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BreitBurn Energy Partners L.P. (NASDAQ:BBEP)

Q3 2012 Earnings Call

November 6, 2012 01:00 PM ET

Executives

Jim Jackson - EVP and CFO

Hal Washburn - CEO

Randy Breitenbach - President

Mark Pease - EVP and COO

Analysts

Praneeth Satish - Wells Fargo

John Ragozzino - RBC Capital Markets

Kevin Smith - Raymond James

Ethan Bellamy - Baird

Adam Leight - RBC Capital Markets

Michael Peterson - MLV & Company

Jeff Robertson - Barclays

Ipsit Mohanty - Bank of America Merrill Lynch

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the BreitBurn Energy Partners Investor Conference Call. The Partnership's News Release made earlier today is available from its website at www.breitburn.com. During the presentation, all participants will be in a listen-only mode. Afterwards, securities, analysts and institutional portfolio managers will be invited to participate in a question-and-answer session. (Operator Instructions)

As a reminder, this call is being recorded, Tuesday, November 6, 2012. A replay of the call will be accessible until midnight, Tuesday, November 20 by dialing 877-870-5176 and entering the conference ID 4036390. International callers should dial 858-384-5517. An archive of this call will also be available on the BreitBurn website at www.breitburn.com.

I would now like to turn the call over to Mr. Jim Jackson, Chief Financial Officer of BreitBurn. Please go ahead, sir.

Jim Jackson

Thank you and good morning everyone. Participating with me this morning are Hal Washburn, BreitBurn's CEO; Randall Breitenbach, BreitBurn’s President; and Mark Pease, BreitBurn's Chief Operating Officer. Greg Brown, our General Counsel is traveling this morning and is not able to join us. After our formal remarks, we will open the call for questions from securities, analysts and institutional investors.

Let me remind you that today's conference call contains forward-looking statements within the meaning of the federal securities laws. All statements other than statements of historical facts that address future activities and outcomes are forward-looking statements.

These statements are subject to known and unknown risks and uncertainties that may cause actual results to differ materially from those expressed or implied in such statements. These forward-looking statements are our best estimates today and are based upon our current expectations and assumptions about future developments, many of which are beyond our control.

Actual conditions and those assumptions may and probably will change from those we projected over the course of the year. A detailed discussion of many of these uncertainties is set forth in the cautionary statement relative to the forward-looking information section of today's release and under the heading 'Risk Factors' incorporated by reference from our Annual Report on Form 10-K currently on file for the year ended December 31, 2011, and our quarterly reports on Form 10-Q, our current reports on form 8-K and our other filings with the Securities and Exchange Commission.

Except where legally required, the Partnership undertakes no obligation to update publicly any future forward looking statements to reflect new information or events. Additionally, during the course of today's discussion, management will refer to adjusted EBITDA which is a non-GAAP financial measure, when discussing the partnership's financial results. Adjusted EBITDA is reconciled to its most directly comparable GAAP measure in the earnings Press Release made earlier this morning and posted on the Partnership's website. This non-GAAP financial measure should not be considered as an alternative to GAAP measures, such as net income, operating income or cash flow from operating activities or any other GAAP measure of liquidity or financial performance.

Adjusted EBITDA is presented because management believes it provides additional information relative to the performance of the Partnership's business. The non-GAAP measure may not be comparable to similarly titled measures of other publicly traded partnerships or limited liability companies, because all companies may not calculate adjusted EBITDA in the same manner.

With that let me turn the call over to Hal.

Hal Washburn

Thank you Jim. Welcome everyone and thank you for joining us today to discuss our third quarter of 2012. We delivered another solid quarter with record quarterly high production and profitability levels. In the third quarter of 2012, we produced 2.166 million Boe of oil and natural gas, which is a record quarterly high for the partnership, primarily due to the production from our second quarter Wyoming and Texas acquisitions.

Third quarter production increased 11% from the second quarter of 2012, and 29% from the third quarter of 2011. These increases were muted somewhat by some downtime issues in our northern division and gas production curtailment in our Texas properties. I'll leave Mark to discuss the details on production operations later on in this call.

We also achieved record quarterly high profitability in the third quarter. Adjusted EBITDA for the quarter was $90.1 million, which represented a 36% increase from the prior quarter and a 70% increase from the third quarter of 2011.

Turning to our distributions, we are pleased to have announced our third quarter distribution of $0.465 (ph) per unit or $1.86 per unit on an annualized basis. This represents a 7% increase from our third quarter 2011 distribution, that marks our tenth consecutive quarterly distribution increase.

Our distributable cash flow is supported by our high quality, diversified low decline asset base, our pursuit of growth opportunities in our legacy assets, our growth through acquisition strategy and our very attractive hedge portfolio. Our current target annual distribution growth rate is 5% and we think this is very attainable.

