BreitBurn Energy Partners L.P. (BBEP) Credit Suisse MLP & Energy Logistics Conference Call June 10, 2014 10:45 AM ET
James Jackson - Chief Financial Officer, Executive Vice President of BreitBurn GP, LLC
John Edwards - Credit Suisse
John Edwards - Credit Suisse
All right. So next up, we have got James Jackson. He is the CFO of BreitBurn Energy Partners. He is going to give us his presentation and -- let's see. I don't see him here. Perhaps maybe you can check. How are you doing? Yes. We are ready for you. All right. So here is James Jackson, CFO, from BreitBurn Energy Partners. They are going to give their presentation and story and I will turn it over. I will turn over to James.
Okay, perfect. John, thank you, and thanks to our host here at Credit Suisse. We appreciate the opportunity to run through the BreitBurn story. We have got a lot going on. So delighted as always to share the recent news and results with you.
Let's see. So let me start with just a few key investment considerations. I guess the first point from my perspective is our strategy at BreitBurn really hasn't changed in 25 years. The company was started in 1986 by Hal Washburn and Randy Breitenbach. The idea then was to buy from existing oil and gas companies that were looking to exit particular areas, long-lived oil and gas reserves, where they thought there was significant opportunity by focusing on those assets a little more intently than the predecessor had, to earn excess returns and pick up assets that required fairly low maintenance capital, long production lives and good histories of production in significant oil basins. Frankly 25 years later, we continue to execute on the same strategy, although at a little different scale from 1988.
We are currently up to, from two wells in 1988 to about 3,800 wells across the country today with a $4.7 billion enterprise value. The portfolio is now very balanced in terms of both commodity and in terms of geography. We are present from California to Florida, Michigan to Texas and have an active business both in terms of liquids, where most of it is liquids, call it 85% liquids are oil and a good portion of portfolio, call it 40% is natural gas. We also have a good mix of PDP and PUDs. I will spend a few minutes talking about that, but at year-end 2013, 74% of the portfolio was PDPs, just over 214 million barrels of total reserves.
We have a very disciplined acquisition orientation. We acquire, we exploit, we develop but all of that is very low risk in nature, I think, relative to a larger peer group. We have been active on the acquisition front. We completed $1.8 billion in acquisitions in 2012 and 2013. We have been particularly active in the mid-continent, which I will talk about. That was a part of the portfolio, I think, from our perspective that was missing. So we have been active there. We reoriented our business development team toward the mid-continent two years ago and we have been very successful there, in our regard.
We picked up assets sold by Whiting Oil and Gas, consistent with our long history of acquiring from much larger oil and gas companies and we have also been successful, particularly in the Permian, buying from one entity in particular, which is CrownRock L. P. We have done a series of acquisitions out of their portfolio in conjunction with them, that's proven to be very beneficial to us. And I will talk about those more later.
We are also, not surprisingly, committed to distribution growth. In the last four years, we have grown distribution, as a total of 33% consistently. We are currently paying distributions at $1.99 rate. And in January, we converted, based on the interest of our unitholders, to a monthly distribution payment policy.
Another important aspect of our strategy is significant hedging. We are hedged through 2018, both oil and gas. I will talk a little about that more later. But that's been part of the strategy from day one. We hedge actively along the way. We are hedged in varying degrees between now and the end of 2018, obviously, but we also hedge significantly in the context of acquisitions, where you will see us do a lot of our hedging is simultaneous with transactions.
And we have a lot of financial flexibility. We currently have a $1.6 billion borrowing base. We are less than 50% drawn on that. Don't expect our outstanding borrowings, absent acquisitions to grow materially throughout the year and demonstrated access to the capital market which I will talk about. And we generally have a pretty consistent strategy for financing acquisitions, happens to time on that as well.
