Hal Washburn - Director & CEO
BreitBurn Energy Partners L.P. (BBEP) Barclays 2012 High Yield Bond and Syndicated Loan Conference Call March 26, 2012 11:50 AM ET
Good morning. Our next presenter is Hal Washburn, he is the co-founder and Chief Executive Officer of BreitBurn Energy Partners. Hal?
Thank you. I am Hal Washburn, I am the CEO and co-founder of BreitBurn Energy Partners. We are a publicly traded master limited partnership focused on long-lived oil and gas producing properties across the United States. We have been in business since 1988, about 24 years, we have been public since 2006 as an upstream MLP. We have been following the same basic business strategy since 88, that is to acquire interest in large oil and gas fields and to focus on operations and technical innovation to increase reserves, production, cash flow and therefore value. As I said we have been in business for over 20 years successfully following the same strategy. We have assets now across the country, long-lived oil and gas fields. We actually have a Reserve Life Index of over 18 years. So our reserve production ratio is 18 plus years.
We are divided into two divisions. Our Northern division, the Antrim Shale in Michigan and several other zones, the New Albany Shale in Indiana Kentucky and oil and gas assets in Wyoming and Wind River, Big Horn, Evanston and Green River basins.
Our Southern division which is primarily crude oil, is Los Angeles basin in Southern California and the Sunniland Trend in South Florida. As of the end of last year, we were just under a Tcfe improved reserves of 151 million barrels of oil equivalent, about 35% crude oil and about 65% natural gas. Our prove development ratio which is very important for master and limited partnership, our prove development ratio is 87%. What that means is we produced almost 90% of the reserves on our books without drilling additional new wells.
Our production today is about 43% crude oil, 57% natural gas. Our market cap is $1.3 billion, we have approximately $643 million in debt, only about $88 million of that is on our senior facility. Our enterprise value is right at $2 billion, our debt to enterprise value is 33%, a very strong balance sheet, a very good position to execute on our growth through acquisition strategy. As I mentioned earlier, we have assets that are long-lived mature fields, very low decline, very stable production profiles. We operate in virtually all of our production, therefore we have a strong control over expenses, we have very good control of our operating costs and we have very high visibility into production, therefore we know what our cash flow generating capacity is, assuming that we hedge our production which we do quite a bit of.
We have a substantial book of low-risk development opportunities. We'll be drilling a number of oil wells this year. When gas prices rebound, we will switch over to gas. One of the nice things about our business is we are balanced between the two and we have the flexibility to move our capital from oil to gas and from gas to oil when the time permits. On the oil side of the business, I believe we will spend about 90% of our capital budget this year. On the oil business, yet in the gas side of the business, we have well over 600 development opportunities when gas prices rebound. And we do hedge consistently and aggressively and the hedge book supports our ability to make distributions.
We have been in business for many years, we have a very strong team with experience throughout the energy industry and throughout the oil and gas business in the United States. We actually have technical and operating people that worked in virtually every basin in North America. And we have a significant history with the BreitBurn assets. Many of these assets we have owned for north of 20 years. As I mentioned earlier, we have been in business for a long time, we have employed the same strategy successfully. Buy large oil and gas fields, put technology to work and let new technologies come to you, we believe you increase reserves, you increase production and you increase value. You couple that with strong operational control as well as a very strong and aggressive hedge book and you have quite a bit of visibility towards your cash flow generating capacity going forward.
Well across the country now. We started the business in Southern California buying large oil and gas fields from major oil companies. We have since grown to be in six states, we are the largest or second largest gas producer, we are not sure how to measure it. We claim to be the largest gas producer in Michigan. Chevron claims to be number one, we will probably not battle them over that. But we are the largest gas producer or the second largest producer in state of Michigan. We have about 75 million barrels equivalent of gas and oil reserves there. The vast majority of that prove develop, we don't have a lot of non-producing reserves booked in Michigan.
However if gas prices rebound and when gas prices rebound, we do have hundreds of drilling locations in Michigan. So we have the ability to hold that business flat and grow the business depending upon how we choose to allocate capital going forward. Another strong gas area for us is Indiana Kentucky, it's not a large business for us, but we have a significant acreage position in the New Albany Shale which is primarily held by production. We don't produce a significant amount now, however if technology opens the New Albany Shale up and makes it economic or if gas prices rebound we have the potential to grow that business.