Now I would like to briefly touch on our 2012 capital program. While acquisitions drive a significant component of our growth; development opportunities from our legacy assets are important to growing production organically.

During the third quarter we identified additional projects in California were a brilliant success this year justifies further capital spending. As such we are now seeing today a $14.6 million increase to our 2012 capital program, which now totals approximately $152 million. Mark will provide more details about the updated capital program later in the call.

As you know, we’ve closed three acquisitions year-to-date. Our operations team continues to work hard with integrating these assets into our portfolio. We are extremely pleased with the opportunities of the NiMin, Element and CrownQuest acquisitions have brought us.

NiMin builds on our established presence in Wyoming and entering the Permian Basin with a strong operating partner and high quality assets with plenty of growth opportunities is something that we have targeted. We plan to continue expanding our presence in the Permian and have already seen new acquisition opportunities that fit our business model.

This quarter we remained very active on the acquisition front. Our acquisitions team screened and evaluated almost 125 opportunities. We continue to pursue a very disciplined and selective acquisition strategy that targets creative acquisitions with the best MOP assets for our portfolio.

With two successful financings this quarter, we have a very strong balance sheet going into the remainder of 2012 and early 2013. We are pleased to be in a great position to continue targeting acquisitions this year.

Now I would like to take a moment to comment on our announcement made earlier this morning regarding Randy Breitenbach’s decision to retire. At the end of this year, Randy, my business partner for over 25 years will retire from his position as President. But our time working together and Randy’s involvement with BreitBurn are not over.

Randy will become a non-executive director and has agreed to step into the role of Vice Chairman of the Board. I’m very pleased that Randy will continue to be a force in guiding and accelerating the Partnership’s future growth.

Randy and I have worked side by side for virtually all of our careers. So more than anyone else, I can tell you how much he has contributed to BreitBurn’s success. Although he has given up his role as President, I’m grateful that we will still be able to take advantage of his advice and counsel.

On Randy’s retirement, Mark Pease, currently EVP and Chief Operating Officer will become President in addition to COO. Prior to joining BreitBurn in 2007, Mark spent 28 years with Anadarko Petroleum, where he worked in a variety of managerial roles, leading U.S. on shore, off shore and international operations. He also held leadership positions with worldwide responsibility for drilling, major project management, production technology and corporate planning. At COO, Mark has been instrumental in driving operational expense throughout BreitBurn and implementing standard and prophesies that support our continued growth. We all look forward to having Mark serve as the Partnership’s President.

And now I know Randy would like to say a few words.

Randy Breitenbach

Thank you Hal. It was a long time ago but I remember when Hal and I sat in a room in (inaudible) and decided to try and build a business round the concept of acquiring and developing long life oil and gas properties. We shared a lot of ideas about what the business might become someday. Today BBEP is more than I could have imagined; a publicly traded partnership with oil and gas production in seven states and an enterprise value of almost $2.5 billion.

We used to think that doing one deal for few hundred thousand dollars was significant. Now we routinely manage acquisitions of several hundred million dollars at a time. And while Hal and I spent years working on each and every business need, we now have a very strong leadership team in place and talented employees doing exceptional work in all of our field and office locations around the country.

I’m incredibly proud of what we have accomplished to date and I'm excited about what will be accomplished in the years to come. I know that Mark will do an outstanding job as President, while I look forward to being engaged in BBEP, as Vice Chairman. I will also continue to serve Chief Executive Officer and Director of Pacific Coast Energy Holdings and I am and always be committed to the success of the BreitBurn businesses.

Now I'll turn this call over to the team to discuss what really matters today, BBEP’s third quarter results.

Hal Washburn

Thanks Randy. It's been a great 25 year run and I look forward to us continuing to work together in the years ahead. With that, I’d like to turn the call over to Mark and Jim to discuss the operating results for the quarter.

Mark Pease

Thank you Hal. Before I discuss BBEP operating results for the third quarter, I want to take a minute and talk about my new role. Two of the primary reasons I came to BreitBurn in 2007, were the personal reputations that Hal and Randy had in the industry, and the business model and solid foundation upon which the partnership was built. With those two elements in place, we have had great success and I have appreciated being part of the Executive team for the last five years. Now I’m looking forward to serving as President and helping deliver continued excellent results in the years ahead.

Turning to the operating results for the quarter, I'll discuss the results for the total company and then go into some of the details for each of the divisions. In the third quarter, we produced 2.166 million barrels oil equivalent, which was at the low end of our second half 2012 guidance range.

Production was lower than forecast of this quarter, primarily due to infrastructure downtime and differed well work in our northern division and lower than expected production for some of our Texas properties due to gas curtailment. I will go into more details about this in just a moment.

