Breitburn Energy Partners L.P. (NASDAQ:BBEP)
Bank of America Merrill Lynch 2014 Energy and Power Leveraged Finance Conference Call
June 4, 2014 10:10 AM ET
Halbert S. Washburn – Chief Executive Officer
And next up we have Breitburn Energy Partners and from the company we have Hal Washburn, who is their Chief Executive Officer. So, Hal thank you for coming and take it away.
Halbert S. Washburn
I’m glad we have the interrogation lights, you can almost see there is an audience out there. I’m Hal Washburn. I’m CEO and Founder of Breitburn Energy Partners. I’m glad to be here on a beautiful New York day, I came up actually early yesterday from Houston and it was about 20 degrees hotter here than it was in Houston, which was a little surprising to me. If I can get this thing going, maybe dispense with the cautionary statement.
We got a new concept description, I’m having a hard time reading that, I apologize, I think I probably have to refer to the slide deck in front of me unless they start to clear up.
But anyway, we have been in this business 26 years, my partner and I were classmates at Stanford. We studied petroleum engineering. We started the business in 1988 and we had a strategy then, a sustained strategy that we employ today, we acquire and exploit. We acquire properties, a lot of original oil in place, with stable low decline producing assets with what we believe will be at each acquisition the opportunity to increase the reserves, increase the production and increase the value. We’ve been doing that successfully and growing the business since 1988 and currently we have an enterprise value of about $4.7 billion.
We have a great collection of high quality MLP assets, very low decline, stable production, generates a significant amount of free cash. We have about a 15-year reserve life, about 214 million barrels of proved reserves at year-end. A high percentage of those, about 75% proved developed producing and a high concentration of oil. We made a strategic shift in 2010 to focus the business toward oil from natural gas and we currently produce about 53% or have reserves of about 53% oil, 7% NGLs and about 40% natural gas.
We have been in the acquisition business for 26 years. We’re disciplined, but aggressive acquirers. We successfully acquired about $1.8 billion in acquisition, have about $1.8 billion in acquisitions in 2012 and 2013. We acquired a large collection of assets from Whiting Oil and Gas and their partners in the Oklahoma Panhandle, the possible unit, and Northeast Hardesty Unit as well as associated midstream CO2 facilities. And I’ll talk a little bit more about that as we get into the presentation. And at the very end of 2013, we did our third acquisition in West Texas from CrownRock and their partners and the Permian is about $300 million.
We’re committed to distribution growth. We’ve committed to growing distributions 4% to 5% per year. We’ve delivered on that. In fact, since the first quarter of 2010 we’ve grown distributions approximately 33%. We currently paid an annualized rate of $1.99 per unit per year and we do pay now monthly. We started the monthly distribution policy in January of this year.
And finally, we do have a strong hedge book and significant financial flexibility, got borrowing base of about $1.6 billion and almost $800 million available under that facility. We have substantial hedge book at attractive pricing, about $91 per barrel for oil and about $4.71 for natural gas. And we’re committed to funding our acquisitions through a combination of equity and debt, in pro forma all of our acquisitions at 40% to 50%, equity 50% to 60% debt.
We’re geographically diversified, and for us that’s important. We don’t want to be tied to one basin and one play, one particular strategy. We’re not looking, as I said, for explosive growth. We’re not a Bakken play or an Eagleford or a Marcellus player. Rather, we’re looking for sustainable and slowly growing cash flow. And so, having diversification in both the commodities and geography and geology is important to us.
We’re currently in nine states, the northern part of the United States in Wyoming and Michigan to the south; Texas, Florida and California. We have a gas producing business in Michigan where we’re the largest natural gas producer in the state. We have about 350bs of almost 100% PDPs there. And while it makes up the largest single operating area by production, because of this disconnect should gas and oil prices by SEC, we tend to only makes up about 10% of our business. So while it’s an important business for us, the natural gas business in Michigan is less and less important from a free cash flow perspective.
