BreitBurn Energy Partners L.P. (NASDAQ:BBEP)
Barclays CEO Energy-Power Conference
September 6, 2012, 11:45 a.m. ET
Hal Washburn – Director & CEO
Name – Title
We’d like to get started with our next presentation. I’m pleased to welcome BreitBurn Energy Partners to our conference. Our speaker today from Breitburn is Hal Washburn, who is one of the cofounders of BreitBurn and is the company’s CEO. I’ll turn it over to Hal.
Thank you. I hate to compete with lunch, so I hope you do enjoy yourself. I apologize in advance. I am recovering, I hope, from the flu, and I’ve got a cough that just doesn’t want to go away so if I have to step away from the mic and cough, I apologize now. Hopefully that won’t happen, though.
I am Hal Washburn. I’m the cofounder and CEO of BreitBurn Energy Partners. We’re an oil and gas partnership in upstream MLP. We’ve been in business since 1988. My partner Randy and I actually went to college together. We were engineers at Stanford. We started the business about four years after undergrad. And our strategy in 1988 is really unchanged from the strategy we pursue today, and we really had a belief, and the belief was that technology had driven the energy industry from the beginning. We believed it would continue to drive the industry and we believed that it would actually drive the industry harder and faster as time went by, and the technology would just allow us to get more and more oil and gas out of existing fields and new, unconventional sources around the United States. So we didn’t think the United States was a dead area for oil and gas like most thought in 1988. Rather, we thought it was an area where we’d continue to get more oil and gas out of the ground, and we built our business based on that. We built our business based on using new technologies, working oil in existing fields to get more reserves, more production, more cash flow and more value.
We acquire and exploit. We don’t drill wild cat wells. That’s very important to understand. Our business is built on acquiring, exploiting, producing and continuing to acquire. We’re focused on distributions. We are an MLP, and we’re focused on delivering consistent and growing distributions. We have an internal target of mid-single digit growth per year in distributions. We look to be at the top of our peer group in distribution growth. To that end, we’ve increased distributions nine consecutive quarters.
I’ll show a map that shows where we are, but we’re [inaudible] broken into two divisions, a northern division and a southern division. As of the end of last year, we had about 150 million BEO of proved reserves. A very high percentage of that, 87%, proved developed. That’s a very important component of, and a very important metric for MLPs. 87% of the reserves that we have in our books at the end of 2011 will be produced from existing wells, and wells that have already been drilled. Very low-risk, very low execution risk on these reserves and on these productions. You’re not counting on us drilling thousands of wells to cover two produce reserves that are on our books.
We like to be balanced between oil and gas, and our production is roughly balanced at 50-50 oil and gas. We have an equity market cap at about 1.5 billion, total debt of about $775 million, an enterprise value of $2.3 billion. Some of the slides have been updated, some haven’t. We did an overnight deal last night of 10 million units that, the end trading today, and that was about $18.51. So, some of the numbers are updated on these slides and some are not to reflect that equity deal.
So as I said before, I’ll show you where we are. We’re across the country and that’s by design. High growth [inaudible] is focused on one area and has success there if you leverage that growth and growth exponentially. It could grow, you know, many X times their factor by leveraging success in one basin. We’re not that type of business. We’re looking for slow but sustainable growth, we don’t want to be tied to one basin, we don’t want to be tied to one play, we don’t want to be tied to one commodity. We want to have diversification across many basins, plays and commodities. Therefore, we are across the United States.
We started in California. California remains a very important part of our business but it’s no longer even the largest part of our business. Wyoming is a larger business force, Michigan is a larger business force. We’re the largest gas producer in the state of Michigan. We are a top ten producer in Wyoming, a top five to ten producer in California, very large producer in Florida, not saying much because there are a lot of producers in Florida. We’ve made two large acquisitions for us in West Texas this year. I’ll talk about those in more detail, but we think the Texas, and West Texas in particular, will become a larger and larger part of our business as we go forward.