Third quarter production did increase 11% from the prior quarter and 29% from the third quarter 2011. Production spent for the third quarter was approximately 55% natural gas and 45% oil. As I mentioned in the last earnings call, we expect liquids production to grow to approximately 50% of total production by year end; with NGLs continuing to be a very small portion of that.

For the third quarter, lease operating expenses including processing fees and transportation expenses were $40.3 million, or $18.62 per Boe, which is below or better than the midpoint of our second half 2012 guidance range. This is down about 7% from the $20.03 per Boe in the second quarter of this year, primarily due to three things.

First, we had higher production, which mostly came from the Texas and Wyoming acquisitions, at close midyear, and these are properties that have lower unit operating expenses than our legacy assets. Second, we had lower than anticipated maintenance costs in Michigan and California. And third our operating group continues to do an excellent job of staying very focused on controlling cost. It’s one of our key metrics and it gets a lot of attention. The cost of materials and services stayed relatively flatter in the quarter but we have seen an increase of 5% to 10% year-to-date. We do expect second half expenses to be within our revised guidance range.

Capital expenditures from our oil and gas activities in the quarter were approximately $49 million, up significantly from the prior quarter expenditures of $28 million. The increase reflects the two consecutive capital program increases implemented in May and August that targeted development opportunities in our legacy assets and in our newly acquired assets in Texas and Wyoming.

If you recall we increased our original 2012 capital program of $68 million by $19 million in May and by $50 million again in August to a total of a $137 million. Of that $69 million increase, $39 million was allocated to our legacy properties and $30 million was allocated to the newly acquired assets. We have identified additional projects in the Santa Fe Springs field in California where our drilling success this year justifies further capital spending on additional oil wells and related injection projects.

As Hal mentioned earlier, we are announcing today a $14.6 million increase to our 2012 capital program, which now totals approximately $152 million. So far we are pleased with the results of incremental capital, of which more than 95% has been allocated to oil projects. Considering that the bulk of our spending occurred in the third quarter, we being to see the impact on production in the fourth quarter of this year.

Now let's discuss the third quarter performance of our two operating divisions. Third quarter production in the northern division, which consists of Michigan, Wyoming, Indiana and Kentucky was about 1.5 million barrels of oil equivalent, which is up about 2% compared to the prior quarter's production.

However production during the quarter was less than forecast mainly due to two issues. First there was a significant amount of downtime from third party planned and pipeline repairs in both Michigan and Wyoming. Some of those repairs did continue into the fourth quarter but are now been completed.

Second, there are more than 100 low volume gas wells that are shutting, due to being uneconomic to repair and return to production at current gas prices. As prices improve these wells will be repaired and put back on production. A combination of those two issues reduced net production by more than 1 million cubic feet per day.

Third quarter per unit controllable lease operating expenses for the northern division were $1.85 per Mcf equivalent, which is slightly below our LOE for the first half of the year. Capital spending in the northern division for the third quarter totaled approximately $16.7 million and consisted of 15 drill wells, 12 workovers and one facility optimization project.

The capital activity this quarter was successful in adding incremental net production of about 2.5 million cubic feet equivalent per day. In the southern division which includes California, Florida and Texas, third quarter production was 619,000 barrels of oil equivalent, which is up about 40%, compared to the second quarter 2012 production of approximately 446,000 barrels of oil equivalent. This increase was primarily due to the new acquisitions and to the additional drilling in Santa Fe Springs.

We had strong production growth despite losing approximately 300 net barrels of oil per day due to curtailments on a portion of the gas gathering system in Texas. The system operator expects to have the system capacity expanded by mid next year, so it’s not a quick solution but the issue is being addressed.

Controllable lease operating expenses for the quarter averaged $30.60 per barrel oil equivalent, which is about 28% lower than last quarter, mainly due to the acquisition of the new properties in Texas which have lower LOE and also due to the lower well work over expense in California.

Capital spending in the Southern division for the third quarter totaled approximately $32 million, which was above second quarter expenditures of $22 million, mainly due to the billing activity in California, Florida and Texas.

During the quarter six oil wells were drilled and completed in California, nine wells were drilled in Texas, six of which have been completed by the end of the quarter and one well was drilled and completed in Florida. These new drilled wells added incremental net production of about 700 wells barrels of oil per day. The Permian properties were acquired are still operated by CrownQuest but we will take over the operations on the producing wells at year end.

CrownQuest will continue to operate the drilling and we have a shared interest in the development locations. There has been at least one drilling rig operating on our property since August, but as many as three rigs operating during certain times. We anticipate that 20 wells will be drilled by the year end. Nine wells were drilled in the third quarter and we plan to drill 11 wells during the fourth quarter.