This is a snapshot of our portfolio. We have titled this a geographically diverse base. We started, took the company public in 2006. We were present in California and Wyoming. We then expanded to Florida with a small acquisition. We then acquired a significant presence in Michigan, Indiana and Kentucky from Quicksilver in 2007. And as I mentioned most recently, we have beefed up our presence in Wyoming and then expanded into Texas in 2012, and then additional acquisitions in Texas and Oklahoma in 2013.
So that has got us up to 214 million barrels of reserves. A reserve life of over 15 years. 81% proved developed in terms of our totals for last year. And again on oil concentration, 53% of the reserve mix is oil, 7% NGLs, so call it 60%, 61% liquids, which is a good place for us to be in terms of reserves and not surprisingly the production mix was very similar. And I will talk a little bit more about some of these specific areas as we move forward here.
So in terms of how the strategy comes together, it really starts with having a strong base of MLP assets. We have assembled those over the last eight years since going public in October of 2006. Those acquisitions have been in and out very consistent, meaning both in whole and in part, with a long-term strategy of BreitBurn of acquiring long-lived reserves. So we have a very, very strong base of assets.
That being said, we did look at the portfolio in 2010 and made a conscious decision to increase the portion of the portfolio, increase the portion of our reserves that were PUDs. I will talk a little bit about that momentarily, but in 2010 at the beginning of the year, less than 10% of our reserves were PUDs. Coming out of the financial crisis and the commodity price volatility, we had seen for the better part of 2008, 2009, we wanted more organic opportunities in the portfolio than we otherwise had. So we reoriented the business development group and you will see the outcome of that here shortly.
I mentioned our effective hedging strategy. The fact is when you are plus or minus 80% hedged for the next 12 months and given the nature of our assets and their long producing history, it really lends itself to a lot of visibility in terms of what the next 12 to 18 months of cash flows look like. After 25 years working in a host of different industries, energy for the last eight, it's surprising to me the amount of visibility we have on our business vis-à-vis the amount of visibility others have on their businesses. And that's a combination of again, the right assets and a very strong hedge portfolio.
Finally, we layer on that accretive acquisitions. Acquisitions have to be accretive to distributable cash flow per unit. They have to be accretive to DCF per unit on a fully financed basis. So we underwrite everything assuming we ultimately finance it with 50% to 60% equity and we insist, we don't necessarily publicize it but when we do our underwriting, it's important for the acquisitions to be accretive to net asset value per unit as well on a fully financed basis. And the result has been very consistent distribution growth for the last four years, which I have talked about.
I mentioned, we have reoriented the portfolio. I would just like to highlight two items here in this slide. The first is how the portfolio has changed in terms of liquids mix over the last year, call it four years. We were 35% liquids in 2010. We are now up to 60% liquids. Obviously that was a conscious decision. But more important is the bottom part of the slide where we talk about what the reserve mix looks like.
In a business or in a sector where we and our peers generally talk about 8% to 10% declines, if the portfolio only has plus or minus 10% PUDs in it and you are not able to acquire theoretically, you only have the ability to sustain the business organically, i.e. by drilling your internal opportunities for about a year. And that was, I think, fine for most people, up until the financial crisis but coming out of that we were very deliberate and we wanted to increase the portion of PUDs in the portfolio and we targeted, call it, 20% to 25%. And that number will move around a little bit every year when you update your reserves, obviously based on where commodity prices are.
But we now have that percentage up to right around 20%. That's the low end of the range for us. We are certainly comfortable there. Wouldn't mind seeing that tick up a little bit, but not surprisingly to get there the last four or five transactions we have done on the acquisition side have had a higher PUD component. But they have been in areas like Oklahoma, Texas, Wyoming. Either areas that are very prolific in terms of low risk drilling opportunities or areas that we know very well and as a result we now feel very comfortable that we have a whole host of organic growth opportunities in the portfolio that we didn't have, call it, three years ago.
So that has been an important strategic shift for us. This year we will spend $325 million approximately on capital across all of our properties, but it's concentrated in a few locations. Specifically maintenance capital, we estimate at $125 million. So between the total capital program, it's $125 million of maintenance capital and $200 million worth of growth capital.