We are acquire and exploit business. We said at the beginning of 2012 that we were targeting between $300 and 500 million of acquisitions. We also said that we would be focusing on organic growth, primarily in our oil-producing properties. We’ve actually now increased our capital budget twice from our original capital plan of about 70 million to about 137 million. We’ll be drilling a number of oil wells throughout our portfolio, Wyoming, California, Florida and now West Texas. We’re targeting about 21% year-over-year production growth in 2012, a combination of organic drilling as well as acquisitions. We’ve completed five acquisitions in the last just over a year, about $650 million. As I said, we targeted 300 to 500 in 2012, on top of the deals we had done last year. So far we’re making good progress on our target for ’12. We’ve completed three transactions, totaling about $313 million, two in West Texas for $220 million, and one [inaudible] in Wyoming for $93 million. I’ll talk a little bit more about those in a second.
We also focused on our distribution growth. We’ve targeted about 5%, mid-single digit annual distribution growth, supported by our organic drilling as well as acquisition activities going forward. We’ve been successful at increasing that distribution for the last nine quarters. Current distribution is 184 annualized, and we’re looking for a targeted distribution coverage ratio for the second half of this year of 1.2 times.
A key part of our business is acquisitions. We’ve been making acquisitions since we started the company in 1988. We’re good at it. We’re disciplined, we’re rigorous in our analysis and we look at a lot of deals. It’s really a numbers game. If you look at 2011, we looked at almost 200 transactions. We closed two. We made 16 bids, exposed $1.6 billion, and we closed two deals for 338 million. If you look at the first seven months of 2012, we looked at even more deals. Over 300 deals, we closed three for 313 million. Our acquisition team is in the market every day, knocking on doors, looking at unsolicited opportunities as well as looking at all the properties that are suitable for an MLP that are on the broadly open market, that are being broadly marketed. So we are active in the business. It’s a key part of our business and it always has. It’s something that generates the growth that BreitBurn looks forward to as we move forward.
We also are happy about our organic growth potentially. We started the year with a lot, thousands, of gas drilling locations. That’s great. We still have them. We have a [inaudible] on gas. At some point, gas will come up and we’ll start drilling those locations again. We didn’t have nearly as many oil drilling locations. We focused our engineering teams, our geologic teams and geophysical teams on our legacy assets and said, guys, we’ve never really pushed to drill a lot of wells into oil properties. We’ve drilled anywhere from six to 15, 20 wells a year, kind of just drilled what we developed and then moved on. We said, guys, we want to look at our oil properties and see what we can do. And shortly after we announced our first capital budget of just under 70 million, we raised it by about $20 million, basically focused on oil drilling projects in our legacy properties, primarily in California in our Santa Fe Spring field.
Later this year in August, last month, we raised our capital budget by another $50 million, and that was a combination of about $30 million of newly-acquired assets. We have 160 drilling locations in Texas and quite a few in Wyoming, as well as 20 million more committed to our legacy assets in California, Wyoming and Florida. So we’ve increased our capital budget, we’ve increased our organic growth and we’re very excited about that. We really look to keep drilling rigs working for a quite a while now on our oil properties, both the newly-acquired as well as the legacy properties.
But again key to our distribution growth and key to our growth is acquisitions, and I’ll talk a little bit now about the three that we’ve done this year. $313 million total, about 15.4 million BOE of total reserves and about 2,440 BOE of production in Q2 of 2012. The first two deals, Element and Crown Rock, were in West Texas. The third deal, NiMin, was – actually, the reverse. The first deal was NiMin, and that was in Wyoming.
So the West Texas deals. Very proud of these two transactions. We actually went into this transaction bidding on a non-operated interest, a 50% non-operated interest in a Wolfberry project in West Texas. We were willing to buy a non-opposition because we knew the operator quite well. In fact, we knew the operator, had been talking to the operator, for a couple years about possibly doing things together, so when this non-op position came on the market, we had already been talking to the operator about this project, we knew it well and thought there might be something we could do here. So we went in, made an offer on a non-op piece that was less competitive than it otherwise would be. At the same time, began discussions with the operator and said, we think that we can do something here that might be attractive to you all. We don’t operate in West Texas today, we want to, what we’d really like to do as our first deal is align ourselves with a good operator. We think that maybe this might work for you. How about we buy from you all of your interest in current wells, and you maintain your half interest in all the future drilling and you continue to operate. The operator thought about it for a while and came back and said, we think that makes sense. So what we ended up doing was we ended up buying 100% of 40 producing wells and a half interest non-op in 160 development locations. Great transaction for us, in that we get into the Permian Basin in a significant way but we’re not exposed to operational, executional risk by becoming an operator immediately.