Project performances, as we forecast during the acquisition process with the exception of curtailment that I mentioned earlier. The curtailment only affects a portion of our properties; so we will focus activity in the areas that are not restricted until that problem is resolved.

The NiMin integration in Wyoming has gone very well. As we said previously, it is in an area where we have a significant presence and a strong operating team. We plan to drill nine wells this year. Two have been drilled and completed and our testing. Three wells have been drilled and are waiting on completion and remaining four wells will be drilled and completed before year end. We currently have two rigs running and expect to be completed by early December. So, operations have transitions say mostly. From an operations perspective, it’s been a solid quarter and a very busy one as well.

With that I’ll turn the call over to Jim.

Jim Jackson

Thank you Mark. I’d like to start by giving some additional commentary on our financial performance during the quarter, our recent financing activities and liquidity position and then provide a quick update on hedging. As Hal mentioned, adjusted EBITDA for the third quarter 2012, which included approximately $13.2 million of revenues was operating expenses from the effective date to the closing date for recent Permian acquisition increased approximately 36% to a record quarterly high of $90.1million, from $66.3 million in the second quarter. This increase was primarily due to contributions by the Wyoming and Permian Basin acquisitions, and based on our second half guidance, this is toward the high end of our implied guidance range for the quarter.

Regarding earnings, we recorded a net loss of approximately $73 million or $0.01 per diluted coming unit for the third quarter of 2012, as compared to a net gain of $92.5million or $1.29 per diluted common unit in the prior quarter. The decrease in that income was primarily due to unrealized losses of approximately $92 million on commodity derivative instruments for the quarter, compared to unrealized gains of approximately $82 million on commodity derivative instruments in the prior quarter.

As most of you know, we are required by fair value accounting under GAAP, to mark-to-market our commodity derivative portfolio instruments for every reporting period and because oil and natural gas futures prices increased in the third quarter, the result was a significant unrealized loss in the period. Excluding these unrealized losses, we would have had net income of $19 million of $0.25 per common unit during the quarter.

Because of the volatility and earnings due to fair value accounting, we refer to adjusted EBITDA as a key indicator of profitability. We reported total capital expenditures in the third quarter of $49.5 dollars and this is not include any expenditures related to the program increase that Mark detailed earlier.

At $49.5 million in spending for the quarter, we are trending toward the high end of our guidance and with the $14.6 million increase announced today; we expect total capital spending for the second half of the year to be between $105 million and $109 million.

Cash interest expense for the quarter, which includes the impact of realized losses on interest rate derivative, was $15.2 million, which is below the low end of our implied guidance range for the quarter but we expect the total for the second half of the year to be within our second half guidance.

Now I’d like to discuss distributable cash flow for the third quarter of 2012. Distributable cash flow, which we define as adjusted EBITDA, excluding revenue less operating expenses from recent acquisitions was approximately $44 million in the third quarter. This amount is after cash interest expense of $15.2 million and assumed maintenance capital of approximately $17.7 million and represents an increase of 21% versus second quarter distributable cash flow.

On a per unit basis, distributable cash flow was approximately $0.53 per unit and based on total units outstanding and including invented equity compensation awards. Our coverage ratio for the quarter based on the $0.465 distribution to be paid November 14th was 1.14 times. Our second half coverage ratio for 2012 should range between 1.1 and 1.2 times.

We believe that by completing approximately $300 million to $500 million in acquisitions each year with target acquisition multiples of five to six times next whole month’s EBITDA will allow us to support further distribution increases.

We are on track to deliver on this plan this year. We have completed approximately $315 million in acquisitions year-to-date. We continue to actively review additional acquisition opportunities and have grown distributions by 7% over the last 12 months.

Now I would like to address our recent financing activities and strategy. In early September, we completed the successful offering of 11.5 million common units priced at a price to public of $18.51 per unit. We also capitalized on favorable market positions in the high yield market and completed a $200 million add-on financing to our 7 and 7/8s (ph) senior notes due 2022. The notes were offered at a 103.5% of par for yield towards 7.25%. These were both very attractive long term financing. Net proceeds from both transactions were used to reduce borrowings under our bank credit facility.

In addition, we recently completed our semi-annual borrowing base redetermination process and I’m pleased to report that our borrowing days was increased by 25% to $1 billion. Given the strength of our overall liquidity position, we elected to take $900 million in total commitments at this time but we have the ability to increase commitments with lender approval to the full $1 billion level as needed. And as of November 6th we had only $45 million in total borrowings outstanding under our credit facility.