I will talk now about a few of our selected operating areas. The first is our Oklahoma operating area. This is the latest addition to our portfolio. We acquired these assets from Whiting Oil and Gas. That transaction was announced just about a year ago, just under a year ago. A very important acquisition for us. We have had presence in California and Florida and a host of other states. We have been focused on Oklahoma for a considerable period of time. Senior people in our operating team have a considerable amount of operating experience in Oklahoma.
So after a fruitful negotiation, we were glad to add these assets to the portfolio. They include the Postle Field and the Northeast Hardesty unit. It also includes 100% ownership position in the Transpetco, Libby Lateral, Hardesty Lateral, CO2 pipelines as well as the Hough Oil Pipeline, and Dry Trails Gas Plant. It was important for us to own 100% of the midstream assets connecting these operations. That was about something we spent a lot of time on in the course of the negotiations here in addition to tying up sufficient CO2 to execute on the development program. So excellent addition. We picked up the assets. Tremendous amount of original oil in place here, 400 million barrels of oil equivalent in place, 242 producers and we have a relatively significant development program for both the Postle Field and the Northeast Hardesty Field.
So an excellent addition to the portfolio. But again, higher PUD component than the base business was a year ago. 31% PUDs today. That's helped our percentage very consistent with our strategy in 2010. They again reorient towards liquids, and also give us a fair amount of growth opportunities organically inside the business. I will talk a little bit about how we are allocating capital in Oklahoma going forward as well.
Next is Texas. We currently have just under 15,000 net acres in Texas, call it 41 million barrels of proved reserves. We have 230 producing wells in Texas. We will drill about 100 wells in Texas this year. So it will be the most significant area we have in terms of 2014 development. We have a large inventory of undeveloped locations. We are currently generally drilling on 40 acre spacing, looking at downspacing, obviously, and also looking at what's going on in the area in terms of horizontal well opportunities. We are not likely to become a significant player in the horizontal drilling space side.
No surprise there. But we may participate in a well, partner on a well or two, and see what those results are before we think about how best to take advantage of what's now an active opportunity in this area in terms of horizontals. This acquisition over this area too has a higher PUD component. But again, they are low risk drilling opportunities and we have got between four and five range running in Texas right now. So good addition to the portfolio and would not be surprised if more of what we do in terms of acquisition or otherwise is in Texas going forward.
Next is a quick snapshot of what our capital program looks like for 2014. I mentioned it's targeted to be $325 million in size, almost all of it, 92% will be spent on oil projects in Texas, California and Oklahoma, as well as CO2 supply and infrastructure. In addition, 85% of the capital is spent on rate generating projects. Portfolio wide, we will drill 168 wells. So that will be a record for us this year. We are on track in terms of well count in the program and in the area where we are most active, Texas. We are not seeing a lot of cost inflation in terms of drilling in those wells which we generally see it around $2 million or coming in a little bit under that, which we are very pleased with.
In the first quarter, we spent just under $80 million. We completed 28 gross wells and two workovers and added about 2,500 barrels a day of IP. You can see on the lower left the illustration, not surprisingly, with the recent acquisition activity, California and Texas are where plus or minus 75% of the capital spending go this year. And same in terms of well count, even more concentrated there, frankly, Texas and California at up to just under 160 of the wells. Noted, we are not drilling a lot in Michigan, Indiana and Kentucky. We haven't been particularly active there for two or three years. We will allocate less than $10 million to Michigan this year.
Now that will obviously change if commodity prices, we think, on the gas side start to move a different direction. A lot of undeveloped acreage there. A lot of drilling opportunities in Michigan. But not prices that are attractive to us right now.
I will just spend a few minutes on our acquisition strategy and activity. We are seeing a lot of opportunities. Last year we saw over 400 opportunities. This year we are not quite on pace to see that many but the acquisition market is still very active from our perspective. We are very selective. Last year, we fully evaluated about 30 transactions. So call that, two to three a month. And we were ultimately successful closing two of those deals. That's a pretty, I will say, consistent hit rate, but that's really the business we are in. We will look at a lot of different opportunities in the course of the year, and if we can do one or two, maybe three, to reach our goal this year, that's about on plan. So very active, in terms of the business development effort, even though we haven't announced a transaction this year.