The other area where we have a large amount of gas production is Southwest Wyoming, which has made a large acquisition, Cabot, some significant long-life gas producing assets. So we do have exposure to gas and while we’ve turned our focus to oil, I think it’s important to note that between Southwest Wyoming and Michigan, northern Michigan primarily, we probably have in excess of 1,000 locations, which are held by production. Virtually none of those are on our book as proved reserves, because we don’t plan to drill wells while oil well economics are so compelling.
However, when gas prices strengthen we have a significant exposure natural gas. So while we turned our focus to oil, we maintained natural gas production as well as significant natural gas up side. Gas prices starts at $5 and $6 per MMBtu on a strip, you’ll start to see us drilling in southeast Wyoming and northern Michigan. As I said we’ve got north of 1,000 opportunities to drill.
But we turn our focus really to the oil business, which is where we spend our time over the last three or four years. And our oil businesses are in Florida, West Texas, Oklahoma and California. At Florida, we produce about 1,800 barrels a day, Texas we are up to over 7,500 barrels a day, and mostly oil, some NGL’s and small amount of nat gas. Oklahoma, about 7,000 barrels a day, and the Oklahoma Panhandle, and California up to about 5,000 barrels a day of high quality Brent based crude oil.
So significant oil producing business throughout the southern part of the United States, as well as also the Big Horn, Wind River and Powder River basins, in Wyoming. So, as I said we are committed to grow in our distributions. How do we that? We do that by layering on top of a great MLP asset base; very long lived, very low decline production, whereon strong organic growth opportunities.
We’ll talk about our capital program, but we execute very well in our capital program, we drill a lot of wells every year. We have a strong hedge book. It helps us to take the volatility out of our cash book. I will talk more about our hedge book, as we get into it. We make accretive acquisitions as we have for 26 years and we believe we couple those together, it allows us to grow our cash flow and therefore our distributions to our investors. And we have shown that to our investors over the last four years and a couple of quarters.
As I said we made a move toward oil, beginning in 2010. In 2010 oil made up about a third of our portfolio, today it makes up about 60%; that is about 72% growth in oil. We did that two ways. We focused our exploitation teams, our technical teams, our geologists or geoscientist or engineers, from our gas producing business to our oil producing business, that look at our legacy asset, let’s generate organic growth opportunities in oil.
We did that very successfully in both Wyoming and in California.
We also re-focused our acquisition efforts instead we want to move the business more toward oil. We focused our acquisition efforts on oil, we made successful oil acquisitions in Wyoming, in West Texas, Oklahoma and California through a combination there of exploitation opportunities as well as acquisition opportunities.
We significantly grew the oil portion of our business. At the same time, we took all of our gas price off our books, when gas prices collapsed. In 2010, proved and developed drilling opportunities made up over 9% of our portfolio. We thought it was important to replace those gas storing opportunities to oil drilling opportunities. And we have done that successfully with more than double the PUD component of our reserves. And those PUD opportunities represent high margin oil growth opportunities in the portfolio, organic growth opportunities.
Let me talk a little bit about few of our operating areas, the first is Oklahoma, the newest area. We moved into Oklahoma last year with the acquisition from Whiting Oil and Gas of the Postle unit which is a large, mature CO2 flood in the Panhandle. In addition to that Postle unit, we acquired the Northeast Hardesty unit, which was an early stage CO2 flood, in fact we put CO2 the first CO2 in the Northeast Hardesty at the end of last year.
In addition to those two fields, we acquired the infrastructure and the CO2 supply. So we acquired CO2 supply, about 140 Bcf or 140 more than that Bcf gas over 10 to 15 years. So basically all the CO2 require to implement our 3P reserve development program.