With the benefit of our recent financing success, we are extremely well-positioned to continue to execute on our operating plan and grow through acquisition strategy. We believe that going in the year end and early 2013, there may be some unique opportunities in the acquisition market and we are positioned quite well to take advantage of that.

Recall that our financial policies included maintaining leverage as measured by the ratio of total debt divided by last 12 months adjusted EBITDA of between 2.5 and 3:1. We will of course exceed this range from time to time, following significant acquisition activity but we'll work to bring our metrics back in line as market conditions permit, just as we did in September. For the 12 months ended September 30, growth from our acquisitions, our debt to last twelve months adjusted EBITDA ratio was just under 2.5 times.

Now turning to our hedging activity, we continue to see our hedge book play an integral role in mitigating commodity price volatility, particularly with natural gas. Our realized natural gas prices for the third quarter averaged $5.89 per Mcf, compared with Henry Hub Natural Gas spot prices of $2.88 per Mcf. On the oil side, average realized crude oil and liquids prices were $89.55 per barrel, compared to NYMEX crude oil spot prices of approximately $92.17 per barrel for the same period.

Brent Crude Oil spot prices which are an important benchmark for our California oil production averaged $109.63 per barrel in the third quarter, compared to $108.04 in the second quarter of this year. We continue to opportunistically layer in new hedges this quarter. We hedged approximately 685,000 barrels of oil production for the period covering 2013 through 2016, at an average price of $92.05 per barrel and hedged approximately 2.6 million Mcf of natural gas production for 2016 at an average price of $4.51 per MMBtu. Assuming the midpoint of our 2012 production guidance is held flat, our production is hedged at 76% for the fourth quarter of this year, 78% in 2013, 69% in 2014, 67% in 2015, 30% in 2016 and 2% in 2017.

Average annual prices during this period ranged between $88.12 and $99.94 per barrel of oil and $4.30 and $7.16 per MMBtu for gas. We will continue to evaluate and opportunistically add to our hedging portfolio in the future and an updated presentation of the Partnership’s commodity price protection portfolio as of October 30, 2012 will be made available in the Events and Presentation Section of the Investor Relations tab on our website.

In conclusion I'd like to reiterate that we delivered a good quarter where we posted record profitability and record production, increased distributions for the 10th consecutive quarter, significantly enhanced our liquidity position, and expanded our capital program for the third time this year, are targeting attractive growth opportunities in our legacy assets. We look forward to a strong finish to 2012 and thank our unit holders for their continued support.

This concludes our formal remarks. Operator, you may now open the call for questions.

Question and Answer Session

Operator

Thank you. (Operator Instruction). And the first question comes from Praneeth Satish with Wells Fargo.

Praneeth Satish - Wells Fargo

Just two quick questions from me. I was wondering if you could talk about how you expect to manage distribution coverage and growth in 2013? It looks like some of the partnerships, higher price, natural gas callers roll off this year. Will that impact your distribution growth policy at all in 2013?

Hal Washburn

Sure Praneet, this is Hal. We’re very comfortable with our target of 5% year-over-year distribution growth that’s based upon our continued success with our internal development programs, our continued success in the acquisition markets. As we go forward, we’re seeing a lot opportunities in both areas. We’ve increased our capital programs significantly for 2012 and we expect very well robust program for 2013. That, coupled with continued acquisitions should allow us plenty of distribution coverage to maintain distributions and grow them at our target rate.

Praneeth Satish - Wells Fargo

And with all the recent acquisitions, I was wondering if you could give an update for what you view as maintenance CapEx for the partnership? Should we view the Q3 level of $18 million as a good run rate for 2013?

Hal Washburn

Yes. I think, you really ought to look at it and we look at it at just about 23% of EBITDA. It works very well for us and we look at that in various different pricing scenarios and that’s a good number for the partnership.

Operator

Next will be John Ragozzino with RBC Capital Markets.

John Ragozzino - RBC Capital Markets

I guess Hal, maybe you can give us the answer to this one, but can you give us a little idea for, just the basic distribution of responsibilities between you and Randy and then kind of how does that change going forward on the bigger picture stuff, just given his Co-CEO role, kind of narrowed down a little bit to a one man band if you will.

Mark Pease

I’d first say that as you know, I've been acting President for a few years now and although we've have equal responsibility, those responsibilities had already began to separate.

Hal Washburn

Sure, and John we've been thinking this for a little while now and obviously feel very comfortable with Mark moving into the President's position obviously as we are much larger business than this when he run North America for Anadarko. I think they were at about 300,000 barrels a day and about $3 billion a year in capital spending. So despite our pretty significant increases over the last year we are still pretty small compared to what he's done in the past.