We were able to leverage the operational capacity of a very good operator in the basin. This is one of many projects they have in the Permian. We were able to put people in their offices, engineers, geologists, drilling hands, to understand what we need to do to execute on these drilling programs, and basically learn so that in a few months, three months, six months, whatever, we’ll be in a position where we could make a large operating acquisition in this area. So, a great transaction for us, we got 100% of the wells that are currently producing, all the cash flow today, and we got 50% of all future drilling. So 40 wells, 100%, 160 wells at 50%. Unique transaction, one where we identified something that others didn’t see and were able to come in and do a deal that worked for us and worked for the seller, and part of being rigorous in your acquisition evaluation, looking at things in ways that others may not.
Wyoming was just more of a slam dunk. The red dots outline is the assets we acquired. Everything in blue is what we own. This was pure [inaudible]. The sellers package came out, they used several of our fields as analogs for what could be done if you wanted to optimize operations. We knew the operations better than anyone else, so we were the natural buyer, we were able to come in and make a very good acquisition here. A lot of current production, 500 BOE per day, and a significant amount of upside. In fact, we moved our first drilling rig into these nine acquisition, I believe, last week, and started our first well. So we’re very pleased on this one. This is great. We’ve leveraged a great operating team out of our Cody, Wyoming office, guys that know how to deliver, that have delivered and continue to, as well as just great assets, 100% oil in a core operating area for BreitBurn.
So, three fantastic acquisitions so far this year. We set a target of 300 to 500 million. We’re at 313 million so far. We’re well on our way, we think, to reaching the higher end of that target. I hope next year I’m sitting in front of you saying our target is now 500 to something north of that. So far, very pleased with the acquisitions.
I get a lot of questions about what’s going on in Michigan, so we have a few slides here. We have a very large acreage position in Michigan, about 130,000 acres net in a couple very attractive places. First is the Utica Collingwood. Devon is doing work there. Excuse me, and Encana is doing work there. Devon has said they will begin to do some work. Chevron has said they’re going to drill some wells. We’re not sure what’s going to happen. They’ve had successes, they’ve had failures, it went from being extraordinarily hot play to being a play that’s less than hot today, and Chesapeake’s troubles have had a bit of a problem with it. Chesapeake is now trying to sell their position. But we have a large acreage position.
Our acreage is in yellow. The light blue lines indicate the extent of the play, and then the black lines indicate the dry gas window, the wet gas window and the oil window. So our acreage between is the two lower, or the two southernmost lines, is in the wet gas window. It appears if the play is going to work, that’s where it will work. So, it’s not something I would buy BreitBurn units for, but it is something we have a significant position in and it is potentially worth a lot.
Similarly, the A-1 Carbonate, that’s a play that Devon’s been developing, again just a little bit higher up the column from where the Utica Collingwood is. They’ve taken a large position, they’ve drilled several wells, I don’t think their results have been so far what they’ve been looking for. But again, BreitBurn’s acreage, same acreage, our Eastern Antrim trend lies right above where the A-1 Carbonate looks to be most expected. So again, not a reason to buy BreitBurn, but certainly something that we have in our portfolio that could well be of value in the future.
A reason to buy BreitBurn, though, is our commitment to hedging and commodity price protection. We are an MLP, we’re committed to distributions, we’re committed to minimizing volatility of our cash flows. We’re very good operators, we’re very good engineers and geologists, that means we’re good at knowing how much oil we’re going to get out of the ground and knowing how much oil we’re going to schedule. It also means we’re very good at cost control. The one thing we’re not good at is predicting future commodity prices. Therefore, we hedge a significant amount of our production. As you can see from this slide, for the second half of this year, we’re close to 75, 80% hedged, at just under $100 per barrel for oil, and $7.10 per mmbtu for natural gas. That hedge book continues and is very consistent. Had I been standing here in front of you at this time last year, you would be looking at a slide very similar to this, with one year more on it. So, our commitment to hedging is strong, we basically hedge 70 to 80% in the next 12 months, two-thirds to three-quarters the months after that, 50% to three-quarters after that, and we continue to add to our hedge book. With each acquisition we make, we also hedge. In the Crown Rock and NiMin and Element Deals, we hedged out four to five years of production at the time of the acquisitions. So, very consistent hedging, very high level of hedging, to help moderate the volatility in oil and gas prices.
