Pioneer Southwest Energy Partners L.P. (“Pioneer Southwest” or “the Partnership”) (NYSE:PSE) today announced financial and operating results for the quarter ended June 30, 2012.
Pioneer Southwest reported second quarter net income of $65 million, or $1.82 per common unit. Net income for the second quarter included unrealized mark-to-market derivative gains of $48 million, or $1.35 per common unit. Without the effect of this item, adjusted income for the second quarter was $17 million, or $0.47 per common unit. Cash flow from operations for the second quarter was $27 million.
Oil and gas sales for the second quarter averaged 7,103 barrels oil equivalent per day (BOEPD). The Partnership’s production guidance for the quarter was 7,400 BOEPD to 7,900 BOEPD. Production from the Spraberry field in West Texas was negatively impacted by approximately 530 BOEPD due to unplanned third-party natural gas liquids (NGL) fractionation downtime and tight industry NGL fractionation capacity at Mont Belvieu, Texas, as described below. Had these third-party processing issues not occurred during the second quarter and all of Pioneer Southwest’s NGL volumes could have been fractionated and sold, the Partnership’s production would have been approximately 7,630 BOEPD.
- The Spraberry field produces oil and associated liquids-rich gas. The gas includes NGLs, which are separated at the Midkiff/Benedum and Sale Ranch gas processing facilities in West Texas. These NGLs are then transported to third-party fractionation facilities at Mont Belvieu. During May, a significant third-party facility was shut down for planned maintenance. When it came back on line in late May, it had operating problems and was not able to achieve its pre-shutdown fractionation capacity. As a result of this problem and tight fractionation capacity across the Mont Belvieu complex, Pioneer Southwest built an NGL inventory of 28 thousand barrels that could not be processed for sale in June, thereby negatively impacting production for the second quarter by approximately 310 BOEPD. Within the next month, the fractionation facility is expected to increase processing rates to its pre-shutdown processing capacity, thereby allowing Pioneer Southwest’s NGL inventory and ongoing production to be fractionated and sold over the remainder of 2012. Based on the Partnership’s second quarter NGL price realization per barrel, the NGL inventory has a sales value of approximately $850 thousand.
- The Midkiff/Benedum gas processing plants were also forced to reject ethane into the residue gas stream during the second quarter as a result of tight NGL fractionation capacity at Mont Belvieu. The net impact of rejecting ethane was primarily a loss in production of approximately 220 BOEPD. Ethane rejection continues and is expected to impact Pioneer Southwest’s production over the remainder of 2012 based on the outlook for continuing tight fractionation capacity at Mont Belvieu. Due to low ethane prices, there is not a significant economic impact associated with rejecting ethane versus selling it. Pioneer Southwest estimates that its revenues are lower as a result of rejecting ethane by approximately $2 thousand per day at current gas and NGL prices.
The Partnership’s three-rig drilling program continued during the second quarter, with nine new wells being placed on production. At the end of the quarter, the Partnership had seven wells awaiting completion and three wells being drilled. The Partnership has a large inventory of remaining oil drilling locations in the Spraberry field, with approximately 85 40-acre locations and 1,200 20-acre locations. The 2012 capital program is expected to result in 50 wells to 55 wells being drilled or recompleted during the year. Essentially all of the wells drilled will be deepened to the Strawn formation, and 35% of the planned wells will also be deepened to the Atoka formation. Production data from current Strawn completions supports the addition of an incremental 30 thousand barrels oil equivalent (MBOE) of estimated ultimate recovery (EUR) for wells completed in this interval. Completions in the Atoka interval are estimated to add an incremental 50 MBOE to 70 MBOE of EUR. Approximately 85% and 70% of the Partnership’s acreage position has Strawn and Atoka potential, respectively.