So we're very comfortable that Mark's going to do a great job as President, continue to grow and Randy will still be a great advisor. He'll maintain an office down the hall and I'm looking forward to continuing to talk with him about big issues as we move forward. He will be on the Board, he will be Vice Chairman of the Board. So yes, I think we feel very good about the team that’s in place and we are well positioned for the future.

John Ragozzino - RBC Capital Markets

Turning to the budget, with the third increase in CapEx this year, all of it seemingly going to California; is there an expected shift in companywide crude oil differentials, like expect them to (inaudible) on the premium to get a brand pricing out there.

Jim Jackson

Well sure, we basically break out our production that’s tied to grant as well as our production that’s tied to our WTI separately and you'll see as the mix increases, we should have high realization.

John Ragozzino - RBC Capital Markets

And then given that a lot of the spending isn’t going to have a lot of impact 2012, do you have an estimate for kind of where we shake out in terms of crude oil for natural gas ratio for 2013? I know you're targeting about 50% by the end of the year but, budget being a little bit back-end loaded, we see that trend continuing and have an idea where it might end up.

Hal Washburn

It’s little early for us to look into 2013. We’re still working on our plan for 2013, so I don’t want to say much more than kind of where we are right now, which is we're moving towards 50-50 and comfortable with that.

John Ragozzino - RBC Capital Markets

Okay just one more for me. Jim, when you think about the A&D market for ‘13, you mentioned kind of $300 million to $500 million target acquisition program, call it a 5 to 6 times multiple would be kind of where your sweet spot is. Is there any pressure that you're seeing in terms of specific types of deal packages, whether they be liquids rich or smaller in size or larger in size that showing a richer acquisition multiple, Is there any differentiation between the size of deals of the quality in terms of revenue pricing?

Hal Washburn

This is Hal. Let me clarify one thing. Our target for 2012 was $300 million to $500 million. We have done about $350 million so far this year and we are still active in the market. We haven't set a target out for 2013. At this point I would hope it would be at least that, if not more. We’re seeing a lot of real properties on the market, a lot of liquids properties on the market just because people that need to raise capital are selling things that are most highly valued, but we are seeing gas deals and we’d love to make some gas acquisitions at a very attractive pricing; based on current strip with a lot of upside in future development. It will be a great acquisition for the partnership. But right now we probably are seeing more liquids rich deals, especially ones that are trying to get done by the end of the year.

Jim Jackson

And John, it’s Jim. The other thing I’d clarify is the acquisition market is competitive. Hal and Randy (inaudible) that it’s always been competitive year-in and year-out for the last 20 years, but from a financial point of view, our past experience, particularly this year is achieving things and getting deals done in that five to six times multiple range. But out there is very doable as consistent with past practice and we’re going into the last quarter this year and early next year, with a balance sheet which is probably as clean and liquid as it ever been.

Operator

And the next question comes from Kevin Smith with Raymond James.

Kevin Smith - Raymond James

Randy, your presence on these calls will be missed and congratulations Mark. First question, nice work on operating costs, current LOE cost, are they, per unit, should I think about those as sustainable or is that kind of one time and migrating back up.

Mark Peace

Now this is Mark. I think with addition particularly of the Texas and Wyoming properties, which are lower per unit LOEs than what our legacy properties are, that should be pretty sustainable going forward, again given some sort of the status quo with current commodity prices.

Kevin Smith - Raymond James

And then just to confirm, did you say 300 barrels a day of production was constrained in the Permian? Was that net or gross?

Mark Peace

That’s a net number.

Kevin Smith - Raymond James

And so then with the CapEx increase, are you sticking with the second half 2012 production guidance of 4.4 million to 4.7 million Boe?

Hal Washburn

Yes we are.

Mark Peace

Yes we are.

Operator

Next will be Ethan Bellamy with Baird.

Ethan Bellamy - Baird

Randy, I hope your promotion to the Vice Chairman means you get to ski more, and Mark, good luck to you. Jim, I know you hate talking about this but, can you tell us the number of Florida barge shipments and if there is any lumpiness ahead in that area.

Jim Jackson

Actually Mark's got the Florida team with him. So, Mark do you want to handle that.

Mark Pease

Yes, we can.

Jim Jackson

Yes, we have another shipment going out in November that'll take us up to five for the year and we're planning one more by the end of the year, before the end of December. So we should be at six shipments through the year.

Mark Pease

Ethan, that last one should be right at the end of the year or, so the proxy, at least for the last quarter the proxy of production and sales should be pretty similar.

Ethan Bellamy - Baird

With respect to the A&D market, were any of the transactions posted by your competitors recently on your radar or something that you’d investigated? I'm just trying to assess the probability of you guys getting something else done by the end of year.

