LRR Energy, L.P. Announces Second Quarter 2015 Results

LRR Energy, L.P. (NYSE: LRE) ("LRR Energy") announced today its operating and financial results for the three and six months ended June 30, 2015.

Selected Financial and Operating Information

A summary of selected financial and operating information follows. For consolidated financial statements for the three and six months ended June 30, 2015, please see the accompanying tables on pages 7-9.
 
      Three Months Ended   Six Months Ended
  June 30, 2015 June 30, 2015
(unaudited)
(in thousands, except distribution coverage ratio)
 
Oil, natural gas and natural gas liquids sales $ 19,608 $ 37,109
Gain (loss) on commodity derivative
instruments, net (1) $ (8,927 ) $ 9,755
Total revenues $ 10,707 $ 46,919
Lease operating expense $ 6,008 $ 12,780
Production and ad valorem taxes $ 1,482 $ 2,748
General and administrative expense $ 12,673 $ 16,464
Interest expense $ 3,120 $ 5,889
Net income (loss) available to unitholders $ (22,314 ) $ (47,250 )
Net income (loss) per limited partner unit $ (0.52 ) $ (1.35 )
 
Capital expenditures $ 5,096 $ 17,376
Adjusted EBITDA (2) $ 20,454 $ 40,169
Distributable cash flow (2) $ 11,962 $ 23,946
 
Cash distribution $ 5,268 $ 10,536
Distribution coverage ratio (2) 2.27x 2.27x

(1) See commodity derivative settlements on page 6. (2) Non-GAAP financial measure. See reconciliation of non-GAAP financial measures beginning on page 10.
       
Three Months Ended Six Months Ended
  June 30, 2015 June 30, 2015
 
Average net production (Boe/d) 6,747 6,807
Average cost per Boe:
Lease operating expense $ 9.79 $ 10.37
Production and ad valorem taxes $ 2.41 $ 2.23
General and administrative expense $ 20.64 $ 13.36
 

LRR Energy's average net production for July 2015 was approximately 6,900 Boe/d through July 24, 2015.

Recent Events

As of July 29, 2015, LRR Energy had $235 million of outstanding borrowings under its revolving credit facility and $50 million of outstanding borrowings under its term loan. LRR Energy currently has $8 million of available borrowing capacity under its revolving credit facility and $11 million of cash on hand.

LRR Energy previously announced that the board of directors of its general partner declared a cash distribution for the second quarter of 2015 of $0.1875 per outstanding unit, or $0.75 on an annualized basis. The distribution will be paid on August 14, 2015 to all unitholders of record as of the close of business on July 31, 2015.

Additionally, LRR Energy previously announced that the special meeting of unitholders to approve its merger (the "Merger") with Vanguard Natural Resources, LLC ("Vanguard") is scheduled to occur on September 10, 2015. LRR Energy's unitholders of record at the close of business on July 24, 2015 will be entitled to receive notice of the special meeting and vote at the special meeting. LRR Energy expects the Merger to close in the third quarter of 2015.

Commodity Derivative Contracts

As of June 30, 2015, LRR Energy had the following outstanding derivative contracts.
               
Index 2015 2016 2017 2018
Natural gas positions
Price swaps (MMBtu) NYMEX-HH 2,688,648 5,433,888 5,045,760 3,452,172
Weighted average price $ 5.75 $ 4.29 $ 4.61 $ 4.05
 
Basis swaps (MMBtu)

(1)
2,601,807 2,877,047 - -
Weighted average price $ (0.1666 ) $ (0.1115 ) $ - $ -
 
Oil positions
Price swaps (Bbl) NYMEX-WTI 360,683 610,131 473,698 562,524
Weighted average price $ 93.42 $ 87.27 $ 84.34 $ 82.26
 
Basis swaps (Bbl) Argus- 187,000 364,800 - -
Weighted average price Midland-Cushing $ (3.2500 ) $ (1.0500 ) $ - $ -
 
NGL positions
Price swaps (Bbl) Mont Belvieu 112,877 - - -
Weighted average price $ 34.45 $ - $ - $ -

(1) Our natural gas basis swaps are traded on the following indices: Centerpoint East, Houston Ship Channel, WAHA and TEXOK.