One of our core areas is Wyoming and I'll talk a little bit more about it, a couple of acquisitions that we made last year, but it's an area we have been in for over a decade. We have interest in Wind River and Big Horn basins as well as Evanston and Green River basins. We are a top 10 producer there, we produce about 7000 Boe per day. We have sub-44 million barrels equivalent of proven reserves in Wyoming.
Down in Florida in our Southern division, we own the old Exxon assets in the Sunniland Trend which is in South Florida. Average production in 2011 was about 1800 barrels a day, but we have been growing that business. We are up about 40% since acquiring the business. We have been running a rig drilling horizontal wells in the Sunniland Trend field for about two years now. We have had a lot of success there and we hope to continue to run that rig for the next year or so.
So it's an area that we like a lot, an area that we have been growing, it’s an area that’s 100% crude oil, excellent pricing, water-borne barrel based pricing. So we are selling at premium to WTI for those barrels. And then finally California. My favorite area really, high margin oil production. We sell at a significant premium to WTI, we sell at very, very small discount to Brent. All the California crude is priced against Brent. There are no physical interconnects between the Pad 5, the West Coast and the rest of the country. So basically the marginal barrels coming into the state are waterborne barrels. Therefore we sell at a significant premium.
High margins, a lot of oil in place, over 1 billion barrels of oil in place under the leases that BreitBurn holds in Southern California. And a significant amount of that crew developed, almost a 100%, we don’t book a lot of undeveloped reserves in California. Yet each year, we drill anywhere from 3 to 20 wells and each year we add reserves. We expect to be able to continue to do that in the current price environment for the foreseeable future.
As I mentioned, we have about 20 million barrels of proved reserves against a resource base, north of one billion barrels. So a significant business for us, a high profit, high margin business for us and one that we hope to continue to grow, as we have historically.
We have grown significantly since our IPO in 2006. In 2006, we were half California, half Wyoming. Today, Michigan makes up the largest part of our business with about 45%, Wyoming about 30% and California about 15%. We've also diversified our asset base. We did not want to be dependent only on oil, or only on natural gas and today we are very well diversified between oil and natural gas.
We haven't however just grown for the sake of growth; we've also grown per unit. We've increased our reserves per unit by about 56% since our IPO and we've increased our production per unit by over 60%. So we haven't grown just for growth. We've grown each unit holder’s share of the partnership or of the business.
Our core strategies were highly focused. We are run by a bunch of engineers, who are focused on operating our business, focused on making acquisitions that fit in our business and continuing to grow our cash flow and our distributions. In 2011, despite the fact that we are an MLP, we grew our production by 5% over 2010. In 2012 we will spend just under $70 million, about the same, slightly less than we spent in 2011 on internal growth projects. This is not including acquisitions. This is organic growth. We will spend about $70 million and we will be focused very heavily on the oil side of our business. Virtually all of our gas production, gas acreage is held by production; therefore we have the luxury of not having to allocate a significant amount of capital to gas.
Frankly though, the gas projects are economic, especially in the areas we operate, however they don't compete with the high rate of return that we can get on the oil projects today. So we are not in a situation where we can’t drill the gas projects. We are in the situation where we choose not to and that is a luxury or flexibility that we had put into the business intentionally.
We are, however, an acquisition and exploitation business. We don’t grow primarily through the drill bit, we do not explore. So the only way that we add reserves to our business is through acquisitions. It has been our strategy for 24 years. It is the strategy that we continue. We successfully acquires in high price environments, low price environments, in periods of time when there was tremendous amount of capital flooding into our industry and periods of time when capital is fleeing the industry. We are vigorous in our acquisition and focused on how to acquire. In 2011, we told the public that we hope to do $200 million to $300 million worth of acquisitions, $250 million was the number we talked about. We beat that pretty handily. We did about $340 million worth of acquisitions in 2011. We did a deal just under $60 million for oil properties in Wyoming, a bolt-on to our existing Wyoming business, which is a core business for BreitBurn and then we did a $280 million asset acquisition of primarily, gas properties at a very attractive evaluation in South Western Wyoming in Evanston and Green River Basins.
