1 IPAA Annual Conference November 9, 2007 BreitBurn Energy Partners LP.
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Transcript of 1 IPAA Annual Conference November 9, 2007 BreitBurn Energy Partners LP.
1
IPAA Annual Conference
November 9, 2007
BreitBurn Energy Partners LP
2
Forward-Looking Statements
Cautionary Statement Relevant to Forward - Looking Information for the Purpose of "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995
This presentation contains forward-looking statements relating to BreitBurn Energy Partners L.P's ("BBEP") operations that are based on management's current expectations, estimates and projections about its operations. Statements made in the course of this presentation that are not historical facts are forward-looking statements. Words such as "anticipates," "expects," "intends," "plans," "targets," "projects," "believes," "seeks," "schedules," "estimated," "guidance," "recommends," "will recommend”, and future projections shown in charts and tables and similar presentations and expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond our control and are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements. The reader should not place undue reliance on these forward-looking statements, which speak only as of the date of this presentation. Unless legally required, BBEP undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.
Among the important factors that could cause actual results to differ materially from those in the forward-looking statements are crude oil and natural gas prices; the competitiveness of alternate energy sources or product substitutes; technological developments; delays in planned or expected drilling and development programs; the future performance of the properties acquired from Quicksilver Resources Inc.; potential disruption or interruption of BreitBurn's net production due to accidents or severe weather; the effects of changed accounting rules under generally accepted accounting principles promulgated by rule-setting bodies; and the factors set forth under the heading "Risk Factors" incorporated by reference from our Annual Report on Form 10-K for the year ended December 31, 2006, Quarterly Report on Form 10-Q for the quarters ended March 31, 2007 and June 30, 2007 and other filings with the Securities and Exchange Commission. Unpredictable or unknown factors not discussed herein also could have material adverse effects on forward-looking statements.
Except as otherwise noted, information in this presentation relating to the properties acquired from Quicksilver is based on information provided to BreitBurn by Quicksilver as of June 30, 2007. BreitBurn intends to issue 2008 guidance before year-end and notes that its earlier guidance (issued August 14, 2007) for 2007 was prepared prior to the acquisition from Quicksilver and is no longer current or applicable.
3
Agenda
► Overview of BreitBurn Energy Partners
► Overview of Upstream MLPs
4
Overview of BreitBurn Energy Partners
5
History of BreitBurn Energy Partners L.P.
► BreitBurn Energy Company was formed in 1988 by Randall Breitenbach and Halbert Washburn, Co-CEOs of BreitBurn Energy Partners L.P. (BBEP)
► BBEP was formed in March 2006 as an independent oil and gas partnership focused on the acquisition, exploitation and development of oil and gas properties with the objective of generating stable cash flows and making distributions to unitholders
► As of the IPO, BBEP held primarily of long-lived oil and gas assets in the Los Angeles Basin in California and the Wind River and Big Horn Basins in Wyoming with estimated proved reserves of 29.7 MMBoe and daily production of approximately 4,300 Boe/d*
► Since the IPO, BreitBurn has made four significant acquisitions, including additional assets in the Permian Basin, Florida and California
► On November 1, 2007 BreitBurn completed the acquisition of all of the natural gas, oil and midstream assets of Quicksilver Resources Inc. in Michigan, Indiana and Kentucky for approximately $1.5 billion
► The Quicksilver acquisition more than doubled BreitBurn’s estimated proved reserves and daily production
► Our recently announced quarterly distribution of $.4425 represents a 7.3% increase over our initial quarterly distribution of $.4125 paid in February 2007
*Amounts as of December 31, 2005.