Quarterly Report on Form 10-Q

LRR Energy expects to file its Quarterly Report on Form 10-Q (the "10-Q") with the Securities and Exchange Commission (the "SEC") no later than August 10, 2015. The 10-Q will be available on the Investor Relations page of LRR Energy's website www.lrrenergy.com or from the SEC website www.sec.gov.

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.

Important Information and Where to Find It

In connection with the Merger, Vanguard filed with the SEC a preliminary Registration Statement on Form S-4 that includes a preliminary proxy statement of LRR Energy that also constitutes a preliminary prospectus of Vanguard. A definitive proxy statement/prospectus will be sent to security holders of LRR Energy seeking their approval with respect to the proposed merger. Vanguard and LRR Energy also plan to file other documents with the SEC regarding the proposed transaction. INVESTORS AND SECURITY HOLDERS ARE URGED TO CAREFULLY READ THE PROXY STATEMENT/PROSPECTUS AND OTHER DOCUMENTS FILED WITH THE SEC WHEN THEY BECOME AVAILABLE, BECAUSE THEY WILL CONTAIN IMPORTANT INFORMATION. Investors and security holders will be able to obtain a free copy of the proxy statement/prospectus (if and when it becomes available) and other documents filed by Vanguard and LRR Energy with the SEC through the website maintained by the SEC at http://www.sec.gov. Copies of the documents filed with the SEC by Vanguard will be available free of charge on Vanguard's internet website at http://www.vnrllc.com or by contacting Vanguard's Investor Relations Department by email at investorrelations@vnrllc.com or by phone at (832) 327-2234. Copies of the documents filed with the SEC by LRR Energy will be available free of charge on LRR Energy's internet website at http://www.lrrenergy.com or by contacting LRR Energy's Investor Relations Department by email at info@lrrenergy.com or by phone at (713) 345-2145.

Participants in the Solicitation

Vanguard, LRR Energy, and their respective directors, executive officers and other members of their management and employees may be deemed to be "participants" in the solicitation of proxies in connection with the proposed merger. Investors and security holders may obtain information regarding Vanguard's directors, executive officers and other members of its management and employees in Vanguard's Annual Report on Form 10-K for the year ended December 31, 2014, which was filed with the SEC on March 2, 2015, Vanguard's proxy statement for its 2015 annual meeting, which was filed with the SEC on April 20, 2015, and any subsequent statements of changes in beneficial ownership on file with the SEC. Investors and security holders may obtain information regarding LRR Energy's directors, executive officers and other members of their management and employees in LRR Energy's Annual Report on Form 10-K for the year ended December 31, 2014, which was filed with the SEC on March 4, 2015, and any subsequent statements of changes in beneficial ownership on file with the SEC. These documents can be obtained free of charge from the sources listed above. Additional information regarding the interests of these individuals will also be included in the proxy statement/prospectus regarding the proposed transaction when it becomes available.

Forward-Looking Statements

This press release includes "forward-looking statements" as defined by the SEC. All statements other than historical facts, including, without limitation, statements regarding the expected benefits of the proposed transaction to Vanguard and LRR Energy and their unitholders, the anticipated completion of the proposed transaction or the timing thereof, the expected future reserves, production, financial position, business strategy, revenues, earnings, costs, capital expenditures and debt levels of the combined company, and plans and objectives of management for future operations, are forward-looking statements. When used in this press release, words such as we "may," "can," "expect," "intend," "plan," "estimate," "anticipate," "project," "believe," "will" or "should" or the negative thereof or variations thereon or similar terminology are generally intended to identify forward-looking statements. It is uncertain whether the events anticipated will transpire, or if they do occur what impact they will have on the results of operations and financial condition of Vanguard, LRR Energy or of the combined company. Such forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in, or implied by, such statements.

