Ronnetta Eaton - Manager, IR
John Weinzierl - President, Chairman & CEO
Drew Cozby - VP & CFO
Larry Forney - VP & COO
Abhishek Sinha - Bank of America Merrill Lynch
Michael Peterson - MLV
Kevin Smith - Raymond James
Memorial Production Partners (MEMP) Q4 2012 Earnings Conference March 5, 2013 10:00 AM ET
Welcome to the Memorial Production Partners LP Fourth Quarter and Full Year 2012 Investors Conference Call. Memorial’s operating and financial results were released earlier today and are available on Memorial’s website at www.memorialpp.com. (Operator Instructions). Today’s call is being recorded, a replay of the call will be available or accessible until Tuesday March 12, by dialing 855-859-2056 and then entering the conference ID, 89634203 or by visiting Memorial’s website www.memorialpp.com
I would now like to turn the conference Ronnetta Eaton of Manger of Investor Relations.
Thank you Mary. Good morning and welcome to the Memorial Production Partners LP conference call to discuss operating and financial results for the fourth quarter and full year 2012. We appreciate you joining us today. John Weinzierl, Memorial’s Chairman and Chief Executive Officer will lead the call followed by Drew Cozby, our Vice President and Chief Financial Officer and Larry Forney, our Vice President and Chief Operating Officer.
Afterwards securities analysts will be invited to participate in a question-and-answer session. Please note that some of the remarks and answers to questions by management may contain forward-looking statements and are based on certain assumptions and expectations of management. These remarks and answers reflect management’s current views with regards to future events and are subject to various risks, uncertainties and assumptions. Although management believes that the expectations requested in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to be correct and undertakes no obligation and does not intend to update these forward-looking statements to reflect event or circumstances occurring after this call.
Please refer to our press release and our SEC filings for a list of factors that may cause actual results to differ materially from those in the forward-looking statements made during this call. In addition, non-GAAP financial measures may be disclosed during this call. Reconciliations of those measures to comparable GAAP measures may found in our press release on our website at www.memorialpp.com.
With this in mind I’ll now turn the call over John Weinzierl, John?
Thanks Ronnetta and good morning, 2012 was a remarkable year for MEMP. To summarize 2012 we closed five accretive acquisitions totaling $446 million and we grew our adjusted EBITDA 23% throughout the year which allowed us to maintain strong coverage ratios while at the same time increasing our distribution three times to $2.03 per common unit from a $1.90 per common unit at the IPO.
We delivered all of our operational and financial reporting obligations in a timely and accurate manner. The five acquisitions we closed added 295 billion cubic feet equivalent of crude reserves and 32 million cubic feet equivalent per day at current production. Additionally these acquisitions extended our footprint from South Texas and East Texas into North Louisiana and Southern California while at the same time extending our reserve life to over 20 years and adding a significant amount of oil and natural gas liquids into our commodity mix.
The result we believe is a more balanced partnership that we feel is well positioned to deliver stable distributions in the coming years. As you may recall our acquisition growth strategy which you have heard us talk about includes firstly drop down transactions from our operational partner Memorial Resource Development; number two, acquisitions from our private equity partner Natural Gas Partners; thirdly, joint bid with NGP and MRD as a partner to a transaction; and lastly third party acquisitions. We were able to check the box on each of these specified strategies which bodes well for us regarding our flexibility to complete fields both at our sponsors and on our own through third party transactions and demonstrates our commitment to grow our inventory through acquisition opportunities.
This will continue to be one of our competitive strengths as we go through 2013 and beyond. Yesterday’s closing price of $18.54 per unit our yield was approximately 10.9% based on our current annualized distribution rate of $2.03 per unit. Combined with our stable asset profile and significant growth potential we believe our yield represents an attractive investment in the current markets.
We’re well positioned operationally, organizationally and financially to continue executing on our growth strategy. Overall we’re pleased with MEMP’s 2012 financial and operational performance during a period of challenging market conditions. I want to thank the entire partnership team for their contributions to these results. We expect 2013 to be another active year, we will continue to emphasize consistent cash flow generation to support distributions to our unit holders or to maintain and grow production by effectively operating our assets and actively pursue opportunistic transactions in line with our strategy.
We expect to follow our 2012 annual report on Form 10-K on or before March 8, 2013 and anticipate our schedule K1 being available on or about March 11, 2013. Now I will turn the call over to Drew Cozby, our Vice President and Chief Financial Officer to walk us through our financials.
