BreitBurn Energy Partners L.P. (BBEP)
Barclays High Yield and Syndicated Loan Conference Call
May 13, 2014 02:30 PM ET
Jim Jackson - Chief Financial Officer
Gary Stromberg - Barclays Capital
Gary Stromberg - Barclays Capital
Why don’t we get started. Our next presenting company is BreitBurn Energy Partners and from BreitBurn we have Jim Jackson, CFO.
Gary thank you, thanks for hosting us, I appreciate it. Another great turnout this year, happy to be here. As Gary said my name is Jim Jackson, I am Executive Vice President and Chief Financial Officer for BreitBurn Energy Partners. I also want to take this opportunity to introduce to my left Antonio D’Amico, Antonio joins us heading up our Investor Relations effort and our governmental affairs effort working jointly with myself. And Greg Brown, EVP and General Counsel at BreitBurn. And Antonio joins us from a variety of roles over the last 19 years at Occidental Petroleum also in LA. So he’s gone from the largest oil company LA to the second largest oil company in Los Angeles. So happy to have Antonio here, happy to introduce you guys and hopefully all have the chance to say hello and get to know him.
Let me take a few minutes and just go through the BreitBurn Energy Partners’ story, as many of you know and I will just touch on some of the key highlights here. Our strategy at BreitBurn really hasn’t changed in the last 25 years. The company was started at 1988, we had two wells at that point, the idea was the acquire long lived oil and gas reserves typically being sold by larger oil and gas companies that were moving on to different kinds of projects higher return projects et cetera and to buy those assets and working a little harder than had been worked by the predecessor. So we again started with two wells in 1988, 25 years later, we have essentially been following the exact same strategy and we are up to around 3,800 wells across the country.
I will talk a little bit about how we have expanded particularly in the last four, five years, but the key from our perspective is, we are really pursuing the same business model, we laid out in the business plan 25 years ago.
The portfolio today is both high quality and very balanced. Originally we are all oil, we have since diversified into oil and natural gas, a portion of the portfolio is now NGLs that is around 7% of the portfolio today.
But we like having a balance, we like having both significant producing oil and gas reserves and significant proved undeveloped oil and gas reserves, because the markets do change, there will be different return opportunities to exploit those assets over time, based on commodity prices, opportunities et cetera. And we like having that optionality in the portfolio. We're now up to just under 215 million barrels of estimated proved reserves.
We've grown significantly through acquisitions. We completed in 2012 and 2013 approximately $1.8 billion in acquisitions in a variety of states. Again I'll talk a little bit about how we've expanded the portfolio. But the most recent of the 2 acquisitions have been in the Oklahoma Panhandle. We bought assets from Whiting Oil and Gas, this is called the Postle field and the Northeast Hardesty unit, which is a large CO2 flood. We paid right around $850 million for that asset. And then we also at the end of 2013 in our third transaction with a group called CrownRock, which some of you may know, we acquired additional assets and contiguous acreage in the Permian, where our footprint is now reasonably significant.
So, we'll continue to grow via acquisition, it's an important part of our strategy obviously along with exploiting the base business. All of that is done in the interest of supporting and growing distributions. We are very focused on the monthly distribution strategy; we've increased distribution sequentially now for 16 quarters; they are up about 33% since early 2010. And not surprisingly that's important part of our strategy and important part of our ongoing access to the capital markets as well.
Finally, layered on top of the asset base and our development strategy is our hedge book which I'll talk about. We're significantly hedged certainly for the next three years and also well hedged in the years 4 and 5 as well.
This is a quick snapshot of the assets, so I won’t go through this in detail, but maybe a little bit of the history. We started the company in California, we then expanded into Wyoming and over the course of 2006 through 2013, we picked up assets in Florida, Michigan, Indiana, Kentucky and most recently we've been focused on the Mid-Continent both with the acquisition from Whiting and again with the third acquisition I mentioned through from CrownRock.
So we're now diversified across the country East to West, North and South, diversified in terms of oil and gas and don't particularly have any one areas of most significant area in terms of concentration or otherwise.
In terms of our overall layering in the strategy, we start with a very strong MLP asset base. These are long live reserves, north of 15 years in terms of reserve life. We have built into the portfolio and I'll spend a minute on this shortly, a larger component approved undeveloped assets, very early on in the life of the MLP. We had a very, very small percentage of the portfolio as PUDs and our view was if we expanded that modestly, we give ourselves a significant opportunity to grow organically in an environment where the acquisition market or the financial markets otherwise weren’t cooperating. And I'll talk about how we reposition the portfolio a bit in that regard.