These risks and uncertainties include, but are not limited to: the ability to obtain unitholder approval of the proposed transaction; the ability to complete the proposed transaction on anticipated terms and timetable; Vanguard's and LRR Energy's ability to integrate successfully after the transaction and achieve anticipated benefits from the proposed transaction; the possibility that various closing conditions for the transaction may not be satisfied or waived; risks relating to any unforeseen liabilities of Vanguard or LRR Energy; declines in oil, natural gas liquids or natural gas prices; the level of success in exploitation, development and production activities; adverse weather conditions that may negatively impact development or production activities; the timing of exploitation and development expenditures; inaccuracies of reserve estimates or assumptions underlying them; revisions to reserve estimates as a result of changes in commodity prices; impacts to financial statements as a result of impairment write-downs; risks related to level of indebtedness and periodic redeterminations of the borrowing base under Vanguard's and LRR Energy's credit agreements; the ability of Vanguard and LRR Energy to comply with covenants contained in the agreements governing their indebtedness; ability to generate sufficient cash flows from operations to meet the internally funded portion of any capital expenditures budget; ability to obtain external capital to finance exploitation and development operations and acquisitions; federal, state and local initiatives and efforts relating to the regulation of hydraulic fracturing; failure of properties to yield oil or gas in commercially viable quantities; uninsured or underinsured losses resulting from oil and gas operations; inability to access oil and gas markets due to market conditions or operational impediments; the impact and costs of compliance with laws and regulations governing oil and gas operations; ability to replace oil and natural gas reserves; any loss of senior management or technical personnel; competition in the oil and gas industry; risks arising out of hedging transactions; and other risks described under the caption "Risk Factors" in Vanguard's and LRR Energy's Annual Reports on Form 10-K for the period ended December 31, 2014. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of their dates. Except as required by law, neither Vanguard nor LRR Energy intends to update or revise its forward-looking statements, whether as a result of new information, future events or otherwise.
 

LRR Energy, L.P.

Selected Operating Data

(unaudited)
           
Three Months Ended June 30, Six Months Ended June 30,
2015 2014 2015 2014
 
Production:
Oil (MBbls) 270 216 545 434
Natural gas (MMcf) 1,470 1,666 2,988 3,288
NGLs (MBbls)   99   90   189   175
Total (MBoe) 614 584 1,232 1,157
Average net production (Boe/d) 6,747 6,418 6,807 6,392
 
Average sales price:
Oil (per Bbl):
Sales price $ 52.69 $ 94.23 $ 48.24 $ 93.34
Effect of settled commodity
derivative instruments   23.74   (3.50 )   27.77   (2.14 )
Realized sales price $ 76.43 $ 90.73 $ 76.01 $ 91.20
Natural gas (per Mcf):
Sales price $ 2.53 $ 4.54 $ 2.67 $ 4.76
Effect of settled commodity
derivative instruments   2.77   0.71   2.61   0.62
Realized sales price $ 5.30 $ 5.25 $ 5.28 $ 5.38
NGLs (per Bbl):
Sales price $ 16.78 $ 30.67 $ 14.98 $ 34.99
Effect of settled commodity
derivative instruments   9.41   (1.81 )   9.94   (2.77 )
Realized sales price $ 26.19 $ 28.86 $ 24.92 $ 32.22
 
Average cost per Boe:
Lease operating expenses $ 9.79 $ 11.70 $ 10.37 $ 10.95
Production and ad valorem taxes 2.41 3.85 2.23 4.02
General and administrative
expenses 20.64 4.62 13.36 5.08
Depletion and depreciation 14.16 14.87 14.26 14.82
 
Derivative instrument settlements
and amortization (in thousands):
Commodity 11,413 $ 271 24,818 $ 637
Interest rate (672 ) $ (204 ) (1,077 ) $ (404 )
 

LRR Energy, L.P.