So we are able to grow our business in an area that we have a strong operating team and a extremely strong technical team and we are able to buy, make acquisitions at attractive evaluations and particularly the gas properties we bought in South Western Wyoming and these are the properties that had we tried to buy them two to three years earlier, we probably would have to pay $750 million to $800 million. We paid $280 million. We have 90 proved and developed locations in this acquisitions package and we have over 600 virtually identical drilling opportunities.
We won’t drill a lot of these wells at gas prices where they are. We however, believe in long-term, gas prices will be stronger. So we have a significant amount of drilling opportunities embedded in this acquisition and we expect to drill those. The nice thing however, to repeat what I said earlier is, mostly acreage if not all of the acreage is held by production. So we don’t have to drill these wells, at in particular time but we have the option to drill them when we choose to.
We’ve also been growing distributions. We’re growing distributions about 20% in the last two years and just under 10% in the last year. We’re currently paying the distribution rate of $1.80 per unit annualized and we have as I said, increased distribution seven consecutive times, and we’ve also raised both debt and equity in the public markets and I’ll talk a little bit more about that in subsequent slides.
A key part of our business is our hedge book and we’re very aggressive in hedging. We believe that we need to lock in prices we receive for our product, in order to maintain the business model that we run. And as you can see, we’ve a very aggressive hedge book, with close to 80% of our production hedged this year, just under 75% in the following year at strong prices, a 101, 92, over $7 per MMbtu for the gas this year and almost $6 next year. So a very strong hedge book and basically a lot of price protection and visibility in to what our cash flow would be.
We’ve produced about 9,500 barrels of oil this year and we have the lion’s share with hedged aggressively over the next few years at average prices, somewhere in the mid-90s per barrel.
We’ve also produced about 75 million cubic feet of gas per day at the mid-point this year and again a very significant and strong hedge book on that, particularly, in 12 and 13 where we’re selling gas at $7.12 and $5.96 per MMbtu.
This is one of my favorite slides in the deck. This is why we hedge. What we show here is our EBITDA by quarter beginning with the first quarter of 2008 and those are the bars. We’ve overlain oil and gas prices during that same period in the two lines. But what we show is, in the second half of 2008, oil prices sold by over a $100 a barrel, from a $140 to less than 40. Gas prices at the same time fell from $14 to under $4.
So we had a collapse in oil and gas prices like we’ve never seen; a drop of $100 a barrel. We never felt we would get to $100 a barrel when we started this business 24 years ago. We saw this epic collapse, yet our EBITDA fell about 15% and held rock steady through that period. So through that period, basically we saw a collapse in oil and gas prices, yet our EBITDA fell only 15% and held rock steady and you have seen it start to grow as we have increased capital spending, made acquisitions and as oil prices have rebounded. This is why we hedge. Our cash flow is held steady in a volatile, commodity, price business.
So we make quarterly distributions. These are taxes and unit distributions. Our tax shield runs anywhere from 52% to 100% on a distributable income, based on the basis that the unit holder has. We have made cumulative distributions of about $7.47 per unit, since our IPO. We IPOed at $18.50, we trade today at about $19.30 and we paid out $7.50 roughly in the interim, so, a significant amount of income and value creation for our unit holders since our October 2006 IPO.
As I mentioned earlier we have increased our distributions in the last seven quarters to a current run rate of about $1.80 per unit, per year and I also mentioned we have a strong hedge portfolio that supports these distributions and a 2012 coverage ratio based on the midpoint of our guidance is just under 1.2 times.
Again, as I mentioned earlier, we have access to the public equity and debt markets in the last year and a half or so we've raised about $800 million in debt and equity. In February of this year, we sold 9.2 million units. In the secondary, that was an $8 million deal with a 15% [SHU]. In February of last year, we sold just under, 5 million units in the equity markets.
During the some period of time, we did a $305 million notes deal, our first notes deal on October of 2010; it was priced to yield 8 and 7/8% and then this year we came back in January and priced the second deal, a $250 million deal, priced to yield at 8%.