6
► Acquire long-lived assets with low-risk exploitation and development opportunities
► Use our technical expertise and state-of-the-art technologies to identify and implement successful exploitation techniques to maximize reserve recovery
► Reduce cash flow volatility through commodity price hedging
► Maximize asset value and cash flow stability through operating control
Business Strategy
7
► High-quality asset base characterized by stable, long-lived production
► Experienced management, operating and technical teams share a long working history at BreitBurn
Executive officers and key employees have on average over 20 years of experience in the oil and gas industry, finance and acquisitions
► Management has proven acquisition, development and integration expertise
► Cost of capital provides competitive advantage in pursuing acquisitions
No entity-level income tax
No incentive distribution rights (IDRs)
► Significant financial flexibility
Competitive Strengths
8
Summary of Quicksilver Acquisition
Transaction
Assets Acquired
► Approximately 530 Bcfe of estimated proved reserves located primarily in the Michigan Antrim Shale (84%)
► Mature properties characterized by long-lived, predictable production profiles, shallow decline rates and low maintenance capital requirements
► Integrated midstream assets in Michigan, Indiana and Kentucky
► Acquisition of natural gas and midstream assets located in Michigan, Indiana and Kentucky
► Acquisition financed with $750 million cash and 21.348 million BreitBurn Common Units
► Acquisition provides quality operating and technical team, which operates as a stand-alone business unit
Financial Impact
► Immediately accretive to distributable cash flow
► Expect to recommend to the Board a Q1 2008 distribution of $0.575/unit ($2.30/unit annualized) with a 2008 exit rate of $0.625/unit ($2.50/unit annualized) (1)
► Maintaining strong distribution coverage ratio
1.2x – 1.3x 2008E distribution coverage ratio
► Price protection - swapped approximately 80% of PDP production for 3 years at $8.01/mcf
(1) All distributions subject to Board approval.
9
North Sunshine
Hidden Dome
Gebo
Black Mountain
BIGHORN BASIN
WIND RIVER BASIN
Lazy JL
PERMIAN BASINSUNNILAND TREND
Corydon
Major Properties
Headquarters
Gaylord Office
Sawtelle
LOS ANGELES BASIN
Rosecrans
Santa FeSprings
Brea Olinda
East Cayotte
Prairiedu Chien
Niagaran
Antrim
Detroit River& Richfield
WY
CA
TX
FL
KY
IN
MI
Prairiedu Chien
BreitBurn Asset MapSignificant Presence in Seven States
10
Overview of Upstream MLPs
11
55
49 46
33
9
20
27
34
$7,369
$3,146
$5,726$6,213
$589
$2,029
$3,693
$5,619
$9,969
$14,750
$6,926
0
2,500
5,000
7,500
10,000
12,500
15,000
2000 2001 2002 2003 2004 2005 2006 2007
Dol
lars
in m
illion
s
-5
5
15
25
35
45
55
Num
ber of Deals
Follow -On IPO PIPEs Deals
Evolution of the MLP Market
Growth of the MLP Asset Class MLP Public Equity Issuance
Market data as of 11/2/07.
YTD
$14.0$24.3 $27.8
$45.0$56.5
$72.7
$104.2
$149.0
0
20
40
60
80
100
120
140
$160
2000 2001 2002 2003 2004 2005 2006 2007
To
tal M
LP
Mar
ket
Cap
($
in B
illion
s)
YTD
12
E&P MLP Characteristics: Then and Now
1980s Today
Reserve Characteristics ► High decline, short reserve life ► Low decline, long reserve life
► Mature, well-known basins
Drilling ► Included high risk, exploration wells
► Low risk exploitation and development wells
Reinvestment Requirements
► High CAPEX as a % of cash flow ► Low CAPEX as a % of cash flow
Ability to Hedge ► No NYMEX ► Can hedge 5+ years
Balance Sheet ► High leverage
► Low coverage
► Low leverage
► High coverage
13
E&P MLP / LLCs at the Time of IPO
Linn Energy (LINE)
EV Energy Partners(EVEP)
Breitburn Energy Partners(BBEP)
Constellation Energy Partners
(CEP)
Atlas Energy Resources
(ATN)Legacy Reserves
(LGCY)
Vanguard Natural Resources
(VNR)
Encore Energy Partners
(ENP)
Asset Location: Appalachia Appalachia, N. La LA Basin, Rockies Black Warrior Appalachia Permian AppalachiaW Tx, Williston, Big
Horn
Reserve life (Years) 29 19 19 25 19 16 15 14
Reserve life PDP (Years) 19 17 17 20 13 13 11 11
Hedged Production: Year 1 94% 75% 76% 80% 77% 69% 95% 75%
Hedged Production: Year 2 89 72 77 80 77 61 97 64
Hedge Strategy (yrs) 5+ 2 - 3 2 - 3 Up to 5 Up to 3 ~ 2 5 2-3
Structure:
MLP or LLC LLC MLP MLP LLC LLC MLP LLC MLP
Incentive Distributions None (2%/15%25%) None (2%/15%) (2%/15%/25%) None None Escalating (1)
Current Equity Value ($ mm) $3,204 $554 $2,170 $867 $2,175 $600 $208 $472
Current Firm Value ($ mm) $4,255 $776 $2,483 $1,010 $2,894 $765 $232 $538
Source: Company filings – S-1Market data as of 11/2/07(1) Distributions on management incentive units increase from on par with common units to ~4.8x common unit distribution.
