Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Richard D. Finley - Treasurer and CFO

Kristian B. Kos - President and CEO

Analysts

Ethan Bellamy - Robert W. Baird

Daniel Guffey - Stifel Nicolaus

Robert Horwitz - RH Capital

New Source Energy Partners L.P. (NSLP) F4Q 2012 Results Earnings Call April 17, 2013 11:00 AM ET

Operator

Good morning and welcome to New Source Energy Partners Year-End 2012 Conference Call. Just a reminder, today's call is being recorded, and your participation implies consent to such recording. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation.

With that, I will turn the call over to Mr. Richard Finley, Chief Financial Officer of New Source Energy GP LLC. Thank you, sir. You may begin.

Richard D. Finley

Thank you. Good morning and I thank all of you for joining us today for the New Source Energy Partners year-end 2012 earnings conference call. This is our first as a new publicly traded master limited partnership. I am Richard Finley, Treasurer and Chief Financial Officer of New Source, and with me today is Kristian Kos, our President and Chief Executive Officer.

Before we begin, I would like to remind all participants that our comments today may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These forward-looking statements are subject to risk and uncertainties that could cause the partnership's actual results to differ materially from the anticipated results, or expectations expressed in these forward-looking statements. Those risks include among others, matters that we have described in our earnings release, as well as in our filings with the Securities and Exchange Commission, including our annual report on Form 10-K and our quarterly reports on Forms 10-Q. We disclaim any obligation to update these forward-looking statements.

During this call, we will also make reference to certain non-GAAP financial measures. Reconciliations of those non-GAAP financial measures to the applicable GAAP financial measures can be found in our earnings release. You can obtain a copy of our press release in the Investor Relations tab of our website at www.newsource.com.

And with that, I will hand it over to Kristian.

Kristian B. Kos

Thank you, Richard. As this is our inaugural call, we thought it would be helpful to welcome our new unitholders, with an overview of who we are and where we are going at New Source Energy Partners. New Source is an upstream MLP focused on drilling in the prolific 16 million acre conventional Hunton reservoir.

As many of you know, our management team and I have had a long and effective track record of managing and growing energy assets. The senior geologists and all of the key members of the New Source Group have developed conventional resource plays for more than 25 years. Over these years, we have developed specialized processes, and applied technology that helped to increase our portfolio daily. Our success comes from understanding the reservoir characteristics, and using the latest available drilling completion and production technology to access the oil and gas we know is lost within.

Though our current production is from the Hunton only, we believe our processes could have potential application at other reservoirs above and below the Hunton, in which we might have the opportunity to acquire interest in the future.

It has been a busy and successful journey since we were formed, and we intend to continue to position ourselves for growth opportunities. The New Source Group has drilled over 246 gross wells in the Golden Lane field of the Hunton formation since 1999. Our technical team has over 28 years of experience, with a 98% success rate of all wells drilled in the Hunton, and we have a substantial drilling inventory to provide growth for the company and value to our unitholders.

As of December 31, 2012, the partnership's properties contained 121 gross proved undeveloped drilling locations, including 66 gross infill drilling locations. The Hunton is an ideal place for New Source, because it has consistently delivered liquid rich, long life reserves with a low decline rate.

Now let's turn to our year-end 2012 results; our initial public offering was completed on February 13, 2013, and as such, we are reporting today the results attributable to the properties contributed to us in connection with our initial public offering. I will highlight a few financial and operational items in the quarter, before talking about what we have in store for the future.

First, 2012 adjusted EBITDA of $29.8 million was in line with our discussions during our IPO process, and was down from $32.3 million in 2011. As you know, 2012 was a difficult year in terms of lower gas and NGL prices. During the year, our sales price for natural gas averaged $2.65 per mcf, versus the $3.66 per mcf we had seen only a year before. Our sales price per NGLs in 2012 averaged $33.74 per barrel, versus the $45.87 per barrel average in 2011. To note, the majority of 2013 production is hedged at $3.66 per mcf for gas and $36 per barrel for NGLs.

Whilst EBITDA is a financial market, operationally, 2012 was all about milestones for New Source. In 2012, our production was up about 25%, as we drilled in a particularly oil-rich part of the Hunton. Proved reserves were up 3% year-over-year and production costs were pushed down by higher efficiencies, inside of New Source.