Finally, layer into that an active hedging strategy that’s robust in terms of oil and natural gas, yet is very simple in its overall application we don’t have anything to esoteric in that book. And then add to that accretive acquisitions along the way and that’s how we support and grow distributions as we’ve done it historically and that’s how we intend to do it going forward.
I talked a little bit about how the portfolio changed. We’ve reoriented it in two ways. In 2007 we were principally natural gas and we decided at that time to move back towards liquids, both in terms of our historical orientation and in terms of likely future profitability. So, in 2010 we were about 35% liquids in terms of reserves. We’ve now moved that up to 60% at the end of 2013. And in terms of production, by the end of the year we’ll be closer to 66%, 67% liquids into the fourth quarter.
We also added more PUDs. We took the view that from time-to-time when the markets just get dislocated for whatever reason, we wanted to have plenty of organic drilling opportunities inside the portfolio. We didn’t have many of those in 2009, 2010. We’ve added that significantly both with Postle both with Wyoming acquisition from capital oil and gas what we’ve done in the Permian. So we now have literally hundreds of attractive infill drilling locations on the oil side and many more than that on the gas side not surprisingly just given where current gas prices are, but that’s an important transition for us.
I’ll talk now just about two of our selected operating areas. First, is the Oklahoma Panhandle, which we acquired last summer. We picked this up from Whiting Oil and Gas as I mentioned. It is a CO2 flood originally developed back in the late 50s, 1958 I think it was discovered and exploited started as a CO2 flood in the 90s. This is about 30,000 net acres, we own 100% of it. And importantly we also picked up what was a lot of the strategic infrastructure.
So in addition to the field, we also own this Libby Lateral which carries CO2 from New Mexico into the Postle field. We own the connectivity to the Transpetco pipeline there. We own the Hough Oil Pipeline and we own Dry Trails Gas Plant and all the other important midstream assets here that was an important thing for us to make part of the transaction. So overall, it’s around 70% PDP, 85% oil; a very good addition to the portfolio.
Texas is the other operating area where we’ll be particularly busy this year and we’ve been active in the last two years. We have significant acreage now in the Permian; we are up to about 15,000 net acres in the Permian. It is a higher component of PUDs than the rest of the portfolio, but these are largely infill drilling locations and we’ve concentrated our acquisition activity in one area in particular. This is 57% oil very, high quality oil, very low lifting cost vis-à-vis the rest of the portfolio and not surprisingly this is an area you will continue to see us active in both in terms of acquisitions and in terms of, certainly in terms of drilling this year.
Our overall capital program for 2014; we are targeting between $325 million and $345 million in capital expenditures and that’s well in excess of our estimated maintenance capital expenditures of $125 million and almost all of that will be spent in Texas California and Oklahoma. You can see the well counts there in the lower right what Texas and California principally comprising 90% of what we’ll be doing in terms of drilling activity and not surprisingly almost all of this is focused on liquids and oil in particular.
We completed or drilled 30 wells in the first quarter to that activity and our capital spending will ramp up particularly in the second and the third quarter. And you will see the production response from that into the third quarter and the fourth quarter, which accounts for an increasing production from Q1 to Q4 that’s reasonably substantial across the portfolio.
Let’s talk a little bit about our overall acquisition strategy. We have a very large, reasonably large business development group that includes two dedicated people in Los Angeles in 13 in Houston, that’s up significantly not surprisingly from a few years ago.
We are very focused as we always have been on acquiring stable producing properties; long live reserves and then we work on exploiting them and doing a little better job of developing them into the future than the prior owner might have otherwise anticipated.
We have been very successful in 2012 and 2013 in particular acquiring in excess of our stated goals. Each year we layout what we believe is a reasonable target for acquisitions. We see a lot of deals during the year, we’ve been fortunate in the last two years to have exceeded our expectations in terms of size.
In 2013, our goal was $500 million in acquisitions; we ended up doing $1.2 billion. In 2012, our goal was $300 million; we ended up doing $620 million in acquisitions. And this year our goal is $600 million in acquisitions.
We see a lot of transactions. We saw last year and we’re on pace this year to see more than 400 opportunities. Certainly a portion of those are going to be too large, a portion of those are probably too small or relevant, but month-in and month-out the deal flow has been strong.
