LRR Energy, L.P. (NYSE: LRE) ("LRR Energy") announced today its operating and financial results for the three months and year ended December 31, 2014.

Eric Mullins, Chairman and Co-Chief Executive Officer, commented, "Overall, we are pleased with our results for the fourth quarter of 2014. Our financial and operating results improved over the third quarter in part due to our Stroud acquisition that closed on October 1, 2014." Charlie Adcock, Co-Chief Executive Officer, reflected that, "Despite our strong quarter, we expect that 2015 will be challenging given the current outlook for commodity prices, which is reflected in our 2015 capital budget. Our Board of Directors approved a 2015 capital budget of $19 million, which is a 46% decrease from our 2014 capital budget of $35 million."

Selected Financial and Operating Information

A summary of selected financial and operating information follows. For consolidated financial statements for the three months and year ended December 31, 2014, please see the accompanying tables on pages 7-9.
           
Three Months Ended Year Ended
December 31, 2014 December 31, 2014
(unaudited)
(in thousands, except per unit amounts)
 
Oil, natural gas and natural gas liquids sales $ 25,676 $ 116,545
Gain (loss) on commodity derivative
instruments, net (1) $ 70,414 $ 71,235
Total revenues $ 96,104 $ 187,905
Lease operating expense $ 7,133 $ 25,821
Production and ad valorem taxes $ 1,918 $ 8,738
Impairment of oil and natural gas properties (2) $ 37,758 $ 37,758
General and administrative expense $ 2,937 $ 11,447
Interest expense $ 2,805 $ 10,472
Net income (loss) $ 31,153 $ 52,742
Net income (loss) available to unitholders $ 31,153 $ 52,742
Net income (loss) per limited partner unit $ 1.12 $ 1.94

 

(1) See commodity derivative settlements on page 6.

(2) Non-cash charge to impair the value of our proved oil and natural gas properties in the Permian Basin and the Mid-Continent regions.

 
Three Months Ended Year Ended
December 31, 2014 December 31, 2014
(unaudited)
(in thousands, except distribution coverage ratio)
 
Capital expenditures $ 6,549 $ 32,389
Adjusted EBITDA (1) $ 21,863 $ 83,385
Distributable cash flow (1) $ 13,727 $ 52,034
 
Cash distribution $ 13,978 $ 54,520
Distribution coverage ratio(1) 0.98 0.95
 

(1) Non-GAAP financial measure. See reconciliation of non-GAAP financial measures beginning on page 10.
 
Three Months Ended Year Ended
December 31, 2014 December 31, 2014
 
Average net production (Boe/d) 6,641 6,433
Average cost per Boe:
Lease operating expense $ 11.68 $ 11.00
Production and ad valorem taxes $ 3.14 $ 3.72
General and administrative expense $ 4.81 $ 4.88
 

LRR Energy's average net production for the first quarter of 2015 was approximately 6,750 Boe/d through February 28, 2015.

Proved Reserves

As of December 31, 2014, LRR Energy had 33.8 MMBoe of estimated proved reserves, of which approximately 88% were proved developed reserves. Our reserves are 52% oil and NGLs and 48% natural gas as measured by volume as of December 31, 2014. Excluding the impact of production during 2014 and reserve adds associated with the Stroud acquisition, proved reserves increased 12% compared to 2013 due to reserve additions and revisions. Production replacement through reserve additions and revisions during 2014 was 155%. The reserve estimates were calculated using the unweighted arithmetic average first-day-of-the-month closing price for each month of 2014. Commodity prices were adjusted by lease for quality, transportation fees, geographical differentials, marketing bonuses or deductions and other factors affecting the price received at the wellhead. The average trailing twelve-month index prices were $94.99/Bbl for NYMEX-WTI and $4.35/MMBtu for NYMEX-Henry Hub natural gas. For NGL pricing, a differential is applied to the $94.99/Bbl average trailing twelve-month index price for oil. As of December 31, 2014, the standardized measure of our estimated proved reserves was $441.7 million.