We continue to hone our performance and position the partnership for growth opportunities, consistent with the disclosure included in our registration statement filed with the SEC. In the two months since our IPO, we have already started to transform New Source. We have restructured our general partnership, streamlining and aligning our interest further with our unitholders. We have announced our first transaction, pulling more acreage into our public portfolio, and increasing our second quarter production range.

We have recommended that our Board increase our second quarter distribution to $0.55 per unit, and our third quarter distribution to $0.5750 per unit, which would which would represent $2.30 on an annualized basis, or roughly 10% growth from the initial public offering, which took place just two months ago. We are moving in the right direction and we plan on continuing to raise the bar on expectations.

Now let me give a brief review on our recently completed transaction. We announced on the 1st of April that we completed an acquisition of oil and natural gas properties from New Source Energy Corporation, Scintilla, LLC and W.K. Chernicky LLC. As a result of this transaction, we updated our second quarter guidance by 20% for production, and increased our estimated distribution growth by 5% for our second quarter, and roughly 10% for our third. We are excited about growing New Source and about the opportunities we have for future growth. We will continue to provide updates to you, as we make progress on these initiatives.

With that, I will hand the call over to Richard to provide you with a financial review of the year. Richard?

Richard D. Finley

Thanks Kristian. As we mentioned earlier, the fiscal year was completed prior to the IPO closing on February 13, so we are reporting today the results attributable to the properties contributed to us, in connection with our initial public offering, New Source Energy Corporation.

For the year 2012, we reported adjusted EBITDA of $29.8 million. This was a decrease from 2011, due primarily to lower gas and NGL prices, and higher expenses associated with our becoming a public company. Net income was $3.1 million for 2012, which was affected by approximately $7 million of derivative gains. In 2011, loan fees of approximately $700,000 were written off. This resulted in an interest expense decreasing by approximately 14% in 2012.

Average daily production during 2012 was 3,147 barrel of oil equivalent per day, versus 3,194 BOE per day for 2011. Average daily oil production was up 25% year-over-year primarily because we were developing a portion of the Hunton, that has a higher concentration of oil. Our previously announced guidance is that we will achieve second quarter production in a range of 3,900 to 4,100 barrels of oil equivalent per day. As a result of the acquisition of the properties announced on April 1. In addition, as a result of that acquisition, our reserves are anticipated to increase by nearly 4 million barrels.

Production costs decreased year-over-year, because of fewer workovers on our properties. We announced yesterday that our Board of Directors had declared a prorated cash distribution for the first quarter of 27.417 cents per unit. This was the first distribution declared by the partnership, and corresponds to a minimum quarterly distribution amount of $0.5250 per unit, or $2.10 on an annualized basis, prorated from February 13, 2013, through of the closing of the IPO through March 31. The distribution will be paid on May 15 to all unitholders on record as of May 1. We have also recommended to our Board of Directors that they increase the second quarter distribution by 5% to $0.55 per unit and our third quarter distribution to $0.5750 per unit or $2.30 per year on an annualized basis, for all outstanding units, following the completion of the acquisition announced on April 1, 2013.

We have a solid balance sheet with $40 million of debt and $60 billion borrowing base on our current credit facility. We intend to continue to position ourselves for growth opportunities.

With that, I will hand the call back to Kristian for closing remarks.

Kristian B. Kos

Thank you, Richard, and thank you to everyone for joining us for our first conference call today. In just a few months, we are already growing and have a platform to continue. We are in a prime position in the Hunton reservoir, and are eager to capitalize on our unique portfolio for our unitholders.

This concludes our formal remarks, and I would like to open the call up for Q&A. Operator?

Question-and-Answer Session

Operator

Thank you. We will now be conduction a question-and-answer session. [Operator Instructions]. Our first question comes from the line of Ethan Bellamy with Robert W. Baird. Please proceed with your question.

Ethan Bellamy - Robert W. Baird

Good morning gentlemen. Congratulations on the IPO and the first transaction. Can you update us on what the remaining assets are, that are controlled by David Chernicky and basically, what's left after the recent acquisition?