Hal Washburn

You know Ethan, there's a lot going on. We've looked at, I think all the deals that have recently been announced and one reason I didn't get them, as Jim said I think, we've looked at about a 125 deals this quarter. As we said repeatedly, it's a game of numbers. You look at a lot of transactions and get very few done. You need to be disciplined in what you look at. Those were good deals for them. For one reason or another they weren’t the deals for us but we are optimistic that there's enough out there between now and the end of the year that we've got a good shot at doing a little more.

Ethan Bellamy - Baird

Okay, and then one of your largest tiers has a new interesting security out there that appears to be trading pretty well, which could be used in a number of different ways. If this security, which I'm not allowed to talk about something that you guys would be potentially interested in?

Hal Washburn

We're not allowed to talk about it either, but the short answer is yes.

Ethan Bellamy - Baird

Okay.

Hal Washburn

We're obviously watching those guys and what they're doing and if it does continue to trade well it'd be something that BreitBurn would consider.

Operator

Next will be Adam Leight with RBC Capital Markets.

Adam Leight - RBC Capital Markets

Congratulations to everybody. First question I guess…

Hal Washburn

Hey Adam, we're having a hard time hearing you.

Adam Leight - RBC Capital Markets

Sorry, sorry I'll speak up. Just been so cold here that I can’t talk more.

Hal Washburn

Do you have gas and electricity?

Adam Leight - RBC Capital Markets

No. just gas. So you can buy more gas by using lot of it. You talked about unique opportunities in the acquisition market. Would you care to characterize that a little bit more?

Hal Washburn

I think what we mean is there are some situations where groups, individuals, families are looking at what might happen in 2013 from a tax perspective and are very interested in trying to get something done the end of the year, possibly situations, deals that hadn’t really been considered prior to this. So, we’re seeing a lot of kind of end of the year activity.

Jim Jackson

Adam, it’s Jim, I want to add just one additional clarification. When I talked about opportunities being unique, I was, as Hal mentioned, probably more focused on unique as driven by timing, not necessarily unique as assertoric out of the box for an (inaudible).

Adam Leight - RBC Capital Markets

Yes. Got that, okay. You’ve talked about five to six multiples on your acquisitions. How do you compare that to your development spending or CapEx?

Hal Washburn

Sure. Most of our development projects, especially our liquids rich projects, and in particular California projects have significantly higher rates return today, just given where oil and gas prices are and that’s why we’re focusing great deal of our capital on organic development but there is only so much of that in any given portfolio when our business is built on a combination of both development drilling and acquisitions and we continue to make acquisitions to build up our development opportunity portfolio. So, it’s not just one but both areas are important for growth.

Adam Leight - RBC Capital Markets

Okay; and then just two kind of nitpicky questions. Can you help out with the $13 million adjustment for cash flow from acquisitions post effective pre-close? It seems like a large number relative to the timing. Am I mistaken? Am I missing something?

Jim Jackson

Adam, its Jim. That’s just largely a construct of what was negotiated with respect to effective dates and closing dates. That number, as we continue to acquire is going to come up, it’s going to move around. We define distributable cash flow, excluding it just to keep the comparisons very clean but in any given deal, we might have the very short period between effective date and closing date, we could have a long period. It's just setup between the parties on a case by case basis.

Adam Leight - RBC Capital Markets

And then I guess lastly, should we expect any unusual non-recurring compensation expense in G&A when Randy retires?

Hal Washburn

We're still working on Randy's final retirement package but I wouldn’t these to be dramatic.

Operator

(Operator instruction) Moving on to Michael Peterson with MLV & Company.

Michael Peterson - MLV & Company

Have a question with regard to the Permian. I recognize your presence there has been relatively brief but would be interested in your thoughts on the play thus far. Specifically, how would you categorize your comfort and maybe a potential timeline in terms of moving into an operatorship role and expanding your footprint there?

Mark Pease

This is Mark. The short version of that is that we have been pleased with the performance of acquisition to date. I think just about everybody knows what a nice place to be the Permian is in terms of both resource and deal flow. That’s an area that we’ve worked hard to get in and we needed to do it the right way because most of the acquisitions that you see out there, in particular in the area where we did the acquisition, have a significant amount of undeveloped potential and if you're not currently out there and don’t have drilling rigs and services already under contract, then by the time you set up an operation, get all those things done, it creates a lot of lag time.

So the acquisition that we did with CrownQuest, and I know it worked out very well because we'll actually take over operatorship of the producing wells by the end of the year. So that will start our physical presence out in the Permian basin but we’ve got the get fortune of having CrownQuest continue to operate the new drilled wells. They already have rigs and services under contract. They are a very, very operator. They’ve been out there long time, going to drill more than 100 wells this year. So we were learning off a lot from them, from a pure operational standpoint in the Permian Basin. So it’s a great situation from us and you will continue to see us look for more acquisitions out there. It's going to be a key price force.

