LRR Energy's CEO Discusses Q3 2013 Results - Earnings Call Transcript

Nov. 1.13 | About: LRR Energy (LRE)

LRR Energy LP (NYSE:LRE)

Q3 2013 Earnings Call

November 1, 2013 9:00 AM ET

Executives

Jaime Casas - VP, CFO and Secretary

Eric Mullins - Co-CEO and Chairman

Charles Adcock - Co-CEO and Director

Tim Miller - VP and COO

Chris Butta - VP and Chief Engineer

Analysts

Kevin Smith - Raymond James

John Ragozzino - RBC Capital Markets

Michael Peterson - MLV & Company

Mike Schmitz - Ladenburg Thalmann

Daniel Guffey - Stifel Nicolaus

Michael Gaiden - Robert W. Baird

Operator

Good morning. My name is Tasha, and I will be your conference operator today. At this time, I will like to welcome to the 2013 Third Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions) Thank you.

I would now like to turn the call over to our host, Mr. Jaime Casas, Chief Financial Officer. Sir, please go ahead.

Jaime Casas

Thanks operator and good afternoon everyone. Welcome to LRR Energy’s third quarter 2013 earnings conference call. Also presenting this morning will be our Co-Chief Executive Officers, Eric Mullins and Charlie Adcock; and our Chief Operating Officer, Tim Miller. Chris Butta, our Chief Engineer is also with us and available for questions.

During the course of the call management will make forward-looking statements about LRE. Forward-looking statements are based on current expectations and relate to future business and financial performance. Actual results and future events could differ materially from those anticipated in such statements. Forward-looking statements involve certain risk and uncertainties and may not prove to be accurate. These risks and uncertainties are included in the Risk Factors section of our 2012 Form 10-K on file with the Securities and Exchange Commission.

Additionally, during the course of today’s discussion management will refer to adjusted EBITDA, distributable cash flow and distribution coverage as important metrics for evaluating LRE’s performance. Please note these metrics are non-GAAP financial measures, which are reconciled to the most directly comparable GAAP measures in the earnings press release we issued yesterday.

I will now turn the call over to Eric

Eric Mullins

Thanks, Jaime and good afternoon everybody. And we appreciate all of you joining us for our third quarter earnings conference call this morning. In a few minutes, Charlie, Tim and Jaime are going to discuss our third quarter results in detail, but in summary we’re extremely pleased with our operating and financial results for the quarter.

Third quarter financial results benefited from higher liquids production and higher oil price realizations compared to the second quarter.

For the quarter production averaged 6,609 barrel of oil equivalents per day. Adjusted EBITDA was $21.5 million, distributable cash flow was $14 million and our total unit distribution coverage was 1.1x.

On the acquisition front, the market remains very active but challenging from a pricing standpoint. In terms of deals screened this quarter was by far the most active quarter since the fourth quarter of 2012. While we can’t predict the timing of acquisitions or whether we will be successful we are encouraged by our current backlog of potential transactions.

LRR Energy remains committed to a disciplined and patient approach of acquiring assets that we believe are well suited for the MLP structure and at prices that provide long-term distributable cash flow per unit accretion.

Finally, our Board of Directors declared an increase in our per unit distribution for the third quarter, bringing our current distribution to $0.4875 per outstanding unit or $1.95 per unit on an annualized basis. The distribution will be paid on November 14, 2013. The third quarter distribution is the fifth consecutive quarter with a distribution increase.

With that, I will turn the call over to Charlie.

Charles Adcock

Thanks, Eric. I will now review the operating results for the third quarter. Yesterday, we reported total net production of 608,000 Boe for the quarter, an increase of approximately 18,000 Boe over the second quarter production. Our production was roughly 50% natural gas, 36% oil and 14% natural gas liquids for the quarter. Oil and NGL production increased for the quarter primarily due to better well performance and increased recompletion activity at our Red Lake field.

Lease operating and workover expenses for the quarter were $6 million or $9.87 per Boe, compared with $5.3 million or $8.93 per Boe in the second quarter. The 11% increase on a $1 per Boe basis was primarily due to increased non-operated activity at our East Velma field.

Based on our year-to-date re-casted results and outlook for the fourth quarter, we are revising our full year 2013 LOE per Boe guidance downward $0.25 to a range between $10.25 and $10.75 from the prior range of $10.50 to $11. Production and ad valorem taxes for the third quarter were $2.4 million or $4 per Boe and represented 7.7% of gross revenue. This is compared to the production and ad valorem taxes for the second quarter of $2.2 million or $3.72 per Boe.

