Breitburn Energy Partners' Management presents at Wells Fargo Annual Pipeline, MLP, and Energy Symposium Conference (Transcript)

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BreitBurn Energy Partners, L.P. (BBEP) Wells Fargo Annual Pipeline, MLP, and Energy Symposium Conference December 11, 2013 9:10 AM ET


James G. Jackson - Chief Financial Officer, Executive Vice President


Michael Blum - Wells Fargo

Michael Blum - Wells Fargo

Well, I'm going to get us started here.

James G. Jackson

All right.

Michael Blum - Wells Fargo

Very happy to have Breitburn Energy Partners presenting next. We've got the Executive Vice President and Chief Financial Officer, Jim Jackson.

James G. Jackson

Michael, thank you very much. Do we need some more of those? Okay. There you go.

Thank you all for being here this morning. I know we got a few people still getting seated. We did have -- I know we had a stack of handouts. Our CEOs at the conference yesterday and brought those with them. Maybe they've disappeared. This is available on the website, obviously. So apologize if we didn’t bring enough for the group today.

My name is Jim Jackson. I'm the Chief Financial Officer at Breitburn Management Company. I'd like to start by thanking Michael and his entire team at Wells Fargo. They have been great supporters of ours since going public in the fall of 2006. And I'm happy to come in today to share the story with you and the rest of the group. So, let me get started.

I think for those of you who know our story reasonably well, I'll nonetheless stick to the high points and then maybe at the end I think folks have been opening up for questions for few minutes. I'll be happy to do that too before the breakout session.

So, quick overview of Breitburn. I'll look at the large screen to my left since I can't quite see the smaller screen to my right. But first thing I like to tell people about Breitburn is I joined in 2006 and yet the company was started in 1988 with the exact same business strategy it has today, and that is to acquire long lived oil and gas reserves in areas where there is a tremendous amount of original oil in place and over time via through technology, science, price, experience extract more from that reserve base than was originally intended both by Breitburn and by the seller.

The company was started by Hal Washburn and Randy Breitenbach over 25 years ago with that exact same strategy. I've actually read the original business plan and that is in fact what it says and that is what we've been doing for over 25 years.

We started with two wells in Southern California and now we're up to, on a gross basis, almost 5,100 wells in nine states in oil and gas across the country. So we're not a recent construct. We're not a little bit of a roll up. We're not put together through a few companies opportunistically in the marketplace. Hal and Randy had the foresight 25 years ago to think some day this trend was coming and we've been well positioned to take advantage of it.

We do have a very balanced portfolio. We have significant gas assets. We have significant oil assets. Just under 200 million barrels of reserves pro forma for our last acquisition. 70% PDP predominantly liquids, 62% liquids and over 90% of that is crude oil.

We have grown through acquisitions. For those of you who know us well, you're well aware of the fact we've done 12 deals since the summer of 2011 in varying sizes. They've generally been oil-weighted deals not surprisingly. And they've had a little more PUDs in them than some of our earlier acquisitions. I'll talk about why that is, but that was something we intended and focused on and really reoriented the business towards those kind of acquisitions briefly in 2010 and 2011 and we're committed to distribution growth.

I think the MLP model is certainly well understood by this Group, but our pursuing it is exactly consistent with how you would expect it to generally be pursued, i.e. get a strong asset base, make good acquisitions, grow the business, remain nimble and liquid, and deliver, at least among our peer group, best-in-class distribution growth.

And finally, we do have a conservative capital structure. We're generally more conservatively capitalized than our peer group. And I'll talk about that a little bit more shortly as well.

This, a map of our assets, I won't go through this in detail, but I'd say two key points from my perspective. The first is we are diversified geographically. We started in California, expanded to Wyoming, did acquisitions in California, Florida, Michigan, Indiana, Kentucky, Texas and most recently Oklahoma.

So we are producing oil and gas all across the country. That poses a little bit of a management challenge as you can imagine, but by the same token, it also spreads us into a host of different basins and across commodity both oil and gas. So while differentials or operational issues in one area might be less than perfect, they are unlikely to have a real material impact on our business, and we would hope that outperformance in another area helps to offset those.