A little bit more detail on the crude oil book, as you can see, primarily we use swaps, however we do make use of some collars and some puts as we move forward in the curve. The collars that you see in the second half of ’12 were put in a number of years ago. But very consistent, strong hedge book, at very high prices. You know, everything north of $90 a barrel through the next five years.
Similarly on the gas side, very high hedge concentration, mostly swaps, and $5.00+ per mmbtu through ’15. We just started the layering hedges in 2016, we put in a big trade at $4.18 per mmbtu. So hedging is a very important part of our story. We are good at controlling production, we are good at controlling costs, and we need to control prices that we receive, so we hedge. And this is really why we do it.
In this slide, we show quarterly EBITDA in the bars, beginning with the first quarter of ’08, and we’ve overlaid gas and oil prices during that same period, and what you can see very clearly is, in that first half of 2008, oil and gas prices peaked at $14.00 per mmbtu or so for gas, and about $140 per barrel for oil. And in the six months following, both declined precipitously. Oil fell by more than $100 per barrel, gas fell by more than $10.00 per mmbtu. Yet, our EBITDA fell by about 15% and it held rock steady through the depths of 2009. This is why we hedge. We are in a business with extraordinary volatility. We need to be in a position where our cash flows are as desensitized, or as protected as they can be, from that volatility. We hedge, we hedge aggressively, this is why, and the hedges do work.
As I mentioned earlier, we’re committed to growing distributions. Our distributions are very attractive. They’re tax-advantaged. We pro forma north of 70% tax deferral in our distributions currently. We’ve had nine consecutive quarters of distribution increases. We’re currently paying an annualized rate of $1.84. We’ve made cumulative distributions of close to $8.39 since our IPO. Our distributions are supported by our strong hedge book, and a very strong coverage ratio, and we target long-term coverage ratio of about 1.1 to 1.2X. So, distributions, distribution growth, tax-advantaged income, very strong and important part of the BreitBurn story.
This is a slide I don’t particularly like. It shows our yield compared to our peers. We are currently yielding about 9.5%, actually at the end of August. I’d like to see us down well below that. I don’t see any reason why we’re not trading much closer to [inaudible] than to the rest of the guys in this group. We need to keep our nose down, stay focused and we believe that delivering the results that we have delivered, consistency, consistent distribution growth, should yield, should lead to yield compression, and we’re focused on that quite a bit.
So anyway, to summarize, we have a high-quality asset base, a very low decline, very predictable long-lived production. We have an experienced team. We’ve been together for almost 25 years. We’ve been building this team, focused on the same strategy for that period of time. We have a critical mass in several large basins and we’re looking to expand. And there is some upside. There is some excitement over what’s going on in the Utica Collingwood and the A-1 Carbonate in Michigan. We have a great hedge book. We have excellent organic and acquisition-related growth opportunities. As I mentioned, we recently increased our capital budget for 2012 by $50 million to develop legacy and newly-acquired primarily oil-producing properties. Active in the acquisition market, we continue to be active in the market, having closed about $650 million worth of transactions in just over a year, and about 313 million year-to-date in 2012. And we’ve grown our distribution sequentially. We’ve grown it by about 23% since the first quarter of 2012, and we have a distribution coverage ratio of about 1.2X.
That’s the formal presentation. I have a few slides in the back on guidance, et cetera, but I’m sure if we go to the breakout room or if we have questions here. What’s the format?
Not sure if we go to the breakout room, or if we have time for questions here – what’s the format?
We can take some questions in this room before moving to the breakout. Alec, I can start – in the premium basin, with the deals, or with the foothold – foothold you all have gained this year, what do you think BreitBurn brings to the basin to allow you all to compete with others, and what is probably one of the most competitive basins from a consolidation stand point in the US?