Consolidated Condensed Statement of Operations

(in thousands, except per unit amounts)

(unaudited)
           
Three Months Ended June 30, Six Months Ended June 30,
2015 2014 2015 2014
Revenues:
Oil sales $ 14,227 $ 20,354 $ 26,291 $ 40,510
Natural gas sales 3,720 7,565 7,986 15,664
Natural gas liquids sales 1,661 2,760 2,832 6,124
Gain (loss) on commodity
derivative instruments, net (8,927 ) (13,328 ) 9,755 (18,950 )
Other income   26   40   55   71
Total revenues 10,707 17,391 46,919 43,419
 
Operating expenses:
Lease operating expense 6,008 6,829 12,780 12,664
Production and ad valorem taxes 1,482 2,248 2,748 4,648
Depletion and depreciation 8,694 8,680 17,574 17,145
Impairment of oil and natural gas
properties 256 - 35,962 -
Accretion expense 518 510 1,029 1,013
Loss (gain) on settlement of asset
retirement obligations 4 21 68 61
General and administrative expense   12,673   2,699   16,464   5,881
Total operating expenses 29,635 20,987 86,625 41,412
 
Operating income (loss) (18,928 ) (3,596 ) (39,706 ) 2,007
 
Other income (expense), net
Interest expense (3,120 ) (2,575 ) (5,889 ) (5,116 )
Gain (loss) on interest rate
derivative instruments, net   (322 )   (1,128 )   (1,673 )   (1,422 )
Other income (expense), net (3,442 ) (3,703 ) (7,562 ) (6,538 )
 
Income (loss) before taxes (22,370 ) (7,299 ) (47,268 ) (4,531 )
Income tax (expense) benefit   56   (38 )   18   (112 )
Net income (loss) available to
unitholders $ (22,314 ) $ (7,337 ) $ (47,250 ) $ (4,643 )
 
Computation of net income (loss)
per limited partner unit:
 
General partners' interest in net
income (loss) $ (7,595 ) $ (7 ) $ (9,434 ) $ (4 )
 
Limited partners' interest in net
income (loss) $ (14,719 ) $ (7,330 ) $ (37,816 ) $ (4,639 )
 
Net income (loss) per limited partner
unit (basic and diluted) $ (0.52 ) $ (0.27 ) $ (1.35 ) $ (0.17 )
 
Weighted average number of limited
partner units outstanding 28,074 26,733 28,073 26,539
       

LRR Energy, L.P.

Consolidated Condensed Statement of Cash Flows

(in thousands)

(unaudited)
 
Six Months Ended June 30,
2015 2014
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (47,250 ) $ (4,643 )
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depletion and depreciation 17,574 17,145
Impairment of oil and natural gas properties 35,962 -
Accretion expense 1,029 1,013
Amortization of equity awards 838 534
Amortization of derivative contracts 243 330
Amortization of deferred financing costs and other 341 208
Loss (gain) on settlement of asset retirement obligations 68 61
Changes in operating assets and liabilities:
Change in receivables 2,465 75
Change in prepaid expenses 483 (209 )
Change in derivative assets and liabilities 15,659 20,605
Change in amounts due to/from affiliates 4,241 (5,992 )
Change in accrued liabilities and deferred tax liabilities   4,301     2,536  
Net cash provided by (used in) operating activities 35,954 31,663
 
CASH FLOWS FROM INVESTING ACTIVITIES
Development of oil and natural gas properties (17,376 ) (17,094 )
Acquisition of oil and natural gas properties (230 ) -
Disposition of oil and natural gas properties   -     65  
Net cash provided by (used in) investing activities (17,606 ) (17,029 )
 
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under revolving credit facility 10,000 20,000
Principal payments on revolving credit facility (5,000 ) (25,000 )
Equity offering, net of expenses 3 14,810
Distributions   (19,246 )   (25,990 )
Net cash provided by (used in) financing activities (14,243 ) (16,180 )
 
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 4,105 (1,546 )
 
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD   3,576     4,417  
 
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 7,681   $ 2,871  
       

LRR Energy, L.P.