Also, we're diversified between oil and gas. Right now about two-thirds of the assets are oil. You know, that could change obviously with gas prices having come back from the end of 2012. So that reserve mix may change a little bit, but you should expect us to be more oily than gassy.

Our history was in the oil business. We only had the gas business in 2007 with a large acquisition that we did. But nonetheless, we're diversified and we have future drilling opportunities both on the oil side and on the gas side going forward.

Again, this is a little bit of our -- of how we think about the business strategy. You have to combine operational focus, operational excellence with an active acquisition business. That is oftentimes a difficult thing to balance because people internally, either at senior levels of junior levels, feel like they are being pulled in a lot of different directions all the time. But that, as a group in New York knows, that is just how the world works. So we've been at it 25 years and it's been working well.

What we've built we've tried to summarize on the bottom of the slide here. So we have a diversified asset base with relatively shallow declines. We're balanced between oil and gas. Our PUDs are generally low risk PUDs where there is a fair amount of visibility because of their location or our experience in the area and what their ultimate development potential is.

And we'll also talk about we hedge, some like to say aggressively, I like to say rather completely, because our hedge profile isn't particularly aggressive. Candidly, it's pretty boring, but I'll take you through it.

This is the overall MLP strategy. That's also the one we followed very closely. Our business starts with a very strong asset base of low declined properties. We have some organic growth opportunities in the portfolio now that we did not have three years ago. And that is an important differentiator for us versus our peer group, both then and now.

We -- again, we hedge very completely. We're north of, call it 85% hedged at any given time over the next 12 months and around 75% hedged out to year three with more hedging beyond that. We're very focused on acquisitions and we're now on our 14th consecutive quarter of distribution growth with 2012 to 2013 distribution growth around 7%, which we think is very good as compared to the peer group.

I talked a little about the portfolio. This slide which is just the highlights on our expanded portfolio is a bit of an overview. The two items I would focus on here; again we're diverse, but also have a couple of other things in the portfolio that some of our peer group don't have.

We are mostly oil, but a significant portion of that oil production is priced based on Brent crude as opposed to WTI. All of our production in California, both in Southern California and in Kern County is priced to Brent.

We also produce in Florida. Those oil -- those barrels get to market via a barge, which can either go into Houston or elsewhere or up to East Coast and those are generally priced as waterborne or Brent barrels as well, so little bit of a differentiator.

In addition, we have a fair amount of acreage that we are keeping our eye on in the Collingwood, Utica and the A-1 Carbonate. Some of you are familiar with what's going on up there. That's an area that we're watching closely. We have not done a lot of work, have not invested lot of capital there, but we have a significant acreage position in what we believe to be the better part of that play. If it moves forward that is all held by production and we're keeping an eye on that.

I'll talk a little bit about how the reserve base and our production mix has changed since 2010. This is a very important slide from my perspective because it starts with where our business was in 2010 in terms of reserves and we have certainly changed the mix. We were in 2010, 35% oil or 35% liquids rather. We're now up to 62% liquids. But more importantly, it's the story on the bottom half of this slide. And that is that we've expanded the PUD component.

I think when we went public in 2006 we were around 92% or 93% PDP, which was a terrific place to be and tell everyone got into the 2008-2009 financial crises and dislocation, and what at a lot of people will come to was the fact that when the markets dislocate, whether financially or in terms of buyer's and seller's expectations, it can be very difficult to grow.

If that's the case, how do you sustain the business absent making acquisitions? And in a business that generally has high, mid-to-single digit decline rates if only about 9% of your portfolio is PUDs and assuming you would drill all of them in one year which isn't necessarily the case, you can really only go about a year leaving off the inventory that you've built up.

So we reoriented the acquisition team in the middle of 2010 after we moved through a host of governance issues with a major shareholder. We reoriented the business to focus on acquiring oil assets and focused on acquiring properties that would expand the portion of our reserve base that were PUDs.