Michael Peterson- MLV & Company

Mark I appreciate the color.

Operator

Next will be Jeff Robertson with Barclays.

Jeff Robertson - Barclays

Hal, philosophically, can you talk a little bit about how you all want to manage the decline curve between having a growth capital component and growing the production through drilling and also acquisitions and how you think all that will fit into distribution growth?

Hal Washburn

Sure Jeff and that’s why it is a combination of organic opportunity as well, as acquisition long life reserves with lower more terminal type declines. One of the keys is if you are growing production significantly through the drill, but you have to recognize that you will have initial decline rates that are higher than you all in older established fields and older established wells, one of the keys is, you are not going to distribute all of that, for lack of a better word, excess cash flow. You have to be rigorous about kind of looking to what the sustained cash flow is that’s a big part of our model, as we go forward.

Jeff Robertson - Barclays

And with respect to the capital, in addition of wells in Santa Fe Springs, can you talk about when you all would expect the production impact from that to be? Would that be some time in the first quarter of next year?

Mark Peace

Jeff, this is Mark. These wells take us about somewhere between three to four weeks to drill and actually get them on production. So we will start seeing some of that in the fourth quarter certainly but we won’t see an entire quarter of it. So it’s a little bit masked when you compare it to the prior quarter but certainly, the work program that we just approved, we’ll see a full quarter of that, first quarter 2013.

Jeff Robertson - Barclays

Okay and then lastly, Mark, those are wells that you all already have permits for, and is that just inventory that you keep running out there in terms of drilling permits that you’re getting from the state?

Mark Peace

Yes, they are permitted. We’ve been doing a lot of technical work and have a young geologist working on that. She’s doing a very good job, so she generates new opportunities for us out there.

Hal Washburn

Let me add a little more on that. This is a field that BreitBurn has owned since 1999 and it’s a really great example of what we try to do. This is an oil field, very low decline. When we purchased it, it was producing about 1,400 barrels a day. Within six months to a year we had it up to 1,700 to 1,800 barrels a day, and it’s been pretty steady there since. It’s got about 2 billion barrels of oil in place, 600 million barrels have been produced and we’ve got reserves of 10 million to 15 million barrels and we’ve had reserves of 10 million to 15 million barrels forever since we purchased it. We will continue to drill wells there for the foreseeable future with commodity prices where they are today especially California crude being tied to the world market. The economics are super compelling and we are excited about this and it’s in place. We are in the middle of a 80 to 90 year old oil field and will continue to drill wells there for decades, we believe.

Operator

(Operator instruction) Next question comes from Ipsit Mohanty with Bank of America Merrill Lynch.

Ipsit Mohanty - Bank of America Merrill Lynch

A lot of my questions have been answered but just a couple of them if I may. With the CapEx increase focused on California drilling, does that skew your production towards more of sort of a Brent benchmark versus TI going forward?

Hal Washburn

It will slightly and we do break that out. So you can track that but as we increase production in California and as we see kind of our gas production go in more of a natural client, you'll see first accommodation more oil than natural gas. And you'll see California as percentage of the total grow, you’ll have some additional exploitation in Wyoming or California and West Texas.

Ipsit Mohanty - Bank of America Merrill Lynch

And this is more of a sort of a philosophical question but some of your peers have gone ahead and done big gas acquisitions and layered in strong hedges, and you've done some oil acquisitions. Just going forward, is there a preference to do one above the other or you're just going to be opportunistic in 2013?

Hal Washburn

We've said for many years that we think it's very valuable to be balanced and so we are close to balanced from an oil and gas perspective. We had more gas in our portfolio and we made a concerted effort to get back to balance. We made a very attractive large gas acquisition about a year and a half ago. We will look at gas deals, we look at oil deals. We're looking at buying cash flow. We're buying distributable cash flow. If you can make a gas deal work based on the current strip, it could be great transaction, especially if you're getting development locations for free.

So if you're paying for the existing production at current strip and having an option on future gas prices increasing and drilling up developmental wells, great, that's it, that's a great transaction and that's a lot like what we did with Cabot in Southwest Wyoming. So we'll certainly look at it but we do value being balanced and if you see us make a large gas or series of oil transactions, you can expect us to try to get back to more of a balanced portfolio over time.

Operator

And there are no further questions. Mr. Washburn, I'll turn the call back over to you for any closing remarks.

Hal Washburn

Thank you operator. On behalf of Randy, Mark, Jim, Greg and the entire BreitBurn team, I thank everyone on the call today for their participation. Operator, you may now bring this call to a close.

Operator

Thank you. And this does conclude today’s conference call. Thank you everyone for joining us. You may now disconnect.

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