The Hardesty unit, early stage and smaller than Postle, Postle really the key asset here. 400 million barrels of oil in place in Morrow ‘A’ Sands and production just under 7,000 barrels a day currently was significant amount of production up size. We’ll spend a lot of capital in Oklahoma over the next few years developing the CO2 supply that we can frac it for as well as further developing Northeast Hardesty and the Postle unit.
So, existing acquisition for us, we said for several years we wanted to move into the Mid-Continent and this is a great way to do it in scale with a high quality, high margin assets. We think we can leverage half of this business. We own more than 100 mile pipeline, significant infrastructure and quite a bit of supply of CO2. There are number of other fields along the Panhandle there, candidates for CO2 flooding.
We see our opportunity set including acquiring these fields for CO2 injection, joint venturing with existing operators, to develop CO2 foods or possibly just to find CO2. Currently we use all of our CO2 but as our fields mature we will have excess CO2 as we recycle. So we see a lot of opportunity to grow the business having the CO2 infrastructure we believe puts us in a very strong position to continue to grow this business.
The other are we are focusing on is West Texas. We came into West Texas through an acquisition from CrownQuest and in the summer of 2012 we did a second acquisition from CrownQuest and their partners later that year, and a third acquisition from CrownQuest and their partner at the very end of 2013. West Texas in particular Permian Basin another area we had said for several of years we wanted to get into an area that we believe has a lot of opportunities for growth for Breitburn and obviously for our peers.
We are in the Wolfberry. We drill 11,000 foot vertical wells with 4,000 feet section we complete. We currently have about 18,000 gross just under 15,000 net acres in the core of the play. We produce about 7,500 barrels a day currently and net production is growing significantly. In 2013 we spend about $100 million and drilled 53 wells in West Texas.
This year we expect to ramp that up and drill almost 100 wells to spend about $166 million. It’s a core area for us. We’ve got a strong team working the area. And we are producing primarily high quality oils 40 API oil, small amount of NGLs and small amount of natural gas.
In addition to the existing production, existing development plan as most of you have heard, there are lot of horizontal development plays going on in the Permian and we are in the center of the Wolfcamp horizontal development project. What we planned to drill maybe one or two and possibly three wells over the next year or so, horizontal participate I should say, I do believe the vast majority of our acreage will be perspective to horizontal Wolfcamp, we’ll be looking at ways to monetize that to participate that in that development in the future.
So, let me talk a little bit about our 2014 capital program as I said we are going to spend a lot of money drilling a lot of wells in West Texas almost 100 wells for $166 million. We’re also going to be drilling in California, where we drill just under 60 wells spending maybe $4 million and then we’ll continue to develop the CO2 asset that came long with the Whiting acquisition for about $50 million.
About 90% of the total capital is going to spend in Texas, California and Oklahoma and about 85% of that is going to spend on drilling wells, reworking wells and other rate and reserve adding projects in the oil production area of our business.
In the first quarter which is always our slowest quarter because we have operations in the north and Wyoming and Michigan, we spend under a quarter of that about $79 million. We drilled 28 gross wells, completed two work overs and added about 2,500 barrels a day. So, for flowing barrels about $31,500 per flowing barrel of production added in the first quarter. So we are excited about our capital program for 2014. It builds on what we did very successfully in 2013, and I think it sets us up for significant continued growth as we move forward.
So, as I said early on our businesses is built on acquisitions and exploitation. I’ve talked about how we plan to exploit our assets this year. Let me talk a little bit about our acquisitions and what we’ve done over the last couple of years and what we expect to do.
First off, we’ve been in this business and making acquisitions in high commands, high oil price times, low oil price times, when capital is flowing out of the industry and when capital is flowing in. We’ve been it for 26 years. We’ve done it well, we’re very disciplined, we have 15% team is focused on business development. We look at a lot of deals, 2013 was a typical year.
We looked at 400 opportunities. We bid on 30 and evaluated 30. We only closed on two major deals. Pretty typical year for us, our hit rate is about 1%, of all the deals we screened we generally get somewhere around 1% of them. This year we screened 400 and got two, we got 0.5%. But we had a great year.