Anecdotally, there has been some talk about the M&A environment being a little slower this year than last year. I can tell you why we've seen a fewer opportunities this year than last year. It's turned out that we've fully evaluated more at least through the first four months of the year than we did last year. So, still plenty of attractive opportunities out there as part of the overall acquisition side.
The other item I'd like to point out here is just in terms of the strategy being very robust. We've made a total of nine significant acquisitions or at least done transactions with nine different sellers. So, we are not tied to any one industry in particularly, we're not tied to any one group of sellers in particular. We have very broad relationships after 25 years in this business across the E&P space. And I think it shows in the nature of the companies that we've acquired from. They include American Energy, which was a group of individuals in California, series of private equity firms that we picked up a lot in the Permian acreage firm, as well as larger [E&PC] Corps including Whiting and Cabot. So very robust dialogue on the M&A side and very confident we'll continue to see the kind of deal flow we're hoping for this year in terms of reaching our goals.
I talked a little bit about how we've been active in the Permian; this is an overview of the third transaction in the Permian that we completed in December. We closed that right at the end of the year for $282 million, just over 80 million barrels, the estimated prove reserves, these were principally Sprayberry locations and I mentioned development opportunities here we have infill drilling opportunities and development locations for call it 300 potential locations.
So a lot of development opportunity there. And it improved the portfolio in terms of overall lifting costs. Overall lifting costs in our portfolio, including the natural gas is around $17, $18 per BOE. These assets come in between $7 and $8 per BOE, so that's a nice balance to what are some of the higher cost areas we have in the portfolio as well.
I'd also point out that with -- this year in orange and yellow much of what we acquired was acreage that was either very near or immediately adjacent to existing acreage that we have previously acquired from CrownRock. And in some cases, we acquired just additional interest in properties we already owned.
So in terms of additional geologic risk, additional development risk, management time and attention, exploitation, staff time and attention is a very efficient acquisition for us. And after what is close to $1 billion of acquisitions in the Permian, not surprisingly there is still a lot to do there.
This is the stratigraphic column of our assets in the Permian. Not being an engineer, I'll be happy to take questions on that in private. But the illustration here is important, we have about 4,000 feet of in terms of zones vertically that are producing very prolific area, a lot of near-term and long-term opportunity out here we believe.
For the quick financial overview now just in terms of historical performance, we only go back to five years, but our growth has been not surprisingly very dramatic. One of the items that isn't on here is our original production which when we went public, we were producing that about 4,400 barrels a day. We are well in excess of that now at a run rate of right around 40,000 barrels a day at the MLP.
So, we've grown very significantly. But in the last five years in particular growth on the production side has been very consistent. We're up from 6.5 million barrels in 2009 to finishing 2013 at just under 11 million barrels across the portfolio. And the midpoint of our guidance for 2014 is 14 million barrels of production this year.
Our profitability is also growing reasonably consistently, more so in the last few years, where we've been more active on the acquisition side. We're up from $195 million of EBITDA in 2009 to just under $370 million in 2013. And the midpoint of our guidance for 2014 is right around $500 million in EBITDA, so significant growth in terms of profitability as well.
And a lot of the EBITDA growth you see here in 2011, ‘12 and ‘13 is in spite of what we're declining oil and gas prices in our hedge book. So we did a very good job seeing those challenges coming in terms of overall profitability and working hard to work through those in terms of acquisitions and the like.
In terms of our financial strategy, it really hasn’t changed dramatically since we went public, albeit we are much larger. In terms of our overall liquidity profile, we have a $1.6 billion borrowing base; we have $1.4 billion of elected commitments under that and we have just under $600 million of available capacity in early May when we announced earnings on the 7th or on the 8th rather.
In terms of overall leverage, we target 3.5 times debt to EBITDA that’s an important metric for us. That’s up a little bit from when we first went to the high yield market back in 2010. And much of that expansion is due to the fact we are more comfortable with a little more leverage now that we are much more significant in size.
We are currently levered slightly north of 3.5 times but looking through the balance of the year, one of our goals is to get that leverage number absent acquisitions, back down to 3.5 times. We have a couple of different ways to do that, most notably we filed an ATM program in early March. We used that fairly actively up until we were in an earnings black out and you will us continue to be active with that through the end of the year.
