BreitBurn co-CEOs Randy Breitenbach (left) and Hal Washburn crafted an unlikely half-cash/half-equity purchase
of Quicksilver’s Antrim shale assets that would propel the company into the MLP top tier.

Even before its IPO in October 2006, co-founders Hal Washburn and Randall Breitenbach of BreitBurn Energy Partners LP were scoping for potential acquisition targets in Michigan’s Antrim shale for their new E&P master limited partnership (MLP). These maturing assets of the organic-growth-focused Quicksilver Resources Inc., the Antrim’s biggest gas producer, looked ripe for an MLP.


“Since we started planning for an MLP, we were looking at areas we thought fit the model—long-lived reserves with the ability to grow production,” says Washburn, BreitBurn co-chief executive. “We had identified the Antrim shale as assets that made sense for the MLP.”


At its IPO, BreitBurn’s assets were weighted 98% oil, primarily in the Los Angeles Basin of California and the Wind River and Big Horn basins in Wyoming, with proved reserves of 30 million barrels of oil equivalent (BOE). Three acquisitions in early 2007 added about 18 million BOE of additional reserves in Texas, Florida and California.


The heavy gas component of the Antrim assets further lured oil-oriented Los Angeles-based BreitBurn.


“We wanted some diversification in our commodity mix, so we were looking at gas-weighted transactions,” says Washburn.
Fort Worth-based Quicksilver, meanwhile, was considering monetizing its Antrim holdings to fund drilling in its new focus area, the Barnett shale. Beginning in the early 1990s, company founders Toby and Glenn Darden developed the assets in Michigan, along with geologically similar properties in the New Albany shale in Indiana and Kentucky, through drilling and acquisitions. When Quicksilver went public in 1999, these properties represented 80% of the portfolio.


“There’s a big soft spot in our hearts for these Michigan assets because they were the foundation of our public company,” says Glenn Darden, Quicksilver president and CEO. That affection ultimately shaped the sale.


Quicksilver had captured a large acreage position in the Barnett and was ready to develop it, Darden says. “We saw multiple years of growth in the Barnett ahead of us.”


Quicksilver had looked at several ways to monetize the Antrim and New Albany assets, including dropping them into an MLP, a hot spin-off option in early 2007. The growth of the properties had crested and began to decline, although a long reserve life left plenty of resource to harvest. Like BreitBurn saw independently, Darden says, “We felt the Michigan assets were ideal for an MLP-type structure.”


At that time the MLP space was heating up and, even though the company had recently launched a midstream MLP of its Barnett gas-gathering assets, “we didn’t really want to run a separate, E&P MLP,” admits Darden.


Offering the properties to an existing upstream MLP was a logical choice. Several players had shown interest, including BreitBurn, which first contacted Quicksilver in the spring of 2007 through investment banker Credit Suisse. Quicksilver hired JPMorgan Securities to hold a limited auction. Quicksilver believed its prized Michigan and New Albany assets were undervalued by the marketplace, despite the recent sale of DTE Gas & Oil Co.’s Antrim assets to Atlas Energy Resources LLC for $1.23 billion, which many say was 35% more than the No. 2 bid.


“That set a pretty high marker for Michigan assets. We felt like the market was right to monetize.”


Yet it wasn’t the offer of $1.45 billion for the Quicksilver assets that sealed the deal for BreitBurn. It was the structure. And the deal that transpired would transform both companies.

Buying on synergy
In a split-funded transaction, BreitBurn paid $750 million in cash and some $704.5 million in units for the Quicksilver package. “Quicksilver’s willingness to take units and to make a significant investment in BreitBurn Energy Partners was really what made this transaction possible,” says Washburn. “It would have been very difficult, if not impossible, to do an all-cash transaction at that time.”

Quicksilver's 548 billion cubic feet equivalent in gas-weighted reserves righted BreitBurn's virtual all-oil weighting to a balanced near-60% gas portfolio.

Hedge-fund investments in PIPEs (private investments in public equity) had retreated at the time, and PIPEs had been a major source of funding of upstream MLP acquisitions in the first half of 2007.


The cash component BreitBurn was offering was enough to meet Quicksilver’s cash needs to develop its high-quality Barnett acreage. “That was a motivation to fund our capital program for the public company in our higher-growth area,” says Darden.
Quicksilver received 21.348 million units and immediately became BreitBurn’s largest shareholder with 31.9%, maintaining a significant ownership interest in assets they knew very well. The first 50% of the units are locked up for the first year, with the balance locked up for another six months.


“This was a creative way to monetize those assets and still have participation, but to get the liquidity we needed to fund our (Barnett) capital program,” says Darden. “We couldn’t put all (the total package value of) that cash to work at that time, so this was a good solution.


“We still have participation going forward in a big set of assets and a big supply of natural gas. We supplement that with some exposure to oil (via a stake in BreitBurn’s portfolio), which we didn’t have. It also gives us flexibility in terms of whether we should monetize or maintain.”


He feels no pressure to liquidate and will make that decision based on capital needs and the market, he adds.