Net proceeds, these transactions were used to fund the acquisitions that we had announced and I discussed earlier and to reduce borrowings under our credit facility. Currently, we have under $90 million borrowed. We have a borrowing base today of about $788 million, so we have roughly $700 million available; dry powder under our senior facility.
We are going through our semi-annual borrowing base re-determination. We have no indication through banks that the borrowing base will be anything other than what we see today. We don’t expect a significant change either up or down on the borrowing base. We are quite a bit of dry powder. We have very little drawn on the senior facility. We view the senior facility as an acquisition facility. We look to acquire using that facility and then to replace it with equity and with term-debt.
We are an acquisition business as I mentioned and I’ve talked about. We are constantly looking at acquisitions; I believe that we see virtually every deal in the lower 48 that would fit an MLP. We have an acquisition team that’s focused on nothing more than looking at every deal and sourcing a lot of deals privately.
In fact, both of the deals that we did in Wyoming this year we sourced, neither it was a public auction, neither was widely marketed. These deals are resourced, we approached the seller. We said we think that you have a reason to sell these assets; you have capital needs in other places. We will be a logical buyer; we would like to talk. So our acquisition team is constantly talking to other operators and other companies in the industry, looking for acquisition opportunities.
We are looking for things to complement our current asset base. We have a strong operating technical team in Wyoming. We felt very comfortable making those acquisitions. They fit in beautifully with the properties that we currently have. We are also looking for commodity diversification. We are looking at both oil and gas; while we are spending a majority of our capital on oil, gas properties that are very cheap are something that we’re attracted to. If we can buy gas properties based on current low gas prices and have an optional higher gas prices that go into business in the future that’s something that we are very focused on.
We have a rigorous analysis. We look at the net asset value. The discounted cash flow in each acquisition we make; and while an acquisition have to be accretive to current cash flow it also have to be accretive to value. And if we can buy a gas deal today and make it accretive to cash flow and into value and have the option of gas prices rebound in the future that’s an acquisition we’ll seriously consider.
We’re also always looking for properties where can add production reserves. We’re not in just a blow-down scenario. We want properties where there is a lot of oil and gas in place, where we believe we can use our technical expertise and our operational expertise to increase value.
We believe in technology. We believe the technology allows us to get more oil out of the ground; witness steam flooding in California in the 60s, 70s and 80s, horizontal drilling in many of the unconventional basins in the last decade.
Technology will allow us to get more oil and gas out of the ground. We believe we acquire assets with significant oil and gas in the ground even if it’s not in form of proved reserves, we will eventually get more oil out of the ground than what we thought we’re buying.
Key thesis or core thesis to our strategy and one we’ve employed for decades. So we are looking for significant amounts of oil and gas in place. And we’re always looking for things so we can take advantage of our existing operating team as we did in Wyoming with our acquisitions last year.
Getting back to the equity side of the business; we have an attractive distribution yield versus our peer group. We’re currently yielding about 9.4%. The Alerian MLP yield is approximately 5.8% and obviously the 10-year treasury is moving, but when the slide was compared it was about 2.3%. So we do trade at a bit of a premium to our peers and we believe overtime we should drive that down to at least parity with our peers; if not as we believe a trading at a premium value rather than yield to our peers.
So again let me recap. We have a high quality asset base. We have interest in fields in some of the great basins of the United States. We have predictable long-life production very low decline. We’re experienced team. We’ve been building for over two decades. We have a critical mass in several basins where we are a lead operating company that gives us the ability to look at opportunities, acquire businesses that we understand and integrate easily into our operations. We have substantial hedge book. Average weighted prices of about $96 per barrel for oil through 2015 and $6.16 per MMbtu gas through the same period.
We have also grown distributions. We have grown distributions about 20% since the first quarter of 2010. We currently pay about -- we pay $1.80 per unit annualized. We have a strong hedge portfolio in 2012 which supports our high distribution coverage ratio.
Again, we have attractive distribution yield versus our MLP peer group, something we hope to drive down and we have some overhang on our units; Quicksilver Resources had a large position with large capital needs of their own. They have sold their position out in 2011 and are no longer a unitholder in BreitBurn. Their final sale took place in the fourth quarter of 2011. We are moving a significant amount of units from the marketplace and we’re moving it overhang.