We did two tremendous acquisitions of about $1.2 billion. So our team is very focused on looking at every deal is out there and I’m generating new ideas. In fact, when you look at the bottom of the slide, we showed three years worth of acquisitions.
One of the things we pride ourselves on is that we don’t just participate in auctions. We do participate in auctions and we know what it takes to win an auction. You just got to keep your paddle up to the very end, you have to be willing to write the biggest check, that’s not always the best way to acquire. And in fact, if you look at the acquisitions that we’ve done over the last three years, only one the NiMin acquisition in 2012 was a true auction. The rest of the deals, where deals we sourced or negotiated. And even in the NiMin deal, while it was an auction of assets that were in many cases across the lease line from Breitburn’s existing production.
In many cases in fact the NiMin sales per share pointed to the analog of the Breitburn fields as how you could fully develop these fields and what the upside could be. So even in this auction, the one auction we were successful for the last few years we had inside information our operations teams, our technical teams knew these assets probably better than the seller and certainly better than any of the other potential buyers. So we had inside information we are able to exploit that.
We look at the rest of the deals they are all kind of one-off or one, two or three companies talking to the seller. The AEO deal was another tremendous deal came to us through our General Counsel, who had been outside Counsel for the AEO founders. They decided at the end of 2012 that they should sell. That Obama was probably going to raise tax rates in 2013.
They will write he did, they’ll write to sell we did $100 million acquisition in about 45 days from when the deals was introduced to us to the end of the year, tremendous oil acquisition in Kern County, California. So we establish relationships and we worked these relationships and that’s what we think we differentiate our selves from many of our peers in the acquisition business. Because we don’t drill exploratory wells because we are not involved in big resource plays, we have to be very good at acquisitions, we believe that we are and I think that our success over the last few years has validated that belief.
I will talk a little bit about the last acquisition we made the third CrownQuest acquisition West Texas bolt on about $300 million worth of assets, many of the assets were additional interest in oil fields or oil wells and acreage that we already had an interest in and the rest of it was new acreage within the existing play.
So it was a true bolt on operations we knew very, very well. We acquired about 93 Wolfberry producing wells and about 300 potential drilling location, low lifting cost, high margin production in the heart of what looks to be a very, very promising Wolfcamp horizontal play, which as I said, we attach no reserves and production to something I believe is coming to us and we’d be very, very valuable.
I wouldn’t be an engineer, or at least I wouldn’t be presenting as an engineer without one log in my presentations, so here is my one log. And this is a typical log type log for a Permian basin, for the area we are in, and we drill very simple wells. There are 11,000 foot wells and we have 4,000 feet inspection. They are vertical wells today and we frac and complete these with 10 stage fracs through this 4,000 feet.
We target the Wolfcamp, the Upper and Lower Spraberry and several other locations, there are several other zones in the area. Exciting for us and what’s really exciting is when we first been in the Permian there is a limited area that we believe would be productive, as we have been in the Permian now for about two years more and more zones have proven to be productive. It’s a great place to be in the oil and gas business.
There is what they call the Permian sensitivity we think that is very real, the Wolfcamp horizontal being the perfect examples that something is coming to us in our acreage, something we as an MLP would probably not jump into very, very heavily, but we’ll participate the number of opportunities to form out to sell or otherwise JV on that acreage, we are excited about that.
And talk a little bit about our financial overview. Over the last five years have grown the business significantly. We’ve grown our production by about 14% compound annual growth rate, and if you look at the midpoint of our guidance in 2014, which we take our production from 30,000 barrels per day average in 2013, to about 38,000 barrels a day average in 2014 which is about 25% of growth in 2013 to 2014.