14
Post-IPO Acquisitions Driving Equity Performance
Source: John S. Herold, Inc. - Upstream Reserve Acquisitions.* Reserves valuation adjusted for integrated midstream assets.
Months after IPO
2 4 6 8 10 12 14
EV Energy Partners
Jan. 13, 2006
Sept. 26, 2006
Oct. 3, 2006
Nov. 14, 2006
Dec. 12, 2006
Jan. 12, 2007
($ in millions)
Diversified$1.99 / Mcfe
Michigan$1.28 / Mcfe
Permian$2.42 / Mcfe
16+
$291
Blacksand (CA)$1.55 / Mcfe
East Binger (OK)$1.83 / Mcfe
0
Monroe (LA)$1.50 / Mcfe
Cherokee$2.35 / Mcfe
Diversified$2.31 / Mcfe
Austin Chalk$2.56 / Mcfe
Properties in Texas Panhandle
$2.15 / Mcfe
DTE Antrim Assets$2.47 / Mcfe
$125$415 $91
$29
$1,225
$45 $21 $13
$115
$28 $72 $96 $100
Stallion Energy (TX) & Pond Fork (WV)
$1.26 / Mcfe
Kaiser Francis (OK)$2.29 / Mcfe
$100
Sunniland Trend, FL$1.75 / Mcfe
$92
Los Angeles Basin, CA$2.36 / Mcfe
$2,050
Mid-Continent properties$2.69 / Mcfe
PetroHawk Texas Properties
$2.15 / Mcfe
$160
Permian$2.03 / Mcfe
$240
AMVEST - Cherokee$2.58 / Mcfe
$20
Permian Basin$2.77 / Mcfe
$128
Newfield Cherokee$2.84 / Mcfe
$23
Texas Panhandle$1.88 / Mcfe
$21
Permian Basin$2.63 / Mcfe
$61Texas Panhandle
$2.55 / Mcfe
$1,450
Quicksilver Michigan, Indiana, Kentucky Assets
$2.45 / Mcfe*
$11
Antrim Assets$2.06 / Mcfe
15
E&P MLP vs. C-Corps: Relative Price Performance
80
90
100
110
120
130
140
150
160
170
180
190
200
11/03/06 01/02/07 03/04/07 05/04/07 07/03/07 09/02/07 11/02/07
Pric
e as
a P
erce
ntag
e of
Bas
e P
erio
d (%
)
E&P MLP/LLCs Gas Weighted C-Corps Oil Weighted C-CorpsSource: Factset.Note: Data as of November 2, 2007.1. E&P MLP/LLCs: ATN, BBEP, CEP, EVEP, LGCY, and LINE.2. Oil Weighted C-Corps: BRY, CLR, EAC, DNR, PXP, VQ, and WLL.3. Gas Weighted C-Corps: CHK, COG, CXG, EOG, KWK, RRC, SWN, and XCO.
39.7% 35.1%
56.3%
16
MLP IPO Issuance Market Overview
MLP Backlog – Announced Transactions
Source: Commscan Equidesk.