At the same time, BreitBurn was added to Alerian MLP Index which also added to demand for our units.
I am not going to run through our public guidance for 2012, other than say we do have this presentation and our guidance on our website. We are bullish about the business this year. We are bullish about the business going forward. We believe that 2011 was a great year and we are looking forward to similar years in ’12 and ’13 and as we move forward.
And I think with that, I will turn it over to questions. I believe we have five minutes or so.
Are you still willing to hedge at current gas levels (inaudible)?
No, we’ll workout now in years and we have the luxury though today; our business runs is very, very well with oil prices anywhere close to where they are today and gas prices in the $4 or $5 range.
So as long as we are getting above $80 or $90 for oil, we can hedge more oil and less gas and still get to the same cash flow position. But we will hedge some gas and we have entered into hedges especially associated with acquisitions. We are locking the acquisition economics and be comfortable with gas, not having to take that risk for the near future.
When your team looks at acquisitions, how do you compensate them for their work, what's their motivation there?
You know everyone in the organization, everyone in the senior and technical professionals is paid salary, paid a salary, paid bonus and also paid long-term incentive compensation in the form of BBEP units; restricted units. So obviously, last year when the team exceeded the expectations, the acquisition team was rewarded for that.
However, they are not paid in any different way than the rest of the organization. We don't have any sort of commission or outside bonus structure. The acquisition team is motivated in the same way the rest of the organization is, to grow the business, to grow distributions and to grow value through bonuses and long-term incentive programs in the form of restricted stocks.
With regard to visibility and I guess this flows from your hedge strategy, if you were to look at say 2013, just to pick a year, how much visibility do you have at this point into that year based on what you know right now? Just, I am just trying to get a sense as to how, how…?
Sure. I mean, we have very good visibility into the existing assets. However, we are in the business of acquisitions. So much like a company that took source significantly; I can't tell you what that company’s exploration success is going to be in any particular year, just like I can't tell you what our acquisition success will be in any particular year.
However, we said last year, we thought the fairway for BreitBurn and acquisitions was $200 million to $250 million, maybe as much as $300 million acquisitions; we beat that. We now feel that we are half of the base line for acquisitions in 2012, $300 million. So I can’t tell you what 2013, 2014, 2015 will look like, because I don’t know what the acquisitions will look like. However, I am very confident in the business and confident in our ability to execute both from an operational and an acquisition standpoint.
So if you are going to maintain the 10% distribution growth over the last 10 years, how much acquiring would you need to do?
That’s a real tough one, but I will say that we cannot grow distributions anywhere near 10% per year without making acquisitions. We hope to be able to grow distributions 8% to 10% per year. We hope to be at the top of our peer group. If the peer group moves down 8% to 10% per year, it’s no longer what they are doing; then we won’t be at the top of that group. Our goal kind of that 8% to 10% bogey requires acquisitions, it requires operational success and it requires strong commodity prices.
If you acquire gas properties at current prices for gas, can they may be immediately accretive?
Sure, absolutely. That depends on what you pay. I mean the acquisitions and it also depends on how you hedge.
For a hypothetical $300 million acquisition, how would you finance it and how do you think about target leverage?
Sure. We think that, I think the traditional MLP model has been 50% equity, 50% debt. We think in the E&P MLP space you probably need to have a little bit less leverage than that. So we think it’s probably 50% to 60% equity on kind of a statutory run rate basis long-term and 40% to 50% debt on the debt side of the equation. As I mentioned, we’ll use the revolver as an acquisition facility; however, we’ll look to term out the vast majority of that debt in the high yield market.
So if you look at us long-term on a $300 million acquisition, you are going to see 50% to 60% of that with equity and 40% to 50% with debt and a lion share of that debt termed out not on the facility long-term.
2.5 to 3 times EBITDA is a good number for us. You probably won’t see us below 2.5 times, but kind of shooting for getting between 2.5 and 3, post an acquisition once we’ve put in permanent financing.
Well, thank you very much. I believe that I’ll be around here for another five minutes or so if you have any other questions. But thank you for attending. I appreciate it.
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