Recent Events

As of March 2, 2015, LRR Energy had $240 million of outstanding borrowings under its revolving credit facility and $50 million of outstanding borrowings under its term loan. LRR Energy currently has $20 million of available borrowing capacity under its revolving credit facility. Based on the current commodity price environment and our 2014 year end proved reserves, our borrowing base may be reduced below our current outstanding borrowings. We are reviewing alternatives to reduce our outstanding debt under the Credit Agreement, which may include the issuance of debt and equity and the sale of assets. Management believes cash flow from operations and the proceeds from various financing alternatives including our At-the-Market Offering Program with MLV and Co., LLC will provide the financial flexibility to execute our 2015 capital program and debt reduction.

On January 20, 2015, LRR Energy announced that the Board of Directors of its general partner declared a cash distribution for the fourth quarter of 2014 of $0.4975 per outstanding unit, or $1.99 on an annualized basis. The distribution was paid on February 13, 2015 to all unitholders of record as of the close of business on January 30, 2015. Additionally on February 13, 2015, LRR Energy converted the remaining 4,480,000 subordinated units on a one-for-one basis into common units pursuant to the terms of its partnership agreement.

2015 Guidance

Based on current estimates and outlook for commodity prices, and assuming no future acquisitions, our 2015 guidance is as follows:
        2015 Guidance
Daily Production (Boe/d) 6,350 - 6,550
 
LOE ($/Boe) $11.50 - $12.50
 
Capital Expenditures ($MM) $19.0
 

Our 2015 capital expenditure budget of $19.0 million consists entirely of maintenance capital expenditures. As with the past few years, the significant majority of our capital program will be focused in our Red Lake field within the Permian Basin. Approximately 83% and 86% of the budget is earmarked for our Red Lake Field and the Permian Basin, respectively. Approximately 12% of the budget is in the Mid-Continent, primarily for non-operated horizontal drilling in the Putnam field and the remaining 2% in the Gulf Coast region. Approximately 56% of the budget is allocated towards recompletions, 29% towards drilling and completions and the remaining 15% towards non-production related projects, which includes facility upgrades and plugging and abandonment projects. In total, we intend to participate in the drilling of 5 wells, 3 of which are LRR Energy-operated Red Lake wells, and recomplete 26 Red Lake wells during 2015.

The guidance above sets forth management's best estimate based on current and anticipated market conditions and other factors. While management believes that these estimates and assumptions are reasonable, they are inherently uncertain and are subject to, among other things, significant business, economic, regulatory, environmental and competitive risks and uncertainties that could cause actual results to differ materially from those management anticipates, as set forth under "Forward-Looking Statements."

Commodity Derivative Contracts

As of December 31, 2014, LRR Energy had the following outstanding derivative contracts.
                   
Index 2015 2016 2017 2018
Natural gas positions
Price swaps (MMBTUs) NYMEX-HH 5,500,236 5,433,888 5,045,760 2,374,800
Weighted average price $ 5.72 $ 4.29 $ 4.61 $ 4.28
 
Basis swaps (MMBTUs) NYMEX 5,326,559 2,877,047 - -
Weighted average price $ (0.1661 ) $ (0.1115 ) $ - $ -
 
Oil positions
Price swaps (BBLs) NYMEX-WTI 757,321 610,131 473,698 562,524
Weighted average price $ 93.16 $ 87.27 $ 84.34 $ 82.26
 
Basis swaps (BBLs) Argus- 397,035 - - -
Weighted average price Midland-Cushing $ (3.4087 ) $ - $ - $ -
 
NGL positions
Price swaps (BBLs) Mont Belvieu 236,149 - - -
Weighted average price $ 34.46 $ - $ - $ -
 

Annual Report

LRR Energy expects to file its Annual Report on Form 10-K with the Securities and Exchange Commission no later than March 6, 2015. The 10-K will be available on the Investor Relations page of LRR Energy's website at www.lrrenergy.com or on the Securities and Exchange Commission website at www.sec.gov.