So simple calculation is in a situation where your decline rates are plus or minus 10% and your PUD component is, call it 20% to 25%, there is plenty of opportunity, there certainly in the first year of a major market dislocation and likely going into the second year of a major market dislocation for you to drill and sustain the business organically. That is a good place for us to be.

Unlikely that you'll see this PUD percentage increase dramatically, i.e. up to 35% or 40%, that is not our goal. All PUDs aren't created equal, but we like being and call that plus or minus 25% range where we by ourselves can manage the business for an extended period of time without having to go to the acquisition market. So that's a very important slide from our perspective and an important way that the business has changed in the last couple of years.

Operationally, I'll spend a little bit of time on this; maybe just hit some of our core areas. We kind of rotate the story around a little bit here. I mentioned we have a major presence in Wyoming. We've been there for the better part of 10 years now. We've done three significant acquisitions there; one in 2004, one in 2011 and then a second in -- or another in 2012.

We're in the Wind River, Big Horn, Green River and Powder River Basins. We've got just under 1,000 wells gross that's split between oil and gas. We bought these assets from not less in [Knor] in 2004, Cabot Oil & Gas in 2011 and then we bought part of a small public company that was winding up its operations called NiMin that was on the eastern side of Wyoming.

So a fair amount of low risk drilling opportunities, better lifting cost than our overall portfolio, a fair amount of gas PUDs up here that we're not spending a lot of time on. We're generally not spending a lot of time on gas properties in the portfolio nonetheless, but a very good operating area for us and one we know well and the one we continue to look for acquisitions at.

Next is Texas. We've been very active in Texas in 2012 and in 2013. We made two acquisitions in 2012 with -- from CrownRock who has turned out to be a great partner of ours. These are in Dawson, Martin and Howard County, so a good entry into the Permian for us.

As I always said, we spent a lot of time running an oil and gas business not owning oil and gas assets in the states that most people thought were the centre of universe for oil and gas production, at least currently.

So, good to be in Texas. We built that business out. We have a nice footprint in the Permian. We'll continue to look for very complementary add-ons to our operations there. We're not likely to spread ourselves much more broadly than we currently are in the near-term. And nonetheless, Texas is an area we'd like to do more in and an area that obviously is well understood in oil and gas space.

California also a great state to do business in, believe it or not. We have a major operation in Southern California and we added to that with an acquisition of something called American Energy Operations which is right in the middle of the Belridge Field, frankly last year. It too has been a good opportunity to pursue some low risk drilling opportunities. These are sort of 40 barrel a day IP wells on kind of less than an acre spacing.

So, very good business for us that was bought from a private company that we've had a relationship with for many years. That transaction was cash and units. And we've had some very good success in California drilling. Consistent with our business, we operate very high net revenue interest; and again this is all priced to Brent.

This is a little detail on our Santa Fe Springs field. I won't go through this completely, but it's out here as a resource because it’s a good touchstone for our overall strategy. We bought the Santa Fe Springs Field 15-plus years ago. At that time it was producing about 2,000 barrels a day, had 10 million barrels of reserves. The field itself, when originally discovered, was thought to have 1.3 billion barrels of reserves. The field has been -- we and others have extracted about 300 million barrels of reserves. We still have this asset on the books for about 10 million barrels.

We bought it for $12 million, at 10 million barrels of reserves its worth a lot more than that to us today. But what's important about it is we, four years ago, drilled very few wells here. We only drilled three or four wells a year in Santa Fe Springs in 2008, 2009, 2010. We did some seismic work. We learned from what we did in those early years. And consistent with the strategy and consistent with the theses of continuing to work on asset very hard where there is a lot of oil and gas in place, you will eventually find much more of it than anyone anticipated.

We're now drilling about 20 wells a year in Santa Fe Springs, much more than anyone anticipated five years ago. And that has less to do with price than it does with technology, understanding the reservoir a little better, etcetera. So it's a terrific asset. Some wells are there producing 400 years, frankly.

