Pioneer Southwest Energy's CEO Discusses Q1 2013 Results - Earnings Call Transcript

| About: Pioneer Natural (PXD)

Pioneer Southwest Energy Partners L.P. (PSE) Q1 2013 Earnings Conference Call May 2, 2013 12:00 PM ET

Executives

Frank Hopkins – SVP, IR

Scott Sheffield – Chairman and CEO

Richard Dealy - Executive Vice President and Chief Financial Officer and Treasurer

Analysts

Abhi Sinha – Bank of America

Kevin Smith – Raymond James

Aaron Terry – Kayne Anderson

Steve Tabb – Tocqueville Asset Management

Operator

Welcome to Pioneer Southwest Energy’s first quarter conference call. Joining us today will be Scott Sheffield, Chairman and CEO, Rich Dealy, Executive Vice-President and CFO, and Frank Hopkins, Senior Vice-President of Investor Relations.

Pioneer Southwest has prepared PowerPoint slides to supplement their comments today. These slides can be accessed over the internet at www.pioneersouthwest.com.

Again, the internet site to access the slides related to today’s call is www.pioneersouthwest.com. At the website, select ‘Investors’, then select ‘Investor presentation.

This call is being recorded. A replay of the call will be archived on the internet right through May 27. The partnership comments today will include forward-looking statements made pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995.

These statements and the business prospects of Pioneer Southwest are subject to a number of risk and uncertainties that may cause actual results and future periods to differ materially from the forward-looking statements.

These risks and uncertainties are described Pioneer Southwest’s news release on Page 2 of the slide presentation, and in Pioneer Southwest Public Filings made with the Securities and Exchange Commission.

At this time, for opening remarks, I would like to turn the call over to Pioneer Southwest’s Senior Vice-President of Investor Relations, Frank Hopkins. Please go ahead sir.

Frank Hopkins

Good day everyone and thank you for joining us. I am going to briefly review the agenda for today’s call. Scott would be the first speaker to review the financial and operating highlights for the first quarter of 2013.

He will then update you on PSE’s drilling program in the Spraberry field. Rich will then cover the first quarter financials in more detail and provide guidance for the second quarter and after that, we’ll open the call for any questions that the people on the line might have.

So with that, I’ll turn the call over to Scott.

Scott Sheffield

Thanks Frank. Good morning. On Slide #3 our highlights, PSE at first quarter for 2013 had adjusted income of $16 million or $0.46 per unit. That does exclude unrealized mark-to-market derivatives gains of $1 million after tax or $0.02 per common unit.

We had first quarter production averaged almost 7900 barrels/day at 7893. It does reflect a loss of 300 barrels of oil equivalent per day, due to reduced ethane recoveries, associated with the fact that the existing gas processing plant was at or above capacity.

The new plant has just started, the driver plant, it came online mid-April, which alleviates the ethane-recovery issue. It doesn’t mean that in the future, due to a pricing that ethane could be rejected in the future. It’s sometimes better to leave it in the pipe from a standpoint of pricing.

We’ve got 12 new wells, one re-completed well, replaced on production in the first quarter, and [9][ph] additional wells are waiting completion at the end of the first quarter. We continue to see and benefit from deeper vertical drilling, including the Spraberry, the WolfCamp, the Strawn and the Atoka intervals.

Capital program of $120 million expected to generate production growth 9% as compared to 2012. Cash flow operations $22 million, distribution of $0.52 per unit for the first quarter. We paid on May 10 the unit holders of record date on May 3. That equates to $2.08 per common unit on annualized basis.

Slide #4, going to our drilling program, we expect to drill about 50 wells with three rigs. Capital expenditure is about $120 million, including facilities. Again, we expect to generate about 9% production growth and also about 85% of our wells are going to the deeper Atoka interval.

Inventory, 150 remaining 40-acre locations, have been close to 1300 20-acre locations. If you remember, we have had very successful 20-acre location drilling over the last several years at PXD level.

In addition, we are continuing to see successful horizontal WolfCamp drilling by industry participants in and around Midland County where a lot of the acreage is.

Let me turn it over to Rich to go over the financial quarter.