The structure proved tax efficient for Quicksilver as well. “It turned into a very tax-efficient structure for us to take units as part of the consideration. And because our assets are 60% of the total portfolio there, we know what kind of cash flow they are going to kick off.”


The fact that BreitBurn’s MLP structure provides no incentive distribution rights (IDRs) to the general partner was another attraction. “Everyone is treated the same in terms of distribution. As a limited partner, that was important. We get the same distribution as the general partner,” Darden says. At deal closing, Quicksilver projected its distributions would be $50 million a year, with the prospect of increasing.


For the cash portion of the deal, BreitBurn tapped the PIPE market, selling 16.67 million common units for $450 million, or almost 75% more units than it had outstanding.


“There was a lot of institutional support for this transaction,” says Washburn. “While it certainly wasn’t easy, we were able to raise the PIPE funding and raise it from a quality group. We’ve added 23 institutional investors to our investor base, so we’ve got a much broader distribution of our units.”


The PIPE transaction was led by Lehman Brothers and Citi and involved support from large shareholders including Lehman’s MLP Fund and Kayne Anderson, which had bought in BreitBurn’s first two PIPE offerings. “We had a large roster of investors in the PIPE,” he says.


And maybe just in time. Randy Breitenbach, BreitBurn co-CEO, says, “The markets got pretty tough. Because of the sub-prime (capital) market blow-up, access to both the PIPE markets as well as the debt markets was getting tight.” It was not likely that they could have done the deal a few months later, he says, and the deal was the last large PIPE transaction of 2007.


The remainder of the cash portion was funded with $300 million borrowed under a $700-million amended and restated senior credit facility underwritten by Wells Fargo Bank and Credit Suisse.

Growth spurt
With the transaction, BreitBurn more than doubled in size. Proved reserves increased from 289 billion cubic feet equivalent (Bcfe) to 819 billion. Daily production jumped from 46 million cubic feet equivalent to 115 million. In the upstream MLP space, BreitBurn instantly joined the top tier with a market cap of more than $2 billion.


The 76 million cubic feet of added daily BreitBurn production represented 38% of Quicksilver’s total production. The 548 Bcfe in proved reserves, weighted 95% gas, shifted BreitBurn from almost all oil to 60% gas. The Michigan assets included substantial Antrim shale growth opportunities and extensive non-Antrim development opportunities.


The most influential factor in the deal may have been BreitBurn’s desire to keep the entire operating and technical team in place. Where other bidders already had assets and teams in place locally, BreitBurn had no existing footprint in the play and needed the Quicksilver people in place to run the assets.


“One of the most important parts of the transaction for us was that we got the Quicksilver team,” says Washburn. “We think they are the strongest operational and technical team in Michigan.”


Darden says, “That was certainly a consideration in selecting BreitBurn. Providing security to our employees was very important to us. We were looking to protect our people.”


BreitBurn made offers to each of the 144 Michigan team members, and when the deal closed, 143 had accepted the offers; one retired. Washburn says, “The Darden brothers are first-rate gentlemen. They built this team over many years and wanted to make sure these employees were treated properly.”


One of the side benefits of acquiring the Quicksilver shale team is BreitBurn’s advantage in expertise in gas-resource plays. “This will allow us to look at other opportunities that we may not have felt comfortable with as a company focused so heavily on oil,” says Washburn.


The deal came with the acquisition of Quicksilver’s Michigan midstream business—a significant part of the transaction as well. BreitBurn picked up all of Quicksilver’s gas-gathering and -processing systems in Michigan, Indiana and Kentucky. “That sometimes gets lost when we just talk about reserves and production.”


BreitBurn acquired more than 1,000 miles of low-pressure gathering systems, almost 300 miles of high-pressure transportation, transmission and gathering lines, more than 114,000 horsepower of compression and seven gas plants.


The upside? “We have a significant infrastructure.” The benefits include lower net production cost because it is an integrated system, the opportunity to add acreage in an area where the system is in place at a lower cost and with a competitive advantage, and to acquire competitors that don’t have that infrastructure in place.


With the volatility in the financial markets, Breitenbach places a high value on the upside potential of the assets. “Accessing capital for acquisitions will be difficult at least in the foreseeable future,” he says.


“This gives us the additional flexibility to be able to target our growth through organic means. That will allow us to continue to grow without having to access the acquisitions and the capital markets.”


For Quicksilver, the deal streamlined the company by focusing operations and management on high-growth areas, while retaining an equity interest in the sold assets. For BreitBurn, the transaction was game changing, more than doubling its footprint and providing flexibility to pursue larger acquisitions not possible before.


Says Washburn, “The way we structured the deal, we were able to mitigate most of the risk. As we’ve gotten further into the transaction, we’ve found that the assets and the team are better than we thought they were going to be. We’re extremely pleased with the transaction.”


And because of the ownership relationship with Quicksilver, Washburn and Breitenbach foresee a day when Barnett shale assets further down the decline curve “could fit into the MLP quite well.”

Comments