BreitBurn Energy Partners LP has joined Linn Energy LLC and EV Energy Partners LP as the new U.S. oil and gas exploitation companies using an MLP format. Here, BreitBurn's co-chief executives discuss their plans.



In October, some 50% of Los Angeles-based producer BreitBurn Energy Co.'s oil and gas assets were rolled into a master limited partnership (MLP), BreitBurn Energy Partners LP, and publicly offered as units on Nasdaq, trading as BBEP.

Proved reserves in the new MLP totaled some 30 million barrels of oil equivalent (98% oil; 91% proved developed) in the Los Angeles Basin in California (57%) and in the Wind River and Big Horn in central Wyoming (43%) as of year-end 2005. And, average daily production on June 30, 2006, was some 4,500 barrels equivalent. The reserve life is roughly 17 years.

The 6.9 million BBEP units were priced at $18.50 each, raising some $128 million. Oil prices had declined drastically between the initial May filing and the early October pricing. And, the offering had a bumpy start in public trading, closing the first day at $18.47. At press time, the price had improved to $19.25.

Calgary-based Provident Energy Trust owns 96% of U.S. subsidiary BreitBurn Energy Co. and 65.5% of the newly launched BBEP.

Co-founders in 1988 of BreitBurn and fellow Stanford University petroleum engineering alumni, Randy Breitenbach and Hal Washburn - are leading the BreitBurn MLP as co-chief executives. Acquisitions are at the top of their list of plans for the MLP.

Investor - Does the news November 1 about a phased-in change in tax laws affecting Canadian energy trusts, such as BreitBurn's parent Provident Energy Trust, affect your plans for the MLP or for BreitBurn Energy Co.?

Breitenbach That news certainly does affect Provident, but it doesn't affect us at BreitBurn. And even at Provident, they have four years, until 2011, to adjust to the new tax regime. So it's business as usual for Provident for the time being, and we're excited to be beginning life as a public company here at BreitBurn.

Investor - EV Energy Partners priced just days ahead of you. Were you concerned with the softness in initial trading?

Breitenbach There are similarities that BreitBurn Energy Partners has with EV and Linn Energy, but there are a lot of differences. Not all MLPs are the same, and we're quite a bit different. We respect EV and Linn, but our entity is structurally different-different commodities, different locations, a different business plan.

Investor - Is your MLP format just like the Canadian energy trust format or are there subtle differences?

Washburn - We are more similar to the Canadian trust than we would be to the U.S. MLP in some ways, the most important being that most MLPs have a general-partner (GP) promote or incentive-distribution rights-with high splits. Most of the Canadian trusts had similar incentive-type agreements early on and almost all of them have departed from this.

We decided to come out of the blocks without any GP promote at all. Every dollar that is distributed is split out to the unit-holders on a pro rata basis. There is no disproportionate split going to the GP.

We think the Canadian market has shown us it's a great model. There is no synthetic tax, in the form of a GP promote, on unit-holders as the business becomes more successful.

It's a very important point. We chose not to have a GP promote. It is counter-intuitive to us that, as BreitBurn becomes more successful as an MLP, its cost of capital would go up because the GP would be taking a higher and higher split.

Other MLPs have chosen to go with a GP split, and I'm sure they will be very successful, but long-term it is better for our unit-holders not to have one.

Investor - What made the BreitBurn assets that you put into the MLP more appropriate for that format?

Washburn - The assets we chose to contribute to BreitBurn Energy Partners have the right qualities for an MLP. They are long-lived, have very predictable decline rates, and have a very high percentage of proved producing reserves, but enough nonproducing reserves to keep production steady or actually grow it slightly during the next few years. They are very predictable, cash-flow-generating assets.

Investor - Is the MLP format of today the same as that of 25 years ago?

Breitenbach They're really not comparable. The MLPs of the 1980s have the same name and that's about the only similarity. We have studied them and we understand why they did not work. The MLPs of the 1980s had very short-lived assets and in most cases, were encumbered with significant debt. Also, the hedging market was not as developed as it is now so there was very little commodity-price protection available.

Finally, because of the nature of the assets, managements found themselves on a treadmill and the only way they could maintain the production rate or grow it was to take on projects with higher risk profiles and, in some cases, do exploratory-type drilling.

So, there were several characteristics of the 1980s MLPs that we don't think work today, and we have none of those.

We have long-lived reserves, we're very well hedged, we will avoid excessive leverage and we won't do any exploratory drilling, only development drilling.

Investor - The assets you retained in BreitBurn Energy Co. are exploratory?

Washburn - No, they are development assets as well, but they have a lower proved-producing ratio than the assets spun out in the MLP.

Investor - How did you choose which assets to spin out?

Washburn - We had properties that weren't throwing off a lot of cash flow yet, and we had a couple of properties that are in a partnership with GE. These didn't fit the MLP at the time, but in time they will. As we more fully develop these fields they will fit quite well in the MLP, and that is important to us: We have an inventory of assets we're holding back that the MLP may be interested in acquiring over time. We have an opportunity to more than double the size of the MLP just from opportunities from BreitBurn Energy Co.