Webcast and Conference Call

LRR Energy will host a webcast and conference call on Wednesday, March 4, 2015, at 10:00 a.m. Eastern time (9:00 a.m. Central time) to discuss these results. Interested parties are invited to participate in the call by dialing 1-877-493-8071 (conference ID: 70811704). It is recommended that participants dial in approximately 10 minutes prior to the start of the conference call. Participants may access the webcast from LRR Energy's website, www.lrrenergy.com, under the tab for "Investor Relations."

A telephonic replay will be available after the call through March 18, 2015. Participants may access this replay by dialing 1-800-585-8367 (conference ID: 70811704).

About LRR Energy, L.P.

LRR Energy is a Delaware limited partnership formed in April 2011 by affiliates of Lime Rock Resources to operate, acquire, exploit and develop producing oil and natural gas properties in North America. LRR Energy's properties are located in the Permian Basin region in West Texas and southeast New Mexico, the Mid-Continent region in Oklahoma and East Texas and the Gulf Coast region in Texas.

Forward-Looking Statements

This press release includes "forward-looking statements" — that is, statements related to future events. Forward-looking statements are based on the current expectations of LRR Energy and include any statement that does not directly relate to a current or historical fact. In this context, forward-looking statements often address expected future business, operational and financial performance, and often contain words such as "may," "predict," "pursue," "expect," "estimate," "project," "plan," "believe," "intend," "achievable," "anticipate," "target," "continue," "potential," "should," "could" and other similar words. Forward-looking statements involve certain risks and uncertainties, and ultimately may not prove to be accurate. These risks and uncertainties include, among other things, the risk that oil, natural gas or NGL prices will remain at current levels for a prolonged period or decline further, the risk and uncertainties involved in producing oil and natural gas, competition in the oil and natural gas industry, governmental regulations and other factors. Actual results and future events could differ materially from those anticipated or implied in the forward-looking statements due to the factors described under the captions "Risk Factors" in LRR Energy's Annual Report on Form 10-K for the year ended December 31, 2013 and LRR Energy's subsequent filings with the SEC. All forward-looking statements speak only as of the date of this press release. LRR Energy does not intend to update or revise any forward-looking statements as a result of new information, future events or otherwise. All forward-looking statements are qualified in their entirety by this cautionary statement.
   

LRR Energy, L.P.

Selected Operating & Financial Data

(unaudited)
 
Three Months Ended December 31, Year Ended December 31,
2014   2013 2014   2013
 
Production:
Oil (MBbls) 251 223 904 837
Natural gas (MMcf) 1,570 1,746 6,467 7,246
NGLs (MBbls)   98   86   366   315
Total (MBoe) 611 600 2,348 2,360
Average net production (Boe/d) 6,641 6,522 6,433 6,466
 
Average sales price:
Oil (per Bbl)
Sales price $ 67.31 $ 91.78 $ 84.80 $ 92.21

Effect of settled commodity derivative instruments
  19.47   (1.16 )   5.10   (2.45 )
Realized price $ 86.78 $ 90.62 $ 89.90 $ 89.76
Natural gas (per Mcf)
Sales price $ 4.02 $ 3.69 $ 4.41 $ 3.70

Effect of settled commodity derivative instruments
  1.46   1.55   0.97   1.44
Realized price $ 5.48 $ 5.24 $ 5.38 $ 5.14
NGLs (per Bbl)
Sales price $ 25.17 $ 34.67 $ 31.04 $ 32.21

Effect of settled commodity derivative instruments
  5.57   1.94   0.11   4.08
Realized price $ 30.74 $ 36.61 $ 31.15 $ 36.29
 
Average cost per Boe:
Lease operating expenses $ 11.68 $ 12.21 $ 11.00 $ 10.76
Production and ad valorem taxes 3.14 3.56 3.72 3.65
Depletion and depreciation 17.81 22.75 15.64 18.40

General and administrative expenses
4.81 5.17 4.88 5.07
 

Derivative instrument settlements and amortization (in thousands):
Commodity $ 7,717 $ 2,612 $ 10,948 $ 9,661
Interest rate $ (205 ) $ (191 ) $ (847 ) $ (727 )
 
   

LRR Energy, L.P.