In 2013, as I mentioned, we did $1.2 billion in acquisitions. That was more than double our stated goal of $500 million for the year. And this year we are targeting $600 million in acquisitions. We are seeing, as I mentioned, a little less in the way of overall deal flow, but we are also seeing or have seen so far, a few more larger deals this year, i.e. deals north of $500 million than we saw in 2013. So I am not sure if that's going to continue for the balance of the year, but anecdotally the mix has been a little bit different.
I would also point out that we have been successful acquiring from a lot of different kinds companies. We have that illustrated here on the bottom of the page. We have been successful acquiring from C-Corp's. We acquired from Whiting. We acquired from Cabot. Over the years, we basically acquired from the likes of Chevron, Unocal, Oxy. So we got that history. We have been successful in terms of acquiring from private equity, not surprisingly.
And we have also been successful on, I will call them more unique transaction, the NiMin energy transaction was actually a public company liquidation where we participated in that process and bought half of the remaining assets of the business. And then American Energy Operations or AEO was actually a private company owned by two individuals in Kern County, where we have had a relationship for a very long time. That was a transaction where they took a significant portion of the consideration in the form of units. So a lot of different structures, a lot of different sellers, very big part of our business, not surprisingly, and one we have been successful at for going on 25 years now, in good markets and in bad.
One of the more recent acquisitions, as I mentioned, was in the Permian. This is just a quick snapshot overlay of the acreage we acquired versus the acreage we held prior. We acquired incremental interests in existing assets. So a very good fit with our existing business, not surprisingly. We acquired just over 18 million barrels of reserves. These are principally Wolfberry wells. The wells we will drill here are a little deeper than what's generally in the portfolio. These are, call it, 11,000 foot vertical wells that generally have about 4,000 feet a day and the drilling plan here is on track.
We have got diversified buyers of the product but I think the most important point is we were able to put together a third transaction with CrownRock and we did it on acreage that's either contiguous to our existing acreage or we just acquired incremental interest in what we owned already. So very efficient from an operating point of view. Important for us, given the activity level in the Permian, where we would like to have a significant presence there, but we don't want to be spread particularly, not surprisingly. This is the stratigraphic column of the Permian. I am happy to take questions on that afterwards, if you like.
Let me talk now a little about financial performance and our financial policies. Over the last five years, we have demonstrated significant growth. We are up from 6.5 million barrels of production in 2009 to just under 11 million barrels of production in 2013. The midpoint of our guidance this year is 14 million barrels. So growth will continue there. And in terms of adjusted EBITDA, we almost doubled from 2009 to 2013, going from $190 million to $370 million and our guidance this year is just about $500 million of EBITDA. So the business continues to grow very robustly. But we also have disciplined financial strategies.
As I mentioned, we have a $1.6 billion credit facility. We have elected commitments under that credit facility of $1.4 billion and we were right around just under $800 million drawn at the end of May. Our goal is to be 3.5 times levered where it is total debt divided by LTM EBITDA. That is a little below where we are today. We are north of 3.5 times levered, but you may have seen we went to the preferred market with the perpetual preferred offering not too long ago.
All those proceeds were used to repay debt and we have in place a $200 million at-the-market offering program for common stock which we expect to be active with throughout the balance of the year, and should finish the year headed right towards that 3.5 times levered number. So that's absent any acquisitions and acquisitions we finance with 50% to 60% equity and 40% to 50% debt. And that's consistent with the 3.5 times leverage target.