Thank you John. I’ll start by discussing our financial results from the fourth quarter and full year 2012 and our liquidity and our hedge positions as well as our guidance for 2013 which we previously announced in conjunction with our latest acquisition. Before I discuss these results I would like to highlight an item relating to the accounting treatment of acquisitions from affiliates of MEMP including Memorial Resource Development and certain funds controlled by Natural Gas Partners.
Since these types of acquisitions are considered transactions between entities under common control we’re required under GAAP to incorporate the financial results for all periods presented on a combined basis. What this means is our financial results unless specifically identified will include the results of operations on certain assets acquired prior to our taking over operational control.
Adjusted EBITDA for the fourth quarter of 2012 increased 11% to 27.9 million from the 25.1 million during the fourth quarter of 2011 and 23% to 110.1 million for full year 2012 from 89.4 million for 2011.
Distributable cash flow for the fourth quarter of 2012 was 19.1 million or $0.56 per unit covering our distribution by 1.10 times for the fourth quarter. Full year 2012 distributable cash flow was 63.5 million providing a coverage ratio of 1.27 times.
The increases in both adjusted EBITDA and distributable cash flow were attributable to the inclusion of results from our third party acquisitions completed during 2012. Total revenues for the fourth quarter 2012 were approximately 39.7 million compared to 38.5 million for the fourth quarter of 2011.
Revenues for full year 2012 were 141 million compared to the 147 million for full year 2011. The increases in revenues for the fourth quarter 2012 were primarily driven by MEMP’s third party acquisitions in 2012 and offset by lower natural gas average realized sales prices. Total revenues do not include $5.3 million of realized gains on commodity derivatives in approximately 0.9 million in unrealized gains on commodity derivatives for the quarter. Excluding commodity derivatives settlements average realized prices were $5.85 per Mcfe in the fourth quarter of 2012 which was down 9% from the $6.40 per Mcfe in the fourth quarter 2011.
Average realized prices excluding commodity derivative settlements for full year 2012 were $5.65 per Mcfe, a 17% decrease from the $6.84 per Mcfe for the full year 2011.
Average realized natural gas prices for the fourth quarter 2012 were $3.34 per Mcf, a 7% decrease from the $3.58 per Mcf in the fourth quarter 2011.
Average realized natural gas prices decreased 30% for the full year 2012 to $2.88 per Mcf from the $4.13 per Mcf for full year 2011. Crude oil averaged realized prices decreased 9% to $96.41 per barrel for the fourth quarter of 2012 compared to the fourth quarter of 2011 price of a $106 and $0.15 per barrel.
Average realized crude oil prices for the full year 2012 were a $101.04 per barrel compared to the $101.15 per barrel for full year 2011. Average realized NGL prices decreased 33% to $34.16 per barrel for the fourth quarter 2012 compared to $50.83 per barrel in the fourth quarter of 2011.
Average realized NGL prices decreased 30% for the full year 2012 to $35.99 per barrel from $61.70 per barrel in 2011 period. G&A for the fourth quarter of 2012 was 5.4 million compared to 4.9 million reported during the fourth quarter of 2011, included in G&A were non-cash compensation expenses and acquisition related cost representing 2.9 million.
G&A for the full year 2012 was 15.6 million compared to 14.3 million for full year 2011. Included in G&A were non-cash compensation expenses and acquisition related cost representing 4.7 million. Net interest expense for the fourth quarter 2012 was 2.9 million which included 0.2 million of unrealized gains on interest rate swaps and 0.5 million of non-cash amortization of debt issuance cost. Net interest expense for the full year 2012 was 11.3 million and included 3.5 million of unrealized losses on interest rate swaps and 1 million of non-cash of amortization of debt issuance cost.
Total capital expenditures for the fourth quarter 2012 were 9.7 million and 32.5 million for the full year 2012, maintenance capital expenditures for the full year 2012 was 14.8 million, total capital expenditures were above our 2012 guidance due to expenditures on our newly acquired properties in 2012 which were not included in our original estimates.
Now moving on to discussion of debt and liquidity position remains strong. During 2012 MEMP expanded its foreign based flight (ph). We started out in the fourth quarter of 2011 a $1 billion multi-year credit facility had a borrowing base of $300 million. Our bank group which currently consist of $11 participating banks, expanded the borrowing base to $380 million and in junction with the $93.2 million acquisition which we completed with good rich petroleum in September 2012 and then again expanded it to 460 million in conjunction with the $271 million acquisition of the Beta Properties in December 2012.