Consolidated Condensed Statement of Operations

(in thousands, except per unit amounts)

(unaudited)
 
Three Months Ended December 31, Year Ended December 31,
2014   2013 2014   2013
Revenues:
Oil sales $ 16,894 $ 20,467 $ 76,662 $ 77,181
Natural gas sales 6,315 6,436 28,521 26,800
Natural gas liquids sales 2,467 2,982 11,362 10,147

Gain (loss) on commodity derivative instruments, net
70,414 776 71,235 781
Other income   14   80   125   186
Total revenues 96,104 30,741 187,905 115,095
 
Operating expenses:
Lease operating expense 7,133 7,325 25,821 25,397
Production and ad valorem taxes 1,918 2,136 8,738 8,614
Depletion and depreciation 10,873 13,648 36,729 43,420

Impairment of oil and natural gas properties
37,758 63,663 37,758 63,663
Accretion expense 539 491 2,071 1,924

Loss (gain) on settlement of asset retirement obligations
80 24 151 358
General and administrative expense   2,937   3,099   11,447   11,965
Total operating expenses 61,238 90,386 122,715 155,341
 
Operating income (loss) 34,866 (59,645 ) 65,190 (40,246 )
 
Other income (expense), net
Interest expense (2,805 ) (2,372 ) (10,472 ) (9,235 )

Gain (loss) on interest rate derivative instruments, net
  (860 )   (115 )   (1,790 )   1,256
Other income (expense), net   (3,665 )   (2,487 )   (12,262 )   (7,979 )
 
Income (loss) before taxes 31,201 (62,132 ) 52,928 (48,225 )
Income tax expense   (48 )   46   (186 )   (56 )
Net income (loss) $ 31,153 $ (62,086 ) $ 52,742 $ (48,281 )

Net income (loss) attributable to common control operations
  -   -   -   (448 )

Net income (loss) available to unitholders
$ 31,153 $ (62,086 ) $ 52,742 $ (48,729 )
 

Computation of net income (loss) per limited partner unit:
 

General partners' interest in net Income (loss)
$ 31 $ (62 ) $ 53 $ (49 )
 

Limited partners' interest in net Income (loss)
$ 31,122 $ (62,024 ) $ 52,689 $ (48,680 )
 

Net income (loss) per limited partner unit (basic and diluted)
$ 1.12 $ (2.37 ) $ 1.94 $ (1.92 )
 

Weighted average number of limited partner units outstanding (basic and diluted)
27,791 26,183 27,092 25,372
 
 

LRR Energy, L.P.

Consolidated Condensed Statement of Cash Flows

(in thousands)

(unaudited)
 
Year Ended December 31,
2014   2013
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 52,742 $ (48,281 )

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depletion and depreciation 36,729 43,420
Impairment of oil and natural gas properties 37,758 63,663
Accretion expense 2,071 1,924
Amortization of equity awards 1,081 549
Amortization of derivative contracts 692 1,002
Amortization of deferred financing costs and other 485 394
Loss (gain) on settlement of asset retirement obligations 151 358
Purchase of derivative contracts - -
Changes in operating assets and liabilities:
Change in receivables (1,257 ) (2,617 )
Change in prepaid expenses (532 ) (855 )
Change in derivative assets and liabilities (59,344 ) 6,897
Change in amounts due to/from affiliates (5,952 ) (1,722 )
Change in accrued liabilities 3,206 885
Change in deferred tax liabilities   55 (76 )
Net cash provided by (used in) operating activities 67,885 65,541
 
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of oil and natural gas properties (37,616 ) -
Development of oil and natural gas properties (32,389 ) (35,805 )
Disposition of oil and natural gas properties   55 -
Net cash provided by (used in) investing activities (69,950 ) (35,805 )
 