You know, it’s competitive, but it’s also [inaudible] with deals being done, and getting done – you know, I like to say, we love to do a lot of deals in California, we love California, the oil is premium price, there’s a tremendous amount of it, it’s there, we know well. But there are no deal, there’s no transactions to get done – it usually gets done [inaudible]. So, with your indiaquistion business, and that is what we have been doing for 25 years, you have to be in a place where there are sellers, and the premium basin is in place for the sellers and buyers, and there’s a lot of sellers and buyers every year. So, what we bring is our rigorous, you know, analysis, we bring the operational expertise we built over the last 25 years – oil wells and oil well. And we bring, you know, a very strong technical and operating team. So, we bring technical guys that have worked in the Permian for other operators to bare on projects. So, we have – what we have operated in the Permian, we have a lot of people who in prior jobs have operated in the Permian. So, it’s a place where there are a lot of transactions, so it’s a place where if it is a numbers game, we are going to do one percent of all of the deals that we look at – you know, there are a lot of deals to get done in the place that we should be.
Does the operator have other assets that ultimately may be suitable for you all to take a look at, and does the arrangement give you all any kind of first look type of situation?
Yes, the operator in this deal – this is one of many projects that they have in West Texas – we have no formal arrangement, we have no right, however, you know, in my mind it seems logical that as these 160 wells get drilled in the very minimum they are going to grow to sell and as the minority owner, and as partner in adventure it would seem like we would at least have an inside shot at it. And they have several other projects in their private equity back, and you know, there is always a time line in these private equity back ventures, so my expectation would be that they would be selling consistently projects that they bring into [inaudible] and we would certainly be a preferred buyer. There is no – you know, we have no inside track, but I think we will be a preferred buyer, we have good relation – we have very good relation with them, and look to build on. So, we are excited about that potential relationship, but there is nothing that’s, you know, locked down.
Okay. Hal, when you look at acquisitions, and your looking at some of the more liquid stuff with the MGL’s and inability to hedge it much beyond six months, if that. How do you go about hedging that when you look – when you’re running your economics, and basing that versus other oil plays or dry gas plays?
Sure, you know, first off, today, liquids are very, very small part of our portfolio, they are still less than 5%. So, today, it’s not a big issue for us, but, you know, we try to be conservative in price estimates on the liquids, you know, they – the inability to hedge means that we are not going to be as able to be aggressive on the bidding knowing that we can walk in the prices. So, you know, we’re – if we know we can lock in oil, we know we can lock in natural gas, then, you know, we can bid more aggressively. Knowing that we can’t lock in liquids as long makes us, you know, kind of on, or lower, price in our estimate.
So, do you go – do you look at some sort of mark versus WTI 40%, or 35, or how do you…
Well, we look at a range – I mean, we look at a range of prices when we are looking to deal, you know, with them. We have some – I think we have a few scenarios that were 20 or 25%.
Hal, a follow up to your comments about Michigan, do you have any kind of view as to what kind of progress, or what kind of step, or how that play will unfold in terms of activity you are seeing, and the knowledge people are going to get over the next couple of years, and when – when it’s going to, it might become a source of value?
You know, it’s hard to say – you know, in Canada we see well results from Canada that look very encouraging, I don’t know what’s public and what’s not, but we have seen a couple of wells that’s, you know, we don’t when they expect to drill them, but it would be hard to imagine it wouldn’t be economic. But I have heard recently Devon and the A1 carbon [inaudible] has, you know, been pretty discouraged by the first few wells, so it’s really hard to tell. I think, you know, this is part of the package [inaudible] is trying to sell, I think whoever buys it, that will be – I think that will need a lot of innovation because they have got a very large position or a lot of development. So, somebody buys it, you know, I think we will learn a lot when they do and once they jump in – you know, right now, we are in sit and watch. We are not going to put any capital into it, it’s not our business model, but you know, the play can easily come to us. So, you know, in the Utica [inaudible] we would – you know, it’s – interestingly it looks good, so far the EPA, one, is a lot more [inaudible].
Okay. Any other questions for Hal? I would like to thank you for being here today, the breakout session will be up in the Liberty Five room, thank you.
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