I mentioned hedging, where we target being 80% hedged in year one, 75% hedged in year two, 70% hedged in year three. That gives us a tremendous amount of visibility on what the next three years of cash flows look like. So I will talk a little bit about the hedging program shortly, but that's a very good place for us to be. It's not 100% hedged on oil and gas. We actually done that consciously, being 100% hedged can be expensive when cost go up and it can be expensive in terms of how you get there with respect to the instruments you need to use, generally speaking, under bank credit facilities. And then in terms of distribution profile, we are targeting 1.1 times coverage for the year. Again, that's before acquisitions or any other financings.
Let's go back here. Let me just talk a minute about financial flexibility. I won't go through this slide in detail, but I think what's important from our perspective really is two things. It's important in our space to have demonstrated access to capital. We have not been as frequent of an equity issuer recently as we have been in the past but we have come to market with, call it, three significant equity offerings in the last two years. We have had very good access to the high yield market, having done our most recent high-yield transaction back in November, which was upsized to $400 million.
We now have just under $1.2 billion of high-yield outstanding and we just issued, as I mentioned, our first series of perpetual preferred stock that was a transaction where we had targeted around $100 million in capital raised. We ended up in a very short period of time upsizing that transaction to $200 million. So that, coupled with the ATM program I mentioned, is a very different level of access to the capital markets today than we had four or five years ago, and I think that's very important in our business because we generally do not fund acquisitions ahead of time.
When I say we, I mean we and our peer group. We generally don't fund acquisitions ahead of time and to the extent that the capital markets get difficult, I think the smaller you are the more difficult they will become. So, having developed markets for us, having broadened those markets with the ATM and the preferred is an important thing for us to have done. It's an important thing for the larger of our peer groups to think about doing as well, for the larger of those in our peer group to think about doing as well.
In terms of historical distributions, this is a snapshot of what we have accomplished since 2010. We have grown distributions from $1.56 per year in 2010 to just under $1.94 in 2013, and we are currently paying, as I mentioned, at a rate of $1.99 annualized. The tax shield for us is significant. We generally calculate it and update our tax shield estimate in conjunction with our common stock offerings. The last time we did that was back in November 2013 where we expect the tax shield to be about 75% on our distributions on an annual basis over the next three years. We converted to monthly distribution policy, which has been very favorably received principally from our retail investor base.
And going forward, we are focused on the target of growing acquisitions at 5% per year and we think that's a very, I don't want to call it aggressive goal, but you that is a healthy target for us in the E&P space. We think if we can do that year in and year out, over the course of the next few years, that's going to be exceptional performance relative to the peer group. But to do it, the business needs to work, the market needs to cooperate and we also have continue to be successful in the acquisition environment. But that's what we focused on doing. Nonetheless, very good track record of recent distribution growth.
I talked about hedging. This is a quick snapshot. I won't go through this in too much detail but this shows, based on our current production rates, how our existing hedge book protects volumes going forward. We are generally hedged between $94 and $82 in oil. We hedge both WTI and Brent. We have current hedge prices on gas at just under $5 for the next two years and those fall off accordingly.
You will see us make most important moves in hedging when we do acquisitions. So we would like to increase what the hedge book looks like out in 2017 and 2018, but we will focus on doing that less so, I think, in the months ahead and more so when we were doing hedging in conjunction with acquisitions.
And then just, okay, just two more observations. In terms of our oil book and our gas hedge book, the only message I would leave you with on these next two slides is that principally all of our hedges are swaps. So very straightforward hedging strategy. Not complicated. Not expensive.
And one last note here, just on hedging, is that's very successful in mitigating our profitability's exposure to oil prices. So in any given period, as long as we are, call it, 80% hedge, we have a lot of visibility on oil prices.
And then finally, we generally trade right in the middle of the pack in terms of our overall yield. We think that's an opportunity given our size and our history and we have spent a lot of time, not surprisingly, trying to move to the right side of that graph and that's part of why were out today and why we are out so often.
So I will leave you with that and the investment highlights of BreitBurn. Happy to answer any questions after the fact. And again, John, just wanted to thank you and CS for hosting us today.
John Edwards - Credit Suisse
All right. Thanks for a good presentation.
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