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under revolving credit facility 68,000 60,000
Principal payments on revolving credit facility (38,000 ) (38,000 )
Equity offering, net of expenses 25,984 59,513
Distributions (53,428 ) (48,893 )
Deferred financing costs (1,332 ) -
Distribution to Lime Rock Resources - (60,672 )
Contribution to Lime Rock Resources   - (734 )
Net cash provided by (used in) financing activities 1,224 (28,786 )
 
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (841 ) 950
 
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD   4,417 3,467
 
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,576 $ 4,417
 

Supplemental disclosure of non-cash items to reconcile investing and financing activities
Property and equipment:
Change in accrued capital costs $ 6,483 $ 1,663
Asset retirement obligations (440 ) (476 )
   

LRR Energy, L.P.

Consolidated Condensed Balance Sheet

(in thousands, except unit amounts)

(unaudited)
 
  December 31, 2014   December 31, 2013
ASSETS
Current assets:
Cash and cash equivalents $ 3,576 $ 4,417
Accounts receivable 11,124 9,867
Commodity derivative instruments 45,924 9,726
Due from affiliates 5,697 -
Prepaid expenses   1,840   1,603
Total current assets 68,161 25,613
Property and equipment (successful efforts method) 956,326 876,674
Accumulated depletion, depreciation and impairment   (506,368 )   (431,837 )
Total property and equipment, net 449,958 444,837
Commodity derivative instruments 38,540 16,746
Deferred financing costs, net of accumulated amortization and other   2,295   1,154
TOTAL ASSETS $ 558,954 $ 488,350
LIABILITIES AND UNITHOLDERS' EQUITY
Current liabilities:
Accrued liabilities $ 5,506 $ 2,300
Accrued capital cost 9,176 2,574
Due to affiliates - 255
Commodity derivative instruments 556 2,217
Interest rate derivative instruments 2,327 648
Asset retirement obligations   1,065   488
Total current liabilities 18,630 8,482
Long-term liabilities:
Commodity derivative instruments 232 174
Interest rate derivative instruments 817 1,554
Term loan 50,000 50,000
Revolving credit facility 230,000 200,000
Asset retirement obligations 40,539 35,838
Deferred tax liabilities   99   44
Total long-term liabilities 321,687 287,610
Total liabilities 340,317 296,092
Unitholders' equity:

 

General partner (22,400 units issued and outstanding as of December 31, 2014 and December 31, 2013)
310 303

Public common unitholders (19,492,291 units issued and outstanding as of December 31, 2014 and 17,710,334 units issued and outstanding as of December 31, 2013)
208,273 181,290

Affiliated common unitholders (4,089,600 units issued and outstanding as of December 31, 2014 and 1,849,600 units issued and outstanding as of December 31, 2013)
4,643 2,093

Subordinated unitholders (4,480,000 units issued and outstanding as of December 31, 2014 and 6,720,000 units issued and outstanding as of December 31, 2013)
  5,411   8,572
Total unitholders' equity   218,637   192,258
TOTAL LIABILITIES AND UNITHOLDERS' EQUITY $ 558,954 $ 488,350
 

LRR Energy, L.P. Non-GAAP Reconciliation (in thousands) (unaudited)

LRR Energy defines Adjusted EBITDA as net income (loss) plus or minus income tax expense; interest expense-net, including loss (gain) on interest rate derivative instruments, net; depletion and depreciation; accretion of asset retirement obligations; amortization of equity awards; loss (gain) on settlement of asset retirement obligations; loss (gain) on commodity derivative instruments, net; commodity derivative instrument net cash settlements; impairment of oil and natural gas properties; and other non-recurring items that LRR Energy deems appropriate.

Adjusted EBITDA is used as a supplemental financial measure by LRR Energy's management and by external users of its financial statements, such as investors, commercial banks, research analysts and others, to assess LRR Energy's financial performance as compared to that of other companies and partnerships in the industry, without regard to financing methods, capital structure or historical cost basis.