This is a snapshot of our 2013 capital program, an active year for us. We'll finish the year right around $270 million in total capital spending that includes spending related to the acquisition we made from Whiting this summer. We'll drill around 145 wells in six states. So a fairly active program for us historically, but not surprising given that we're growing.

Most of the capital is going to be spent in California and Texas, not surprisingly. Again, these are straightforward sort of less than $1.5 million [AFP] wells, low risk until drilling. Not particularly exciting, but very good returns nonetheless for us.

We'll also be active in Florida and Wyoming. Note that we're not going to be particularly active here in Michigan. Michigan, Indiana and Kentucky principally gas reserves. We'll spend very little capital in Michigan, Indiana and Kentucky this year and likely very little both in Michigan and on the other gas assets in the portfolio. We have drilled only a handful of gas wells frankly in the last two years.

I talked a little bit about our acquisition strategy. We have a large business development team. It was one person when I joined in 2006. We're now up to 15 spread between principally Houston, but also a few important people in Los Angeles. And we are very visible in 2012, we saw about 500 opportunities cross our desk.

Now granted, the bottom 100 are too small, the top 100 are either too large or certainly don't make sense. But there was a lot to choose from in 2012. 2013 has been similarly active, maybe a little slower and part of that is by design, which I'll talk about in a minute, are having completed transaction with Whiting Oil and Gas this summer really put us on the sidelines for a few months in terms of both evaluating that and thinking about our capacity to do the next one.

But we're seeing a lot of opportunities. And it doesn't take that much to move the needle for a company our size, something like $500 million to $700 million a year in acquisitions matters. We don't have to do $1.5 billion or $2 billion or $3 billion a year to move the needle and keep the business running the way we like.

That maybe our issue some day, but for us for the foreseeable future that's not the case. So we can remain very selective. We closed seven transactions in 2012. We closed one so far -- well, one plus a few bolt-ons to that in 2013. So we continue to be very selective and that continues to be good for our business.

This is a quick summary of our acquisition, the Oklahoma Panhandle from Whiting Oil and Gas which we closed on this summer. Now they are principally oil assets. It's a significant CO2 flood. We paid just under $850 million in cash. We, at the time, funded all of that off of a new expanded bank credit facility. We have now with an $830 million acquisition since the summer taken out either in the high yield market or the equity market right around $750 million worth of that. So we've reoriented the balance sheet successfully and I'll talk about that in a minute.

The operations themselves just over -- around 41 million barrels of reserves. That's our current estimate, 95% oil and right around 70% PDP. Differentials are very good relative to most -- really most -- the rest of our business right around $8 a barrel. And the lifting costs are right on top of the lifting costs for our entire portfolio.

The fact is it's certainly more expensive than our gas assets, but the lifting costs here for the Whiting deal are much better than our other oil operations other than in Texas. California and Florida are priced to Brent. They are also higher cost barrels. So this is a nice addition as well. Like most of what we have in Michigan, it's a 100% HBP and consistent with our inclination, currently and historically we'll also operate the entire property.

Strategic rational, CO2 business is a great add-on for the MLP business. It's 15-year reserve life, high margin, very predictable. Not necessarily an area that we expect to grow significantly, but a nice complement in terms of an asset that we can keep over 10 or 15 years relatively flat, a nice complement to some of the higher development oriented acquisitions we made in 2012.

So a good fit for us, increased our production significantly, up almost 30%, and also moved our liquids production to right around 65% of total production, a very accretive deal relatively speaking. Not surprising for a deal that size, that's to be expected. And it gets us into Oklahoma, New Mexico, again strengthens our position in the Mid-Con and gives us a platform to look at other CO2 acquisitions that might come along.

Strategically, we are not reorienting the business in a meaningful way long term towards CO2 opportunities, but this does give us the ability to look at smaller CO2 businesses as they come on the market either in this area or around this area, which we probably wouldn't have done without having done the Whiting transaction.

This is a quick snapshot of the assets. Two things are important here. We locked up either through contract or through access to supply around a 130 Bcf of CO2 which we think will be -- which we think will be sufficient to develop the properties over the next 10 to 15 years.