Kristian B. Kos

Good morning Ethan. Thanks. It's good to hear from you, and thanks for joining the call today, and we were excited to be able to show some growth between when we last visited with you on the IPO and today on our first earnings call. In terms of what's held currently, there's vast amounts of undeveloped acreage held at the parent and by our Chairman, David Chernicky, and then in terms of what plus or minuses [tell of] this current production and we would view these assets, the current production of our assets that have been producing as of Q4 of last year, versus what's being currently drilled and brought online, and they have been in the vicinity of plus or minus 500 to 600 barrels of oil equivalent, and that would be on oilier product streams than we currently have.

Ethan Bellamy - Robert W. Baird

Okay. How are you tracking right now toward production guidance? Can you give us an estimate of where you [cut] your current production rate?

Kristian B. Kos

I think we are in good shape to deliver on the expectation. We have highlighted and given guidance on of 3,900 to 4,100 barrels of oil equivalent per day. We are aspirational to deliver on the midpoint, if not the high end of the range, but we have definitively set guidance in and around where we see production line today and in the future.

Ethan Bellamy - Robert W. Baird

Okay. One more question, and I will jump back in the queue. Kinder is buying Copano and that looks like it's going to go forward. Are there any early indications about what that will mean, if anything for us, (inaudible)?

Kristian B. Kos

That won't -- in terms of the contracts we have in place, won't adjust any of the day-to-day things we see as an organization going forward, nor does it hamper the benefit we have in terms of the takeaway capacity that we have too, that accrues to our benefit through that [plan]. In other words, not only do things not change, but they continue to remain in place and what that means to us, is we can vastly increase our output in terms of our daily production and have takeaway capacity, which for an organization of our size, is exceptionally important, in this resource day and age.

Ethan Bellamy - Robert W. Baird

Thank you.

Operator

Our next question comes from the line of Dan Guffey with Stifel. Please proceed with your question.

Daniel Guffey - Stifel Nicolaus

Good morning guys. Just a quick follow-up on Ethan's question. The 500 to 600 barrels a day of oil that remains in control by David Chernicky. You said that's oilier in your current mix, I guess how oily is that? And then, if you can kind of give any timing in terms of future dropdowns, that'd be great?

Kristian B. Kos

Dan, appreciate you being on the call, and thanks again. It's good to hear from you. Really at present, how we view things, specifically answering your first part of the question is, it's roughly a third oil, which will be crude, and then the remaining portion will be gas and not as much -- not a high BTU content, so the volume of NGLs wouldn't be as significant. It's from another reservoir, so when we alluded earlier on the call, that we have the potential to develop other reservoirs; as a management team, we have utilized the same system of processes in other reservoirs, multiple reservoirs, not just one or two, but a multitude of reservoirs, and this would be from another reservoir, versus being an oilier part of the Hunton, per se.

Then in terms of future dropdowns, we would give guidance to that in terms of when we would think it's appropriate, if we had a better feel for when we want to execute on it. Our primary target at present at NSLP, is to ensure that we have the runway inside of NSLP to deliver without having to rely on third party or related party acquisitions and dropdowns. So, what we mean by that is, as a group, our intent is to provide organic growth through the drillbit, and then if we can deliver on third party or related party transactions, by dropdowns and so on, then it gives additional accretive value to our unitholders. So, for us, the guidance of 3,900 to 4,100 BOE per day is in line with both the maintenance CapEx program we have provided guidance on, the $2.6 million a quarter, as well as what we have outlined in the IPO process, of what we expect to drill this year, we have the potential to increase output beyond that range of 3,900 to 4,100 BOE per day, via the drill bit, and that's a large part of our focus, and that allows us to take our time to make sure we not only buy the right assets, but buy it in a manner that's of great benefit to the unitholder and buy an asset package that allows us to continue to have that runway of organic growth inside the partnership.

Daniel Guffey - Stifel Nicolaus

Okay great. Do you expect at the parent level, any exploration activities to be focused on in 2013 to try to look at kind of some of the behind pipe reservoirs and outside potential, that could eventually be dropdown in New Source company?

Kristian B. Kos

Yes. Yes we do. We will continue to look at that. There is probably one reservoir of particular focus this year. We currently have looked at or played with, including the reservoir that we are looking at, that represents the 500 to 600 BOE per day. We have currently about four reservoirs that we'd be tinkering with, so to speak, and there's one in addition to that, that I think will be focused on this year. And if successful, and we derisk and delineate it from our perspective, then we have another asset package that would be found throughout present, throughout a large portion of our acreage position, and will be of great benefit to us, to not only give us some growth in terms of flowing barrels per day, but again, that runway we really look for in an acquisition.