Distributable Cash Flow is defined as Adjusted EBITDA less cash income tax expense; cash interest expense; and estimated maintenance capital. Distribution Coverage Ratio is defined as the ratio of Distributable Cash Flow to the total quarterly distribution payable on all of LRR Energy's outstanding common, subordinated and general partner units.

Distributable Cash Flow and the Distribution Coverage Ratio are used as supplemental financial measures by LRR Energy's management and by external users of its financial statements, such as investors, commercial banks, research analysts and others to compare basic cash flows generated by LRR Energy (prior to the establishment of any retained cash reserve by its general partner) to the cash distributions it expects to pay its unitholders. Distributable Cash Flow and the Distribution Coverage Ratio are also important financial measures for LRR Energy's unitholders as they serve as indicators of its success in providing a cash return on investment. Specifically, these metrics indicate to investors whether or not LRR Energy is generating cash flow at a level that can sustain or support an increase in its quarterly distribution rates. Distributable Cash Flow and the Distribution Coverage Ratio are quantitative standards used throughout the investment community with respect to publicly traded partnerships and limited liability companies because the yield is based on the amount of cash distributions the entity pays to a unitholder compared to the unit price.

LRR Energy's management believes that Adjusted EBITDA, Distributable Cash Flow and the Distribution Coverage Ratio are useful to investors because these measures are used by many partnerships in the industry as measures of operating and financial performance and are commonly employed by financial analysts and others to evaluate its operating and financial performance from period to period and to compare it with the performance of other publicly traded partnerships within the industry. Adjusted EBITDA, Distributable Cash Flow and the Distribution Coverage Ratio should not be considered alternatives to net income, operating income or any other measures of financial performance presented in accordance with GAAP. LRR Energy's Adjusted EBITDA, Distributable Cash Flow and Distribution Coverage Ratio may not be comparable to similarly titled measures of another company because all companies may not calculate Adjusted EBITDA, Distributable Cash Flow or the Distribution Coverage Ratio in the same manner. The following table presents a reconciliation of Adjusted EBITDA, Distributable Cash Flow and Distribution Coverage Ratio to net income (loss), LRR Energy's most directly comparable GAAP financial performance measure, for the three months and years ended December 31, 2014 and 2013.
   

LRR Energy, L.P.

Non-GAAP Reconciliation

(continued)

(in thousands)

(unaudited)
 
Three Months Ended December 31, Year Ended December 31,
2014   2013 2014   2013
 
Net (loss) income $ 31,153 $ (62,086 ) $ 52,742 $ (48,281 )
Income tax expense 48 (46 ) 186 56

Interest expense-net, including loss (gain) on interest rate derivative instruments, net
3,665 2,487 12,262 7,979
Depletion and depreciation 10,873 13,648 36,729 43,420

Accretion of asset retirement obligations
539 491 2,071 1,924
Amortization of equity awards 262 158 1,081 549

Loss (gain) on settlement of asset retirement obligations
80 24 151 358

Loss (gain) on commodity derivative instruments, net
(70,414 ) (776 ) (71,235 ) (781 )

Commodity derivative instrument net cash settlements
7,899 2,868 11,640 10,663

Impairment of oil and natural gas properties
  37,758   63,663   37,758   63,663
Adjusted EBITDA $ 21,863 $ 20,431 $ 83,385 $ 79,550
 
Adjusted EBITDA 21,863 20,431 83,385 79,550
Cash income tax expense (49 ) (24 ) (146 ) (132 )
Cash interest expense (2,787 ) (2,459 ) (10,905 ) (9,513 )
Estimated maintenance capital (1)   (5,300 )   (5,075 )   (20,300 )   (20,300 )
Distributable cash flow $ 13,727 $ 12,873 $ 52,034 $ 49,605
 
 
Cash distribution $ 13,978 $ 12,884 $ 54,520 $ 50,992
Distribution coverage ratio 0.98 1.00 0.95 0.97
 
       

(1)
 

Estimated maintenance capital expenditures as defined by our partnership agreement represent our estimate of the amount of capital required on average per year to maintain our production over the long term.

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