At the end of the fourth quarter, 2012 we had totaled debt outstanding of $371 million under our credit facility with the liquidity of approximately 96.6 million consisting of 7.6 million of available cash and 89 million of available borrowing capacity. Our total debt outstanding as of March 1, 2013 was 379 million providing 81 million of available borrowing base capacity.
In December 2012, in conjunction with our 5th acquisition we completed a public offering of approximately 11.975 million common units at $17 per unit raising net proceeds of a 194 million.
The proceeds from this offering were used to fund a portion of the Beta acquisition. Next I would like to take a few minutes to talk about our hedges. Consistent with our hedging strategy to mitigate commodity price volatility throughout the year we layered on additional hedges that will continue to play an integral role in our overall business strategy.
Our hedge portfolio provides more certainty to our cash flow and a sustainability of future distributions. Our hedging policy and goal is to enter into derivative contracts, covering approximately 65% to 85% of our estimated production from total crude reserves on a rolling 3 to 6 year horizon. Through this policy we have extensive hedge program to give this commodity price protection through 2018.
For natural gas we have hedged 91% of targeted natural gas production through the year end 2013 and a weighted average floor of $4.51 per MMbtu. Approximately 80% for 2014 and ’15 at 73% through the end of 2018 at a weighted average for price ranges from $4.30 to $4.75 per MMbtu.
It is also worth noting that approximately 98% of MEMPs natural gas hedges are the appropriate basis differential through 2014. Regarding oil we have hedged 81% of targeted crude oil production through the end 2013 at a weighted average floor of a $105.07 per barrel.
Approximately 86% for 2014 and ’15, and 79% through the end of 2018 and weighted average for priced ranges from $90.66 to a $105.07 per barrel. Partially a 100% of MEMPs crude oil hedges are the appropriate basis differential through 2013. Regarding NGLs for calendar year 2013 and ’14 we hedged approximately 70% and 58% respectively of our targeted average net production for both years and hedged prices are approximately $45.65 and $49.19 per barrel respectively.
These hedges have helped protect our pricing position given the decline in commodity prices during the year. We also hedged our interest rate risk and currently have hedges on a 150 million or 40% of our 379 million of borrowings outstanding as of March 1, 2013. These hedges extend through December 14, 2016 at a weighted average fixed annual LIBOR rate of 1.19%.
For more detail in our hedging program please visit our website of the events and presentation section of the investor relations tab. Now we will talk about our full year 2013 guidance along with the announcement of the Beta Properties acquisition in November 2012 we provided guidance for the full year 2013 which is not inclusive of any acquisitions that we may complete during this year.
We’re forecasting annual production an incremental production growth to average within the range of 28 to 30 billion cubic feet equivalent or bcfe or 77 to 82 million cubic feet equivalent per day or the full year. We anticipate adjusted EBITDA to be in the range of approximately 120 to 124 million and distributable cash flow to be approximately 78 to 82 million with corresponding distributable cash flow coverage in the 1.1 times to 1.2 times range.
Maintenance capital expenditures are expected to be 31 million for the year or approximately 25% for the mid-point of our adjusted EBITDA expectations for the year. Total CapEx as we expected to be within the range of approximately 61 to 71 million. Now Larry Forney, Vice President and Chief Operating Officer will walk you through our operating performance in greater detail, Larry?
Thank you Drew. I would like to start by discussing our reserve growth, production and operating expenses for 2012 before moving onto our 2012 activity and operating plans for 2013. We increased our reserves significantly during the year with our 2012 year end reserve valuation coming in at 608.8 billion cubic feet equivalent compared to 324.1 billion feet equivalent for year-end 2011 that will be year-over-year increase of 88%. Acquisition accounted for about 314.1 billion cubic feet equivalent approved reserve additions along with an additional 12.9 billion cubic feet equivalent from performance revisions. Production roll-up and price revisions resulted in deduction of $21.5 to $20.8 billion cubic feet equivalent respectively. Our reserve mix has transitioned to a balanced profile of 62% GAAP, 59% crude developed, at year end 2012 versus 88% gas and 81% crude developed at year end 2011.
Our liquid reserves are now evenly split at 19% oil and 19% NGLs. Geographically reserves are now split with 58% in East sectors North Louisiana, 27% in South Texas and 15% in California. Our well count is now running at 1631 gross and 731 net with just over half of the daily net gas equivalent production coming from the liquids rich East Texas and North Louisiana areas.