Richard Dealy

Thanks Scott. On Slide #5, as Scott mentioned adjusted income excluding mark-to-market derivatives was $16 million or $0.46 per unit, and looking at the middle page, there you can see where we gave guidance for the first quarter and where our results came in, production and the high end guidance, the other items within guidance, as expected, so a good quarter overall for PSE.

Just to update, we do have $154 million debt at the end of the quarter. Credit facility availability is $122 million, which is plenty to fund our 2013 drilling program. We also added some incremental derivative in 2013 on gas. That brings our total gas coverage for derivatives in total of 70% for 2013, 70% for 2014 and/or 10% for 2015.

Turning to slide 6, second quarter guidance, we are increasing second quarter guidance for 7700 to 8200, BOEs/day, really to reflect the new wells coming on and incremental gas processing facility capacity that would no longer be limited in the facility out there, as we have in the fourth and the first quarter.

Now the rest of the guidance items are similar to what they have been in past quarters so I won’t go over those in detail. But they are there for your review. At this point we’ll go ahead and open up the call for questions.

Question-and-Answer session

Operator

Thank you. (Operator instructions) We will take our first question from Abhi Sinha of Bank of America.

Abhi Sinha – Bank of America

Hi, one quick question regarding ethane rejection, what price you guys feel comfortable, I mean at what price would you think you would be voluntarily rejecting ethane?

Scott Sheffield

At what price we’ll reject ethane?

Abhi Sinha – Bank of America

Yes sir.

Scott Sheffield

With gas around, it’s pretty close to a breakeven now with gas at 4, ethane selling for about $0.25. So it’s very close to a breakeven point at this point in time.

Abhi Sinha – Bank of America

Okay. Also I wanted to get touch base on basically on the drop down possibility. If I understand correctly, I mean is there any other asset that you have available outside Spraberry that could be a potential for dropdown or is it mostly limited to Spraberry assets?

Scott Sheffield

No, there’s other assets within PXD that could be dropped down if PXD chose to do that. But today, there’s no current plans for that to happen.

Abhi Sinha – Bank of America

Sure, okay. And the last thing, if you could just shed your thoughts on what the possibility of [Lincore] [ph] type structure? Is that something that management is thinking or does that gets too complicated with the parent’s presence there or how should we think about that?

Scott Sheffield

Yeah, I would say based on where we are today, that’s not something we are considering.

Abhi Sinha – Bank of America

Okay.

Scott Sheffield

Very complicated.

Abhi Sinha – Bank of America

Sure, thank you. That’s all I have. Thank you.

Operator

We’ll take our next question from Kevin Smith with Raymond James.

Kevin Smith – Raymond James

Hi, good morning. Nice solid quarter. With the driver plant online, are there any other production bottlenecks that we foresee? I mean obviously we’re seeing tremendous growth out of the - [just assuming] [ph] every once in a while going to bump into some sort of midstream constraint, but I wanted to get your thoughts on it?

Scott Sheffield

Yeah, we have working with [Atlas] [ph] in regard to another plant potentially coming on by the summer of 2014. So just to make sure that we don’t have future bottlenecks in regards to gas processing. There’s plenty of crude lines that are being built into the Midland tank farm or close by and so we don’t see any issues on crude oil take away over the next 12 months or 18 months or even further out. And also the NGL take away down at Bellevue is pretty much solved also. So right now we are not anticipating any bottlenecks.

Kevin Smith – Raymond James

Great, and what do you seeing on the water disposal costs and remind me what you guys do with that?

Scott Sheffield

We re-inject most of our water back into the San Andres formation, which is about 4500 to 5000 feet deep, and so almost all that produced water and also fracked water is re-injected back into the San Andres formation.

Kevin Smith – Raymond James

Okay.

Scott Sheffield

So our cost, I don’t know. Do we know what the cost is for re-injecting?

Richard Dealy

Yes, a couple of dollars for that and hauling it’d typically run four or five dollars per barrel but we are doing, between PXD and PSE work in the field that we are hoping that more than just re-injecting without any hauling.

Kevin Smith – Raymond James

Are you expecting operating cost then to be pretty flat going forward after we saw a pretty decent step up in the second half of 2012?

Scott Sheffield

Yes, I do expect them to be flat and hopefully come down just a little bit.

