Pioneer Southwest Energy's CEO Discusses Q2 2012 Results - Earnings Call Transcript

Pioneer Southwest Energy Partners L.P. (PSE)

Q2 2012 Earnings Call

August 01, 2012 12:00 pm ET

Executives

Scott Sheffield - Chairman and CEO

Rich Dealy - EVP and CFO

Frank Hopkins - SVP, IR

Analysts

Praneeth Satish - Wells Fargo

Jeff Strauss - Windover Capital

Aaron Terry - Kayne Anderson

John Razzano - RBC Capital Markets

Kevin Smith - Raymond James

Michael Peterson - MLV & Company

Presentation

Operator

Welcome to Pioneer Southwest Energy's second quarter conference call. Joining us today will be Scott Sheffield, Chairman and Chief Executive Officer; Rich Dealy, Executive Vice President and Chief Financial Officer; and Frank Hopkins, Senior Vice President of Investor Relations.

Pioneer Southwest has prepared PowerPoint slides to supplement their comments today. These slides can be accessed over the internet at www.pioneersouthwest.com. Again, the internet site to access the slides related to today's call is www.pioneersouthwest.com. At the website select Investor then select Investor Presentations.

The partnership's comments today will include forward-looking statements made pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. These statements and the business prospects of Pioneer Southwest are subject to a number of risks and uncertainties that may cause actual results in future periods to differ materially from the forward-looking statements. These risks and uncertainties are described in Pioneer Southwest's news release on Page 2 of the slide presentation and in Pioneer Southwest's public filings made with the Securities and Exchange Commission.

At this time, for opening remarks, I would like to turn the call over to Pioneer Southwest's, Senior Vice President of Investor Relations, Frank Hopkins.

Frank Hopkins

Good day everyone, and thank you for joining us. Let me briefly review the agenda for today's call. Scott will be the first speaker. He'll review the financial and operating highlights for the second quarter and update you on PSE's drilling program in the Spraberry field. Rich will then cover the second quarter financials in more detail and provide earnings guidance for the third quarter. After that, we'll open up the call for your questions.

With that, I'll turn the call over to Scott.

Scott Sheffield

Thanks, Frank. Good morning or good afternoon for some. Slide number 3 on highlights. We had second quarter adjusted income of $17 million or $0.47 per unit. That does exclude our mark-to-market derivative gain of $48 million or $1.35 per common unit.

Production average a little over 7,100 barrels a day equivalent. It's down 7% versus the first quarter, reflecting primary reasons deferral by 300 barrels a day, due to unexpected NGL inventory built from unplanned third-party at Mont Belvieu, where the NGLs are fractionated. We expect to sell that inventory volumes over the reminder of 2012.

In addition, we had a loss of 220 barrels a day equivalent and result of the tight NGL fractionation capacity at Mont Belvieu. But we expect ethane rejection will continue for the remainder of the year.

But our nine wells placed on production during the second quarter, 23 wells year-to-date. Seven additional wells were awaiting completion. We continue to see great benefit from drilling deeper to the Lower Wolfcamp, Strawn and Atoka intervals in the program.

We expect to generate full year production growth about 8% compared to '11. Adjusted the guidance obviously reflects the impact of the expected ethane rejection for the remainder of the year.

Cash flow from operations of $27 million. With a distribution of $0.52 per unit for the second quarter, payable on August 9, as a record date of August 2. That equates to $2.08 per common unit on an annualized basis.

Going to Slide number 4, comment on our drilling program. We expect to drill somewhere between 50 to 55 wells and recomplete those wells. The three rig drilling program expect to spend somewhere between $110 million to $120 million.

We expect to drill almost all of our wells. We'll be going to the Strawn formation. We increased our acreage up from 60% to 85% of the acreage position as Strawn potential with approximately about 30,000 barrels of oil equivalent.

And then, 35% of our 2012 wells are expected to be drilled to the deeper Atoka interval. We've increased our acreage there for the potential of the MLP from 40% up to 70% of the acreages at Atoka potential. A typical Atoka well will add somewhere between 50,000 to 70,000 barrels of oil equivalent to our total EUR.

In addition, we've drilled four 20 acre spaced wells on production, four 20-acre in-field wells. The results are very similar to a 40-acre well for Lower Wolfcamp with the EUR of 140,000 barrels of oil equivalent. We'll drill three more between now and end of the year. Total inventory of 85 40-acre locations, over 1,200 20-acre locations, with current well cost of about $1.9 million.

Let me turn it over to Rich to talks about the earnings.

Rich Dealy

Thanks, Scott. I'm going to start on Slide 5. As Scott mentioned, net income of $65 million or $1.82 per common unit did include unrealized mark-to-market derivative gains of $48 million or $1.35, so adjusted $17 million or $0.47 per unit.

Now, looking at the bottom of Slide 5. Our Q2 results versus Q2 guidance, Scott talked about productions, so I'll pass over that. And production cost at $23.34. This is because of the ethane rejection $0.70 higher than it would have been without ethane rejection.

So that would have been around $22.64 per BOE. It does also include our estimate of ad valorem taxes being little bit higher in 2012, though 2011 just as they're based on 2011 commodity prices. The other items enlist on this page are all within the guidance range and what we would have expected going into the quarter.

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