging and have been hedging opportunistically for crude oil over the last year. We believe natural gas prices are lower, but we believe oil prices are strong so we’ve been adding to our hedge book in oil.
David Neuhauser – Livermore Partners
In terms of acquisitions, are there greater opportunity that you’re foreseeing at this point or have sellers sort of backed off with the rally back and the price of crude and natural gas?
We think there’s going to be a lot of opportunities this year. We think that with the focus on the shale play, a lot of conventional assets, which are our bread and butter, should come on the market. We will be competitive. We will be looking at these opportunities, but the nice thing for BreitBurn is for this year and probably next, given the coverage ratio we have, given the built in capital opportunities that we have, while we’ll look at opportunities, make acquisitions and we hope to make some, we could have a very successful year and even next year without any acquisitions.
David Neuhauser – Livermore Partners
At this point with the new syndication, do you have the financial flexibility if you were to go out and make either a medium or larger size acquisition, would you have the flexibility to do so at this point?
There are no further questions at this time. I would now like to turn the call back over to Mr. Washburn for any additional or closing remarks.
Before we wrap up, I’d just like to remind everyone that we will be presenting at the NAPTP’s LP investor conference on Wednesday of this week in Greenwich Connecticut. Anyone who would like to listen to the presentation live or archived, can do so on our website.
On behalf of Randy, Mark, Jim, Greg and the entire BreitBurn team, I thank everyone on the call today for their participation.