From our inventory standpoint we have grown to over 594 development opportunities including 233 (inaudible). During the fourth quarter average daily production was 72.9 million cubic feet equivalent compared to 64.5 million cubic feet equivalent in the fourth quarter of 2011.
Production grew approximately 16% for full year 2012 to 67.2 million cubic feet equivalent per day from 58 million cubic feet equivalent per day in 2011. This growth was a result of the acquisitions we closed in 2012 and our new well drill operations in East Texas and North Louisiana. The overall production split for 2012 was 73% natural gas, 18% crude oil and 9% NGLs.
LOE averaged a $1.78 Mcfe for the fourth quarter of 2012 which met fourth quarter 2011, full year LOE averaged a $1.83 per Mcfe for 2012 which was down from a $1.98 per Mcfe for 2011. Full year LOE excluding our 100% oil producing property in California averaged a $1.23 per Mcfe for 2012 which was down from a $1.39 per Mcfe for 2011. We’re continuing our focus on cost and operational enhancements and projected ongoing downward trend in lease operating expenses for 2013. As outlined previously we closed our 5th transaction 2012 with the acquisition of the Beta Properties in December. The Beta Properties which were operated by the partnership are located in federal waters offshore to Southern California in the 51.75% working interest in two well head production platforms, one processing platform and an on-shore tankage and metering facility.
This field has an original all in site estimation of approximately 940 million barrels which according to a current cumulative recovery of only 9%, two permanently installed platform drilling rig system allowed for the ready maintenance of the existing wells as well as effective and controlled development of the asset 25 crude undeveloped opportunities. The Beta Properties add approximately 14.7 million barrels of oil or 88.4 billion cubic feet equivalent to our reserves, 69% of which are crude developed and increased net production by approximately 1574 barrels of oil or 9.4 million cubic feet equivalent per day at the time of acquisition.
Production sales from this field are 100% oil. Our drilling activity per 212 had a 100% success rate and included the initiation of production from six horizontal cotton value new drills in East Texas and North Louisiana. Three of these wells were completed in first quarter one late in the second quarter and two in the fourth quarter of 2012. Working interest in these six wells averaged approximately 28% and the wells are projected to deliver a net estimated ultra-recovery of 11.3 billion cubic feet equivalent with an 82% rate of return due to their prolific gas rates and high liquid yields.
Current rig operations include participation in six additional horizontal Cotton Valley new drills which are operative by the partnership or our sponsor. Four of these new drills are located in East Texas but remaining two are located in North Louisiana. Working interest these wells average approximately 37% and we anticipate first sale to occur in the first half of 2013. We again expect these horizontal new drills to be solid economic projects due to a high liquid content of the cotton valley. Additional rig operations in 2013 are projected to include 11 more new drills in various fields in East Texas in North Louisiana and six operated wells from our Beta platform from California.
Capital spending for 2013 is projected in the range of $61 million to $71 million with annual production ranging from 28 billion cubic feet equivalent to 30 billion cubic feet equivalent excluding any acquisition. CapEx allocations are currently split 61% in East Texas North Louisiana, 35% in California and 4% in South Texas and primarily dedicated to drilling, recompletions and capital work overs with (inaudible) allocated to facilities projects throughout our operating areas.
To summarize we’re well satisfied with our 2012 performance today and look forward to pursuing further growth of our asset base through organic development and acquisitions in 2013. Thanks all of you for your time with that I will turn it back to John.
Thank you Larry. We like to now open up the line for any questions.
(Operator Instructions). And our first question comes from Abhishek Sinha from Bank of America. Your line is open.
Abhishek Sinha - Bank of America Merrill Lynch
Just wanted to get some idea on like how - what your acquisition CapEx look like in 2013, versus what do you had in 2012? And just a follow-up will be how do you plan on funding it if you have 100 million liquidity available in the bank right now.
I will answer the general question and then I’m going to turn it over to Drew to talk about the financing, but in general we do not have an acquisition budget, we don’t have anything to announce. We’re not ready to announce anything; we’re always looking for opportunities that fit our strategy which is to find accretive acquisitions and to provide stable distributions and growth. I will turn over to Drew to talk about the financing plans for, but and again to summarize we don’t have anything to announce right now.