Investor - What will be the MLP's sources of growth?

Washburn - Organically through development projects, opportunities from BreitBurn Energy Co. and third-party acquisitions.

The MLP will probably make the majority of upstream acquisitions. However, the MLP and BreitBurn Energy Co. may jointly acquire some assets. For example, we might look at an acquisition that includes a field that is almost fully developed and fits perfectly in the MLP, and a field that has a lot of opportunities but is very capital-intensive. That may not fit the MLP. The MLP and BreitBurn Energy Co. have the ability to decide which properties fit well into the MLP, and which properties, requiring big capital commitments, fit better into BreitBurn Energy Co.

Investor - Will you look at asset acquisitions located throughout the Lower 48 and the Gulf of Mexico?

Washburn - Sure. We don't have anything offshore currently, but we would look at opportunities throughout the U.S. We're more driven by the type of property: we're looking for long-lived reserves, with a bias toward oil. These could be in California, the Rockies, West Texas. Many basins in the U.S. fit quite well.

Investor - Would you look outside of North America?

Washburn - Our relationship with Provident is that it has the first look outside the U.S., and we have the first look at upstream acquisitions in the U.S.

Investor - How has your relationship with Provident worked out so far?

Washburn - We sold BreitBurn to Provident in June 2004 because we really liked the Canadian trust model. By doing this IPO and by having Provident as a strategic, long-term unit-holder, we have a lot of advantages.

First, we have a parent that is of a significant size. It's a more than $2-billion-market-cap company. Having it as a strategic partner is a lot different than having a private-equity Investor - who has a position they're going to try to liquidate over time. We are Provident's primary upstream growth vehicle in the U.S.

We also are able to look at a broader spectrum of opportunities. The MLP has a first-look on U.S. upstream opportunities, but if we came upon an opportunity that fits us perfectly but is too large, we have the option to invite Provident into the deal.

We also would be able to look at a broader range of opportunities. Provident has a Canadian upstream business, a U.S. upstream business and a midstream business. We can look at opportunities in the U.S. that might include upstream and midstream. As a traditional upstream MLP, or without the Provident relationship, we probably wouldn't be competitive in those deals, but we can invite Provident in to take the midstream business. We could take the upstream business and put it into the MLP.

And, finally, we have the drop-down opportunities. BreitBurn Energy Co. is a subsidiary of Provident and has held back just over 50% of its reserves. Over time, the MLP will look to acquire many of those assets as appropriate.

The relationship with Provident, we can't talk enough about how important it is to us.

Investor - How have the proceeds from the IPO been used?

Breitenbach Primarily to pay debt and to make a distribution to Provident. The MLP's assets are not capital-intensive. The cash wasn't needed in the entity.

Investor - How has the public-company experience been?

Washburn - It has been very positive. We received tremendous support from institutional Investor - s. Our business model and experience with these assets resonated with them. People are ready for upstream MLPs. They like the asset mix. They like the strategy we have developed for BreitBurn Energy Partners.

Breitenbach We look forward to going out and continuing to discuss how we differentiate ourselves. We now have access to public currency that allows us to do deals we weren't able to do before. It's reduced our cost of capital, which makes us more competitive in the acquisition market and improves our ability to be proactive.

Investor - Were falling crude oil prices unnerving as you approached pricing?

Breitenbach We had very strong Investor - demand throughout the roadshow. Oil's sharp decline on the day of pricing was a challenge, but we got past it. We worked very hard on getting the structure of the MLP right and forming it with the best assets for the long term. Ultimately we think that won the day, despite the day being oil's worst in years.

Washburn - Part of the structuring work was taking a very strong hedging position. All of our economic models are built on oil prices being in the mid-$50s, and the strip is well above that, so we believe distributions are very secure. Oil's sharp decline the day we priced was certainly a disappointment but Investor - s recognized the strong fundamentals of our business so we were able to price the deal even in an incredibly challenging market.

Breitenbach With our hedging strategy, if there is heavy volatility in oil prices, it shouldn't affect our unit price as much as it affects our competitors'. In fact, during a commodity-price downturn, BreitBurn will be better positioned to acquire than when prices are very strong.

Investor - You've run privately held companies for more than 20 years. How do you like the public-company world?

Washburn - There are a lot of challenges, but on the whole, it is very positive. The access to capital is obviously a positive.

Investor - What is your forecast for U.S. E&P Investor - s' use of the MLP format in the future?

Washburn - We believe the MLPs will come to play a very big role in the U.S. upstream sector. The Canadian energy trusts have come to dominate that sector in just the past eight years, and we think the MLPs will do the same in the U.S.

We're excited about being in the forefront of what we believe will be a revolution in how the U.S. upstream sector is organized.

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