Kevin Smith – Raymond James

Got it. Thanks for the time. That’s all I have.

Operator

(Operator Instructions) We will take our next question from Aaron Terry with Kayne Anderson.

Aaron Terry – Kayne Anderson

Gentlemen, congrats on the quarter. I just want to see if you clarify for me when you guys made the statement of the quarter was impacted by loss of approximately 300 BOE/day of reduced ethane recoveries if you wouldn’t reject - if it wasn’t (inaudible) constraints there what would be net - is that the net impact after processing or reducing shrink on those gas volumes. I just want to see if you can clarify how that works.

Scott Sheffield

That is net, after all the impacts so that we would have seen a pickup of 300 BOEs/day.

Aaron Terry – Kayne Anderson

Okay, so roughly 8200 barrels a day would have been kind of the [pro forma] [ph] if it was economic not to process?

Scott Sheffield

That’s right.

Aaron Terry – Kayne Anderson

Okay, that’s all I had. Congrats for quarter.

Scott Sheffield

Thank you.

Operator

And thank you. We will take our next question from Steve Tabb with Tocqueville Asset Management.

Steve Tabb – Tocqueville Asset Management

Thanks. You have a number in your report, a numbers regarding like partnership three rig drilling programs during the first quarter with 12 new wells being placed in production. What was the number of wells, number of drilling that you did last year, number of wells you drilled last year in the first quarter and you said you expected to drill 50 wells this year, how many did you drill last year?

Scott Sheffield

Yes, Steve, I don’t remember the number last year for the first quarter for the whole year we are in that 45 to 50 range last year, but I don’t recall the first quarter numbers exactly. So it is very similar - we had a three rig program last year so this year you can expect to be very similar.

Steve Tabb – Tocqueville Asset Management

So at the end of the quarter the partnership had 9 wells awaiting completion. Would you have about the same number a year ago, so by running at the same rate you ran a year ago?

Scott Sheffield

Yes, and it varies, you know, one or two, but yeah, generally we are going to be in that 6 to 9 range if the timing works out.

Steve Tabb – Tocqueville Asset Management

Now the way you are financing these drilling program a lot of it comes from increasing your Bank [grant] [ph] flows, right?

Scott Sheffield

Yes, we have been leveraging to for drilling and growth.

Steve Tabb – Tocqueville Asset Management

So do you expect to increase your line this year by about the same amount about $28 million as you did last year or will it be substantially less or more?

Scott Sheffield

Well we actually increased it more last year so I would expect it you know we would exit the year based on current commodity prices around plus or minus $200,000 on the credit facility.

Steve Tabb – Tocqueville Asset Management

And your total credit facility is about 250 is it?

Scott Sheffield

It’s about 300 but based on bank pricing today we’ve access about 275.

Steve Tabb – Tocqueville Asset Management

So if you kept on going away you’re going now you might be hitting your limit in two years?

Scott Sheffield

Yes, without - where commodity prices are; I do want add point we do have better derivative portfolio next year so that that’ll add about $25 million to cash flow next year based on our derivative position, but you know that is correct.

Steve Tabb – Tocqueville Asset Management

I am just concerned about how long you would be able to maintain your cash distribution and your present financing at the rate you are going.

Scott Sheffield

Yeah, I think, you know a lot depends on where you know the activity level on the field where service cost go on drilling and what commodity prices do, so there is lot of variables in there and how much production growth we’re generating - 9% this year and growth the next couple of years to balance that out, but over the time yes we’ve got to spend within cash flow.

Steve Tabb – Tocqueville Asset Management

Well, in other words, will you increase production - when will your increased production offset the fact that perhaps you don’t have available bank lines so that you can continue your distributions.

Scott Sheffield

Yes, you know it’s a number of years out before we get to that point.

Steve Tabb – Tocqueville Asset Management

Alright, thank you.

Scott Sheffield

Welcome.

Operator

It appears that there are no further questions at this time Mr. Sheffield I’d I'd like to turn the conference back to you for any additional or closing remarks.

Scott Sheffield

Again thanks on behalf of Pioneer Southwest and we appreciate everybody attending and look forward to seeing you in the next quarter.

Operator

That concludes today's conference call. Thank you for your participation.

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