Similar growth on the adjusted EBITDA side about 70% compound annually, and if you look at our estimate of EBITDA for 2014 is about $500 million, you see we have about 35% growth rate between 2013, $370 million and 2014 forecasted $500 million of EBITDA. So, significantly grow through the last five years.
However, we done that on a disciplined approach. We maintained liquidity and we source the capital markets to continue to grow our acquisitions. Our revolving credit facility has $1.6 billion borrowing base with $1.4 billion in elected commitments. We have about $773 million available under the borrowing base today, so significant dry powder to execute on our acquisition plans for this year. We had modest leverage.
We target 3.5 times last 12 months adjusted EBITDA and we think about acquisition we pro forma those acquisitions as I said earlier with 50% to 60% equity and 40% to 50% debt, and we expect to term out that debt shortly after making the acquisitions. So we expect majority of our debt not to be sitting on the revolver, but rather would be sitting out in term debt.
We have a consistent and strong hedging portfolio and we target a coverage ratio on our distributions of 1.1 times. Now, that’s because of the oil and gas business that does go up, in the last 18 months we have seen 1.34 times and we’ve seen about 0.9 times, but we target about 1.1 time long-term coverage ratio.
We said we have significant financial flexibility. We have accessed the capital markets in various forms, in addition to the common units. We have about $1.15 billion in senior notes the most recent was $400 million add on that we did in November of last year. We issued about $650 million for the equity in 2013 in two tranches, and just last month, we did our first Redeemable Preferred. We did 8.25% Series A Perpetual Preferred and we raised about $200 million in that market.
In addition, earlier this year we launched an ATM program. That’s early stages for us because of the preferred offering and the normal trading windows we’ve sold only about $8 million or $9 million of the ATM, but we do expect the access to ATM this year to about $200 million. When you look at it absent the large acquisitions there’s no reason for us to go to the traditional common equity market this year. We position ourselves well.
In addition, our borrowing base continues to go up as a result of organic drilling programs as well as our acquisitions, as I mentioned earlier. The borrowing base is now $1.6 billion, up from $1.5 billion in the fall.
So we talked a little bit about distribution growth. We’re committed to growing distributions. We believe we have the capacity to do that through a combination of the great assets we hold, our organic opportunities and the accretive acquisitions we’ve historically made. We’d IPOed at about $18. We’ve paid out about $11.59, exactly $11.59 per unit. So our unitholders since the IPO have done well and we currently pay out about $1.99 per unit on distributions. I know that’s less important to all, but it is important to our economy and focus.
Commodity Price Protection, had been this conference last year, I would have shown you a slide very similar to this one. We would have just roll off one year. We have a high level of support for our commodities, because we are in a business that has volatility in commodity prices. There’s significant hedge book and I’ll show you a few pages, the detail and I’ll show you why we actually hedge, why it’s so important to us.
This shows that oil hedge book, I think it’s important to note, we’ve gotten an average oil price, about $91 per barrel with significant hedging through 2017 and we’d be giving the hedge in 2018 and it’s important to note that they’re playing the newer hedge book.
The vast majority of our hedges are pure swaps. We have a few across these collars and a very small percentage of output. So we don’t have any very risky or diversified or delivered based on hedge that’s really insurance policy, the same with natural gas even more so. We have an average price of about $4.70 per MMBtu and the vast majority. Virtually all of those are swaps rather than puts and there’s no collar.
The slide is one of my favorite slides in the deck. It’s the reason we hedge. And this shows oil and gas prices, beginning with the first quarter of 2008, running through the most recent quarter. Plotted against that in the bars is our adjusted EBITDA. And what we see, focusing on the left-hand side of the slide is that in the summer of 2008 oil and gas prices reached heights that we’ve never seen before and haven’t seen since, $140 plus for oil and $14 for natural gas.
However, by February of 2009, six months later, oil was less than $40 and gas was less than $4. So we saw oil drop by more than $100 a barrel. When I started this business we never thought we’d see $100 a barrel oil. We saw in six months oil go to $140 and it dropped by more than $100, same with gas.