Daniel Guffey - Stifel Nicolaus

Okay great. Just one last for me. Obviously NGL prices dropped off pretty hard in 2012. What are you currently seeing for your NGL realizations?

Kristian B. Kos

We have seen it come up. We saw the -- the worse months for us were June and July of last year, we have seen it come up, the correlation has gotten better. We are not soothsayers, we cannot tell what the future brings, but we are not trying to buy into a business plan of having higher oil prices to make us look better. We seem them range on the present. So although we are seeing the correlation between WTI and the NGL realized price increased, we are not sure that on a net BOE basis, that there is a huge amount of upside to the barrel of NGLs. We are not utilizing that as part of our business plan in forecasting.

So we are seeing a higher realized price in the 30s. We are hedged for the majority of our production at $36, which gives us a great footprint and great baseline case for $36 a barrel. And then in the future, the dislocation of infrastructure gets built out or reduced, the dislocation gets reduced through the buildout of the infrastructure, we feel there's benefit to that. But from what we see, there are two parts to that equation for us. Right now, we are priced to Conway in that $36 a barrel hedging. There is a dislocation between Conway and Mont-B, Mont Belvieu, and it seems like there is infrastructure coming online, that will allow us to capture that differential, and then secondarily, it looks possibly that we are three years or so away from better NGL pricing, and a better environment.

So those few things are what we focus on, on being able to capture that dislocation in terms of the differentials important to us. I hope that answers -- somewhat answers your question.

Daniel Guffey - Stifel Nicolaus

Yeah it does. That's all for me. And I just want to say congrats on the IPO and also on your first acquisition.

Kristian B. Kos

Thank you very much.

Operator

[Operator Instructions]. Our next question comes from the line of Robert Horwitz with RH Capital. Please proceed with your question.

Robert Horwitz - RH Capital

Yes, hi Christian. I was wondering if you have the right to other zones in the Hunton, on your --?

Kristian B. Kos

Right Robert, good morning. Hope you are doing well. Thanks for calling in. We currently have the right to access them, to acquire them, via an agreement we have that was set up with New Source, the parent. So we have the right to acquire them and drop them in, but a big part of our focus at NSLP and just our business strategy overall, is not to jump out and try and hold too much acreage that has a lot of risk associated with that, and risk for us means things that we -- that aren't in the development stage.

They are in the derisking stage, exploratory stage, and at our size, a balance sheet and cash flow, and specifically our business style. We are not looking to take on a lot of risks, that might have a lot of upside. We are into hitting singles and doubles, and we want to do that all day long. So from that perspective, we have the rights to all the behind-pipe opportunities, but not the obligation at present, and we will be very cautious about how we bring those reservoirs into the partnership, from the perspective of wanting to have that runway in front of us, that we keep talking about -- that has allowed us to organically develop and organically grow our business without a huge amount of risk.

Robert Horwitz - RH Capital

But you don't anticipate any time in this year or to be involved in any -- in the foreseeable future, to be involved in any other zones on your properties at this point?

Kristian B. Kos

We would envisage that probably 2014, if we do another acquisition, there is, you know, this dropdown we alluded to, that's probably held by our Chairman, David Chernicky, that would open up another reservoir for us, and then, if we were to do that this year, then we'd have an additional reservoir in our portfolio. We'd imagine that in 2014, we have another reservoir in our portfolio, that was in the acquisition we performed on April 1, a very small portion of production coming from another reservoir. So we have, in theory, added another reservoir to our portfolio. It's an oilier reservoir, and as of yet, we haven't incorporated into our development schedule, because we want to make sure we take the time to get our arms around it, and a big part of what we will be doing too in the future is, is how we are forecasting or giving guidance, is to say, we understand the assets we have, or that we have just acquired.