In terms of financing strategy, not particularly different; again, we have always said we look to finance acquisitions generally with 50% debt and 50% equity and we want 70% of that to be debt to be long-term debt. So we will be as it relates to acquisition financing, we will be a frequent issuer in the equity market and will be a frequent issuer in the high yield market as well, not surprisingly. I talked about hedging, I’ll give some additional details here, but we are very focused on having a solid portfolio of hedges in place for the next five years. We are currently about 76% hedged for the next 12 months and that percentage goes down gradually. That’s a little under our target of being 80% hedged in year one; 75% in year two; and 70% in year three, but opportunistically we will look to top off those hedge portfolios going forward. And more importantly we’re likely to add hedges relating to acquisitions even much more aggressively than those percentages I just gave you.
If you look back our historical acquisition strategy, we tend to hedge much more in the way of expected production than those percentages. So with acquisition activity, those numbers will come up as well.
And then in terms of distribution coverage, we are targeting for 2014 absent any acquisitions or other financings to be right around 1.1 times covered. And we think that supports the distribution. We’d like to get that higher, not surprisingly but it will take accretive acquisitions to do that. But again, we’ve got a good track record of executing on those. So that’s important role for the balance for the year.
Spend a few more minutes just on financial flexibility. We -- our last [four] high yield market was back in November, we did a $400 million add on to one of our existing tranches, we have also been a frequent equity issuer as I know many of you know. Just prior to doing the high yield deal in November, we were in the equity market and it’s 16.5 million units, so right around $350 million in proceeds and we were previously in the equity market earlier in the year in February and that transaction was just slightly larger than that.
I mentioned the ATM program; it's a $200 million program. That is probably something based on average daily trading volume. We’re likely to make significant headway on in terms of using by year end. So, that will contribute to the overall equity base as well.
On the borrowing base side, I gave you those metrics there, I won't repeat them here. But do we have a large bank group, which we expanded in size pretty significantly around the Whiting acquisition this summer. It's a mix of domestic, international investment and commercial banks, so we're happy with that group. We did change an important element of the bank deals, covenant package, however we previously had a total debt to EBITDA constraint, we changed that in early February of this year to an interest coverage test. So, not unlike our peers, the principal metric for us now in terms of clients is a 2.5 times interest coverage test. That being said, we're still focused on that total debt to LT and EBITDA metric of being right around 3.5 times.
As it relates to distributions, we had consistent distribution growth for the last three years that certainly facilitated our access to the equity capital markets. We've increased distributions a little more slowly now than we were a few years ago, not surprisingly as we've grown a little bit larger. We also converted to monthly distributions, but we've adjusted the graph accordingly.
On the distribution side, we have about a 75% tax shield. We look to grow the distributions, as I have said not just with the base business, but with the strong hedge book and with acquisitions going forward. And our view is, if we can continue to grow distributions in the 4% to 5% range, which is what we've done historically that performance will be received very positively vis-à-vis our peer group who doesn't have that demonstrated distribution growth history necessarily.
I talked about the hedge book earlier; this is a quick snapshot of where we are in terms of the portfolio. You can see overall we’re 76% hedged for the balance of this year, a little more on the oil side than on the gas side. We’re 79% hedged on expected oil production; 72% hedged on gas; and the overall hedge percentage declines to just about 70% in year two, down the 57% in year three, and then does fall off meaningfully in year four. But particularly years three and year four and year five that's where you'll see us do a lot of hedging in the context of an acquisition most likely. So that's how we'll fill that in. And we have reasonably attractive hedge prices. They arrange from $93 on a blended oil basis, because we hedge both WTI and Brent in 2014 down to below 80s in 2018. And on a gas side, we go from around $5 to around the 440 level until we get out to 2018 where we still stay above $4.
The hedge portfolio is very straight forward. This is a snapshot of what we have in terms of oil hedges. Rather than going to the detail here I would just point out that principally everything we do, certainly on the oil side, is with swaps, same on the gas side which I'll show you next, but we don't have a lot of [acetory] constructs or otherwise in hedge portfolio, so it's very straight portfolio. Here same on the gas side even more or so. So 97% approximately of all of our hedges are simple straight forward swaps, all the counterparties that are part of our bank credit facility.