Just touching on you know just to mention our reserve life at 23 years which is top of - for the upstream MLPs that’s going to provide plenty of bank capacity as well as you looked at 2012 we had access to second lien as well as we accessed the equity markets through the accretive nature of the acquisitions that we executed. So we expect along with the approximate 100 million of current availability and liquidity that we have access to right now we expect to be able to do the same as we did in 2012 but if we need to make any acquisitions.
Abhishek Sinha - Bank of America Merrill Lynch
Just as a follow-up do you expect an increase or a significant increase in your volume base next month (inaudible) because of your higher proved reserves or is it already been accounted for more or less?
I think that we, again are - we have got significant long lived assets with stable predictable production and that tends to be the hold your borrowing base flat or to increase it, those are just good to hear marks. We will announce that obviously when we redetermine that borrowing base effective April 1, 2013.
Thank you. Our next question comes from Michael Peterson from MLV. Your line is open.
Michael Peterson - MLV
It's early day certainly in terms of your operatorship with the Beta assets but probably question for Larry, I wonder if you could share some preliminary assessments in terms of the assets and the operating procedures, my perspective is that the per unit margin and the facility itself offers very attractive returns but at modestly higher risk profile than on-shore operation. Any insight you might be able to share Larry in terms of what your assessment of the operations are and some of the things that you’re focused on.
Thank you Michael. The Beta Properties are it's a fantastic acquisition for that it's a legacy field it's been producing for 32 years, there is a close to a billion barrels original in place, it's only 9% recovery days. We were able to book an additional 57 PDNP and PUD cases for that property. So there is a lot of exploitation potential there that we are very excited about. We’re looking at about a 5% decline on the production days there which makes it an excellent MLP property; I can’t say enough good things about it. The operating costs are reasonable at about - they average about $33 a barrel for 2012, we’re very optimistic what that asset is going to do for us going forward.
Michael Peterson - MLV
For a follow-up and this maybe something more for John. In your prepared remarks you noted the migration from a more gas focused reserve and production based to one a little bit more biased towards liquids. When you think about perspective growth into 2013 are you still exclusively opportunistic in terms of what you might entertain or do you have a bias in terms of commodity?
We have been consistent in what we said to questions about that which is we’re opportunistic about our acquisition opportunities, some of them are gas, some of them are oil and we just look at them individually and if they fit our strategy, our strategy is to create stable cash flow to provide stable distributions and grow them over time. So if regardless of they are oil or natural gas we look at them individually.
Thank you. (Operator Instructions). Our next question comes from Kevin Smith from Raymond James. Your line is open.
Kevin Smith - Raymond James
4Q volumes looked a little light to me. Did you guys have any midstream constraints or was that really just overall declines from acquired - from the acquired assets?
We did have some curtailment of volumes related to one of DCP plant early in October which obviously took away from what’s quarter (inaudible) been otherwise, we just ended up being as you see reported, 73 [million] [ph] day for the quarter.
Kevin Smith - Raymond James
Is that plant that was just curtailed for October and then (inaudible)?
I’m sorry say it again Kevin.
Kevin Smith - Raymond James
(Inaudible) got back online in late October and November it's been fine since?
Yes, it affected couple of [field] [ph] areas we had up there in East Texas and that was a scheduled event. We are aware of it several months in advance and effected a number of the operators up but it's not - those types of events are common for these type of operations, it’s necessary for maintenance and inspections on equipment and so forth, but we factored that into our projection so we met our guidance in 2012 and we are in good shape.
Kevin Smith - Raymond James
Okay great, and then as we look at lease operating expenses, is 4Q kind of the right run-rate, clearly you’re having change and make sure when you layer on a new acquisition but is that for LOE is that what we should think about going forward?
Well, with $1.83 therefore the - with the Beta Properties layered in we – our forecast again in 2012 was to get - was to bring it down from the $1.39 they had in 2011 and get something towards $1.20 and we finished $1.23 per Mcfe so we are (inaudible) assets so we feel good about that as well.
Kevin Smith - Raymond James
Great. And then lastly just kind of follow-up a little bit on Michael’s question, when should we think about hearing drilling results from Beta? Is that 3Q type of event that you guys would be able to talk about?
It will be the second half of the year.
Thank you. I show no further questions at this time and I would like to turn the conference back to Mr. John Weinzierl for closing remarks.
Thank you everybody for participating in the call today. Do not hesitate to reach out to us if you have any follow-up questions. Thanks for your time.
Ladies and gentlemen thank you for your participation in today’s conference. This does conclude the program and you may all disconnect at this time.
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