We are giving guidance on the maintenance CapEx to keep the production flat or marginally grow it. We want to take the time to get our arms around those assets, and then be able to deliver guidance or deliver news on how we intend to grow that asset base, and that present in terms of that other reservoir that we brought into the portfolio, we haven't as of yet, got a development around that reservoir, but we do very much like it, it's within the same system, it relies on the same infrastructure. There are huge amounts of benefits to where it stands from a geographic standpoint, and so we will just -- we will take our time to view how we wanted to view the geologic characteristics, and how we then incorporated into our development schedule.

Robert Horwitz - RH Capital

Okay. Thank you.

Operator

Our next question comes from the line of Ethan Bellamy with Robert W. Baird. Please proceed with your question.

Ethan Bellamy - Robert W. Baird

Hi Kristian, just a follow-up. Where did you shake-out on the use of put options, given everything that's going on with [Lynne] and the puts that you had going into the IPO, what's your policy going to be, going forward on NGL risk management?

Kristian B. Kos

We have taken a view and it's somewhat similar to what we did in the IPO process, the put option strategy can be very good for us, in an acquisition scenario, and somewhat was the case in the IPO, though there were assets, and we were moving them down into the partnership, it was an acquisition somewhat by or contribution [by] into the partnership. To utilize split options in an acquisition allows us to very much see what the true cost, full all-in cost of the assets are in that acquisition, and those put contracts can be incorporated into that total price, and that is something we have seen or heard or read about by [Lynne] story that they have utilized that.

On a go forward basis though, in terms of renewal of those put options, beyond what has been put in place at the time of an acquisition, we very much see the use of proceeds to go into organic or growth by the drillbit as being a better use of our capital; and then in terms of the policy of ensuring that will protect ourselves from the downsize, I prefer to have a higher coverage ratio, as a company; and if we can truly have -- maintain, as we have today, a very strong and solid balance sheet, and then have a higher coverage ratio.

We do two things. We, for the first part, protect ourselves from the downside risk associated with having a lower coverage ratio, and then as a result of that, needing a higher hedge basis, and then in terms of what that coverage does for us, if we don't have to use it to protect ourselves from the downsize, which was the intent, hopefully, we are smarter than that. But time will tell, that coverage ratio then gives us organic CapEx for the ensuing year. That's cash that we should have on our balance sheet, comes the next year, and if we are prudent with our balance sheet, and we are not over-leveraged, then we don't have to use that coverage ratio to fix our balance sheet in terms of our leverage issue, and that becomes organic growth CapEx, and that's a very important part of our go forward plan, to utilize that higher coverage ratio as organic CapEx, and as a result, create growth from our prudence.

Ethan Bellamy - Robert W. Baird

I like that answer. Let me end on a fun one. There are some academics in your area that think that water disposal wells are responsible for earthquakes, specifically the big ones there, what's your take on that?

Kristian B. Kos

Well I do know that, as of yesterday, there were roughly 238 earthquakes above the magnitude of 2.5 globally, in the last seven days, there were 1,028, or thousand or something. In the last 30 days, above the magnitude of 2.5. I can understand the theories of water displacement in aquifers and what that does in terms of -- to the weight of the earth and the fault structures. I can understand what that does on a global basis, whether we are using water for drinking or plowing fields, or what have you. I get that the -- I already do think we make a huge impact on this earth, by building massive skyscrapers and bridges and all these fun things, but I am still trying to scratch my head, what a saltwater well in, say Central Oklahoma has to do with (inaudible) or Japan or the West Coast of Chile. So as big as those earthquakes are, relative to the earthquakes we have here, the fault structures that are here on earth, that create -- depends on what you believe in, but I just sort of scratch my head and say, I know humans are important, but I don't know how important we are, relative to mother nature, and so I think there are great theories out there, but a big dislocation in how -- in terms of what we can do as humans, relative to what mother nature can do.

Ethan Bellamy - Robert W. Baird

Okay. Thank you.

Operator

Since there are no further questions this time, I would like to turn the floor back over to management for closing comments.

Kristian B. Kos

Well, thank you very much operator, and we very much appreciate everyone's time today, and the interest you will have in NSLP and we look forward to building this relationship with you all, through delivering at and above expectations we set. Thank you very much, and appreciate it. Bye-bye.

Operator

This concludes today's teleconference. You may disconnect your times at this time, and thank you for your participation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: New Source Energy Partners' CEO Discusses F4Q 2012 Results - Earnings Call Transcript
This Transcript
All Transcripts