IPO Deal Type Asset Class Size ($mm) Timing
CDM Resource Ptnr LP IPO Compression $169 Q4 2007
Pioneer SW Energy Ptnr IPO E&P 302 Q4 2007
Quest Energy Ptnr IPO E&P 201 Q4 2007
Abraxas Energy Ptnr IPO E&P 56 Q4 2007
Plains GP Holdings LP IPO GP 400 Q4 2007
El Paso Pipeline Ptnr IPO Midstream 575 Q4 2007
Western Gas Ptnr IPO Midstream 375 Q4 2007
Williams Pipeline Ptnr LP IPO Midstream 314 Q4 2007
OGE Enogex Ptnr IPO Midstream 181 Q4 2007
OSG America LP IPO Shipping 181 Q4 2007
EXCO Ptnr LP IPO E&P 1,500 Q1 2008
Resolute Energy Ptnr IPO E&P 275 Q1 2008
17
Key Considerations for an E&P MLP
► Determination of initial assets to contribute Production decline rate PUD / Probable component “Maintenance capex” / reserve replacement;
predictability and level of operating costs
► Potential benefit / size of value arbitrage Vs. Risk Vs. Sponsor’s objectives Need to assess the true cost of capital comparison
► Degree of leverage – cushion / dry powder Especially important for an acquisition story Commodity price volatility
► Strategy / conflicts of interest between Sponsor and MLP (if sponsor is public) Which entity acquires which assets?
► Hedging production smoothes volatility in commodity prices Investor expectations Enhances the expected stability of cash flows
► Questions for sponsor Is there a need for capital? Will an MLP drive sponsor’s stock price higher? Will an MLP facilitate future strategy / growth (e.g.,
acquisitions)?
► Articulation of MLP growth strategy Drop down, acquisitions, organic Is the organization well suited to the intended
growth strategy?
► Reserve Profile Ability to separate PDP/PDNP from PUD/Probable Regional segregation?
► Development capex requirements Maintenance vs. growth
► Liquidity objectives / needs Acquisition financing vs. secondary equity sales
► Tax and accounting issues
► Standalone financial statements
► Liability management issues
E&P Considerations Company - Specific Issues
18
Structural Considerations
Item Consideration
Corporate Structure• MLP vs LLC• Holdco vs asset drop-downs
Distribution Coverage/Growth
• High coverage vs distribution growth – impact on valuation / yield• Variability of operations influences coverage needs
Capital Structure• High leverage reduces distributable cash (interest payments) and hinders acquisition flexibility• Impacted by other factors – acquisition profile, financing needs, hedge profile, etc.
Hedging• Investors prefer visibility for near-term distribution stability• Retain some upside to future commodity price increases• Manage cost structure variability
Management • Significant management overlap is acceptable and has precedent• Board composition requirements
Incentive Distribution Rights• Broad spectrum of precedents• Marketing impact• Impact to sponsor
IPO Size• Depends on objectives• $150 million minimum to establish float and market visibility• Target institutional and retail investors – significant market capacity
19
Management Incentive:
No Incentive Incentive Distribution Rights (IDR)
Management Incentive Interests (MII)
Management Incentive Units (MIU)
Description: ► Investors share equally in all cash flows
► Acquisitions are more accretive long-term without IDRs due to lower cost of equity
► Increasing % of cash distributions paid out to management as per unit distributions increase. Range for 2% interest to 25%
► If distributions per unit paid exceeds 115% of the initial quarterly distribution (IQD), LLC would earn a fee equal to 15% of the distributions in excess of 115% of the IQD
► Fee not payable unless distributions have exceeded the Target Distribution on average for 12 consecutive quarters
► Management granted 550,000 Management Incentive Units
► Distributions on MIUs increase by 37% for each 10% increase in common unit distributions
► Eligible for conversion to common units on a cash parity basis once common unit distributions are $2.74 per unit
Companies:
Subordination: ► No subordination ► Regular subordination► Subordination period for 5 years► Early subordination termination
in year 3 for 25% of the units and year 4 for 25% of the units provided certain tests are met
► Structural subordination ► No subordination
► Unlike midstream MLPs, where issuers have gravitated toward 50% splits, there is a wide divergence of management incentives currently used in E&P MLPs
Management Incentives
EV Energy Partners
20
IPAA Annual Conference
November 9, 2007
BreitBurn Energy Partners LP