This graph illustrates why hedging is so important to us. What we tried to show here is volatility and commodity prices back to 2008, as well as what profitability looks like. The graph as it relates to profitability is skewed a bit by the level of acquisition activity that we’ve had over the last few years, but I think the important part of this graph from our perspective is back in 2008, 2009 when oil and gas prices were incredibly volatile, I know that’s period we all remember but are trying to forget and in the period where we weren’t doing a lot in terms of acquisitions, our overall profitability quarter-to-quarter was very stable.
And the fact is without going too into the details if you take our business where we have a very diverse asset base in terms of number of wells, we’re diversified across commodity. We’re just short of 80% hedged on expected production for the next 12 months. It takes a lot in terms of oil and gas price volatility to really change our outlook on profitability and EBITDA for the year. Generally speaking, oil and gas prices would have to move by about 10% overnight on January 1, to impact full year EBITDA by more than a couple of percentage points, that’s how robust the hedging portfolio works.
This is -- just thinking about our relative value on the common equity side. This is a quick overview of where we and our peers trade in terms of yield on the common units. This is current price versus most recent distribution rate. We’re right in the middle of the path just under 10%. The peer group moves around a bit based on acquisition activity and need to go with the financial markets, but we would certainly like to move to the right on this graph and we think with consistent performance, with consistent distribution growth will take our place further to the right hand side overtime. Hopefully, sooner rather than later, but at least on the equity side, very good value proposition from our point of view.
So, just to recap, we've been in this business now not necessarily as an MLP, but as an acquirer of long live oil and gas reserves for 25 years. The strategy is largely unchanged. We have gone from two states to nine states. We have gone from being predominantly oil to being both oil, gas and to a smaller extent NGLs. We've built a team both on the business development side and on the operating side which we think is excellent. We started with a modest team covering California and Wyoming, we now have an operating team that we are very comfortable having integrate new areas, have look at new development plans, we've taken our capital program from $20 million to $330 million on a run rate basis, so a lot of growth there, a lot of build out and infrastructure, both externally and internally. And we'll continue to focus on our core competency, which is buying assets from previous owners, who have otherwise decided to move on to higher return areas focusing very experienced, very good people from a technical point of view on those assets and doing a little better job of exploiting those and developing those over the intermediate term. And that's really been our value proposition.
So, we are pleased everybody could join us, happy to, I guess Gary, at this point take a few questions here, if any. Otherwise, again appreciate your joining and look forward to catching up.
Gary Stromberg - Barclays Capital
Jim, at the end of the quarter $775 million drawn and our model shows that growing to north of $900 million by year end, what’s your comfort level around borrowings under revolver? And I know you talked about potentially using the ATM program, how do you balance capital needs with revolver and borrowings this year?
Okay, so couple of things. In terms of visibility on the business, part of the comfort I get is, we are now in kind of the third year of the significant capital program. These are assets we generally know very well. We have not seen a lot of variability in terms of costs or variability in terms of outcomes on capital projects, so a lot of visibility on the capital program; also a lot of visibility on expected profitability. I mentioned as part of the hedging discussion it takes a lot in the way of oil and gas price is moving for profitability outcomes to be notably different than we expect.
So, there is a lot of -- from my perspective we have a lot of visibility on what the base business is really going to look like. We are currently absent any financing transactions, absent acquisitions running north of the 3.5 times leverage number which we’re cognizant of certainly, probably did a little less in the way of equitizing the Postle and CrownRock acquisitions in late 2013 but I think that was more timing than anything else.
And we do have demonstrated access to the equity capital markets. The ATM program assuming we were to execute on all of that, that would bring leverage at year end down from kind of the three, about to 3-9 level to maybe the 3-5, 3-6 level. So that's a good solution. And we're also just always looking at other opportunities to finance. And I think we’ve demonstrated particularly in the context of acquisitions that we're prepared to be creative.
Going all the way back to some of the transactions we did in 2006 and 2007, some of those were 100% equity. We've used units as consideration, which is what we did with American Energy Operations in California back in I think the summer of 2012.
So, we are always looking for ways to get the balance sheet where we wanted in terms of target. And we're certainly mindful of the fact that all of our investors are looking at key metrics. So definitely we want to get to around 3.5 times levered by year-end. We've got some visibility on getting there certainly with the benefit of the base business doing well; production is ramping up significantly from the first quarter to the fourth quarter. So, I think between announce and other things we're thinking about it should be time.
Okay. Any other questions; I guess not. Everyone thanks very much. And enjoy the balance of the conference.
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