We picked and that's in Eastern New Mexico the Postle field which is the principle asset here in the Northeast Hardest unit or in the Oklahoma Panhandle. We'll have a little more detail on those next. But we also picked up 100% interest in these midstream assets. These are a small piece of the overall BreitBurn pie at this point, but they are a very important part of the CO2 business and for now they are core as we think about keeping them in-house and developing this asset long-term.

We also picked up now 100% owned Dry Trail gas plant, the [Huff] pipeline and the Transpetco pipeline, which you see here in yellow. So we've locked up all that midstream capacity, which is important to us not surprisingly.

This is a snapshot of the -- and a few of the field operational highlights here. So fairly condensed area, not surprisingly, discovered in 1958, acquired by Whiting. Whiting did a very good job of developing this asset over the last five years. They've grown it -- they grew it significantly. Again, that's not necessarily our goal. We're focused on holding it flat and be a nice complement to the base business. But they did a very good job running it.

Just about 250 producing wells, 160 injectors, varying highlights here on the geography. We picked up all of the field personnel. We're now built out or building out further CO2 capability and Whiting ran the business through the end of October and we picked up the operational responsibility since then, so a nice addition to the overall portfolio.

Just a quick highlight on financials. We've grown the business pretty significantly, not surprisingly since 2006, so I won't dwell too much on that. We do have a disciplined financial strategy. I won't hit all of these highlights, but we generally like to run the business around three times leverage. We like to be plus or minus 85% hedged in year one. And we really don't try to overcomplicate the hedge portfolio, and I'll take a second talk about that here.

Most importantly from any view has been our distribution growth track record. From early 2010, we've taken distributions per unit on quarterly basis from $0.375 to now [$48.75] that's 14 quarters of sequential distribution growth. We got 75% tax shield and we also announced recently that we are converting starting in January two monthly distributions. So, good track record here in terms of distribution growth.

Let me talk for a minute about hedging. We've got very strong hedge prices for 2013, 2014 and 2015. Call it north of $5 gas and $95 oil. And we are basically 85% plus hedged for the rest of this year, 77% hedged in 2014 and 71% hedged in 2015 based on current production levels. So if, for example, we were to continue letting the gas business decline, if gas prices stay low, our gas hedges would go up, etcetera. But a full hedge portfolio there and as we do acquisitions we'll tend to hedge those acquisitions more aggressively.

I'm not going to spend a lot of time on our crude oil and natural gas hedge book because they are 95% swaps basically, so very straightforward. They mitigate operational and profitability volatility, which is illustrated here, which I think all of you understand very well.

And the last point I'll make is just that relative to the peer group we think we are an attractive alternative vis-à-vis some of the closest competitors. We're at about 10% yield. We will certainly focus on working that lower, but attractively priced as a value to the peer group.

So why don't I finish there and open it up for any quick questions, maybe just take one quick question if there any, and then we'll head to the breakout room.

Question and Answer Session

Unidentified Analyst

Why don't you hedge 100% like Lynn?

James G. Jackson

Well, two reasons. To hedge 100% you're typically restricted from doing that by the bank group because the minute you have a production issue, you're over-hedged. So there is a bank issue. Secondly, there is a cost issue and there is a cost -- well, there is an expense issue, which is if you're 100% hedged and oil prices take off, your costs are going up.

Now they don't go up dollar for dollar, but your costs go up. And there is no way to hedge those costs. And that's -- so net-net that's a negative. We think fully hedged is about 80% hedged on expected production because if prices take off, that un-hedged percentage is enough to cover cost increases and it really doesn't subject very near term the portfolio to that much volatility in terms of profitability.

The other way to get 100% hedged if the banks will only let you hedge something less than 100 is to go out and buy puts, and from our perspective, that's expensive. So that's why we've elected not to do it.

Michael Blum - Wells Fargo

We're going to hold it here and thank you very much, Jim.

James G. Jackson

Right. Thank you, Michael. Thank you everyone.

Michael Blum - Wells Fargo

BreitBurn will be available for a breakout right now in the Duke of Windsor room, which is on the fourth floor.

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