Consolidated Condensed Balance Sheet

(in thousands, except unit amounts)

(unaudited)
 
June 30, 2015 December 31, 2014
ASSETS
Current assets:
Cash and cash equivalents $ 7,681 $ 3,576
Accounts receivable 8,659 11,124
Commodity derivative instruments 32,087 45,924
Due from affiliates 1,456 5,697
Prepaid expenses   1,240     1,840  
Total current assets 51,123 68,161
Property and equipment (successful efforts method) 972,398 956,326
Accumulated depletion, depreciation and impairment   (559,893 )   (506,368 )
Total property and equipment, net 412,505 449,958
Commodity derivative instruments 37,159 38,540
Deferred financing costs, net of accumulated amortization and other assets   2,076     2,295  
TOTAL ASSETS $ 502,863   $ 558,954  
LIABILITIES AND UNITHOLDERS' EQUITY
Current liabilities:
Accrued liabilities $ 9,910 $ 5,506
Accrued capital cost 7,642 9,176
Commodity derivative instruments 783 556
Interest rate derivative instruments 2,781 2,327
Asset retirement obligations   2,153     1,065  
Total current liabilities 23,269 18,630
Long-term liabilities:
Commodity derivative instruments 94 232
Interest rate derivative instruments 960 817
Term loan 50,000 50,000
Revolving credit facility 235,000 230,000
Asset retirement obligations 40,558 40,539
Deferred tax liabilities   -     99  
Total long-term liabilities 326,612 321,687
Total liabilities 349,881 340,317
Unitholders' Equity:
General partner (22,400 units issued and outstanding as of
June 30, 2015 and December 31, 2014) (9,139 ) 310
Public common unitholders (19,504,833 units issued and outstanding as
of June 30, 2015 and 19,492,291 units issued and outstanding as of
December 31, 2014) 162,121 208,273
Affiliated common unitholders (8,569,600 units issued and outstanding as
of June 30, 2015 and 4,089,600 issued and outstanding as of
December 31, 2014) - 4,643
Subordinated unitholders (4,480,000 units issued and outstanding as of
December 31, 2014)   -     5,411  
Total Unitholders' Equity   152,982     218,637  
TOTAL LIABILITIES AND UNITHOLDERS' EQUITY $ 502,863   $ 558,954  
 

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 and six months ended June 30, 2015 and 2014.
           

LRR Energy, L.P.

Non-GAAP Reconciliation

(continued)

(in thousands)

(unaudited)
 
Three Months Ended June 30, Six Months Ended June 30,
2015 2014 2015 2014
 
Net income (loss) $ (22,314 ) $ (7,337 ) $ (47,250 ) $ (4,643 )
Income tax expense (benefit) (56 ) 38 (18 ) 112
Interest expense-net, including
loss (gain) on interest rate derivative
instruments, net 3,442 3,703 7,562 6,538
Depletion and depreciation 8,694 8,680 17,574 17,145
Accretion of asset retirement
obligations 518 510 1,029 1,013
Amortization of equity awards 493 249 838 534
Loss (gain) on settlement of asset
retirement obligations 4 21 68 61
Loss (gain) on commodity derivative
instruments, net 8,927 13,328 (9,755 ) 18,950
Commodity derivative instrument
net cash settlements 11,542 444 25,061 967
Impairment of oil and natural gas
properties 256 - 35,962 -
Other non-recurring items (1)   8,948     -     9,098     -  
Adjusted EBITDA $ 20,454   $ 19,636   $ 40,169   $ 40,677  
 
Adjusted EBITDA 20,454 19,636 40,169 40,677
Cash income tax expense (47 ) (44 ) (85 ) (88 )
Cash interest expense (3,695 ) (2,757 ) (6,638 ) (5,401 )
Estimated maintenance capital (2)   (4,750 )   (5,000 )   (9,500 )   (10,000 )
Distributable Cash Flow $ 11,962   $ 11,835   $ 23,946   $ 25,188  
 
 
Cash distribution $ 5,268 $ 13,597 $ 10,536 $ 26,703
Distribution Coverage Ratio 2.27x 0.87x 2.27x 0.94x
 
   

(1)
  Includes one-time costs associated with the merger with Vanguard including consulting and legal fees and severance payments.

(2)
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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