What I really would like to focus on though is the bars. I saw a precipitous drop in commodity prices, the biggest ever. Our EBITDA dropped by about 15% and then held rock-steady through the financial crisis. This is why we hedge. We’re in the business of making distributions to our unitholders where the distributable cash flow is important to us. We went through an epic collapse of commodity prices, yet our EBITDA was virtually unchanged and held rock-steady. The hedges work and this is why we hedge and why we use basic plain vanilla hedges because they are insurance of course.
I go from one of my favorite slides to one of my least favorite slides, given our asset base, given our size, given our operating and technical teams I am disappointed that we’re not trading at the lower shield in our space. We’re slightly better than average. That’s not good enough for us. We love to be at the far end, far right of the slide based on current consensus target that we’d employed, yielded over the nine, which still gives us room to move.
So in summary, we’ve been in this business for a long time. While the consistent strategy we acquire, we exploit, we add values through our operational, technical expertise we have a high quality asset base, a very large asset base with over 200 million barrels of proved reserves with the majority of that oil and liquids.
We have disciplined, but committed acquisitions and we’ve made acquisitions consistently and we make acquisitions aggressively. We’ve made acquisitions consistently for 26 years and we’ve done a lot of acquisitions over the last five years, and over the last two years almost $2 billion of acquisitions. We’ve committed to grow the distribution as we’ve shown and we have a strong hedge book and financial flexibility.
So I did my remark and looks like I’ve got about three minutes or so for questions. So if you have any questions, we’ll take them now.
I’ll start with one. You noted that you are spending some growth CapEx in the Midland Basin. It looks like it’s mostly for vertical wells, but does those make that a reasonable decline on that relevant too? I’m sure you’ve investor worldwide reserves. How do you think about the kind of blending of something, has gotten a little steeper in IP, no initial decline into rest of your asset base given your strategy of volume at low declining worldwide assets?
Halbert S. Washburn
So, the one common thing for all of our assets is their terminal decline is very low, including the stuff in West Texas. So, our terminal decline as a company is between 5% and 7%, 8%, so very low decline and we think about the portfolio. We wouldn’t have done the third CrownQuest deal at the end of 2013 had we not done the Whiting Postle deal earlier that year. So as you observe, high decline on the drill in West Texas. The Postle unit on other hand, we expect that production to be constant for about 10 years. So we’re able to marry very low decline production with higher decline to blend an overall rate that we can live with. But we can’t, as a company, get into a position where we have, like some of our peers, their corporate decline is north of, say, 15%, 20%.
So we need to look at acquisitions and look at the impact of the entire collection of acquisitions. So while we’d love do perfect deal every time, we never see the perfect deal. We have to do deals that collectively are put together, comes close to perfect deal as we can and a good example of that is Postle and West Texas marry together.
Okay. And then just one other quick one, just on that preferred. I know a couple other companies have done them, but how do you think about that or how did you arrive at the decision to use that instrument?
Halbert S. Washburn
Jim Jackson who is our CFO, I think many of you have met Jim, former Merrill Lynch banker, 14 years here. Jim has always said that we want to have as many arrows in our quiver as we can. And so we thought about and talked about preferred as well high yield as well as common as well the ATM to raise capital. We are a capital intensive business. We know we need to raise capital, continue to fund our growth. We want to house as many opportunities to do that as possible.
So we think the preferred is just one more area, one more way we can raise capital, somewhere between debt and equity. We are very pleased with the performance of the preferred. It’s oversubscribed and it’s traded up. So we’re pleased with that. I’m sure as we continue to grow that market remains as it is. You’ll see us continue to access that market. Our bonds trade very well. We’ll continue to access that market.
Okay. Aren’t any questions from the audience we’ll wrap it up. Hal, thank you very much for coming.
Halbert S. Washburn
Thank you. Thank you all.
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