I will now hand the call over to Tim Miller, who will provide more color on our operations for the period.

Tim Miller

Thanks, Charlie. For the third quarter, our average daily production was 6,609 Boe per day, up 2% from the second quarter production. Third quarter production benefited from the continued successful execution of our 2013 capital program, which remains focused on oil weighted projects in the Red Lake field in New Mexico.

During the three months ended September 30, 2013, our total cash capital expenditures totaled $10.5 million. During the quarter, we successfully drilled and completed five wells at Red Lake. We also accelerated our recompletion activity by successfully recompleting 11 wells during the quarter. Year-to-date we have drilled 23 wells and recompleted 21 wells at our Red Lake field.

Our October average net production through October 25th was 6,530 Boe per day. Our updated re-casted production guidance range for full year 2013 is 6,400 to 6,500 Boe per day, which is a narrowing of our prior guidance range of 6,300 to 6,550 Boe per day.

We are also revising our planned 2013 capital expenditures upward by 2 million to $34 million. The incremental capital is scheduled to be used for additional non-operated drilling activity at our Corral Canyon and Putnam fields, primarily during the fourth quarter. We now expect non-operated drilling activity in the Putnam field to remain above previously forecasted levels through 2014, due to a change in operatorship on a significant portion of the leasehold. Including this in our activity, our fourth quarter plan is to drill 10 wells, four of which are at Red Lake and recomplete eight wells, seven of which are at Red Lake.

As Charlie mentioned, our lease operating expenses for the quarter were $6 million, which included approximately $300,000 of expense workovers. Workover cost are difficult to accurately predict and can vary quite a bit from quarter-to-quarter. Workover expenses for the quarter were approximately the same as the second quarter and approximately $800,000 lower than the first quarter of 2013. To clarify, workover costs are primarily associated with repairing things that break, both on the surface and down hole. They are not typically scheduled events.

I will now turn the call back to Jaime, who will walk you through our financial results.

Jaime Casas

Thanks, Tim. For the quarter adjusted EBITDA was $21.5 million. Distributed cash flow was $14 million and our total unit distribution coverage was 1.1x. Excluding our subordinated units, our unit distribution coverage was approximately 1.5 x. In addition to the higher liquids production, our second quarter results benefited from higher oil prices. Our realized oil price for the quarter was $93.20, which was a 3% increase over the second quarter. Natural gas prices were roughly in line with the second quarter.

Next, I would like to provide an update on our current commodity hedge position, which reflects additional 2014 oil swaps and 2015 NGL swaps we entered into this week. Assuming a midpoint of our revised 2013 production guidance is held flat through 2017, our current estimated total production is 96% hedged for the remainder of 2013, 82% in 2014, 63% in 2015, 55% in 2016 and 44% in 2017.

Weighted average prices during the period are $92.50 per barrel of oil and $5.06 per MMBtu of natural gas. More specific details of our hedge position are disclosed in the earnings press release we issued yesterday.

As Charlie and Tim mentioned, we have revised our 2013 public guidance. We expect production to average between 6,400 and 6,500 Boe per day and LOE to average between $10.25 and $10.75 per Boe. Total capital expenditures for 2013 are now expected to be $34 million.

I would like to close with our balance sheet. As of today, we have 190 million of outstanding borrowings under our revolving credit facility and 90 million of total outstanding borrowings in term loan facility.

Eric Mullins

50 million.

Jaime Casas

I'm sorry, 50 million of outstanding borrowings under our term loan facility. We currently have 60 million of available borrowing capacity under our revolving credit facility, which we believe provides ample financial flexibility to continue to execute our capital program and distribution strategy.

Operator, that concludes our formal remarks. You can now open up the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Kevin Smith with Raymond James.

Kevin Smith - Raymond James

First, would you mind reminding me what your inventory like is at Red Lake?

Tim Miller

Yes, this is Tim Miller. We have an inventory of about 100 to 120 drilled wells remaining. About 25 to 30 of those are Yeso infield locations down to 10 acre spacing, the rest are San Andres locations. Interesting -- and as we drill -- and additionally we’ve drilled about 40 Yeso wells over the last couple of years. Every time we drill one of those, those create a San Andres recompletion opportunity as well. So, we have a large number of recompletion opportunities as well, probably in the neighborhood of, I don’t know Chris, you might know better.

Chris Butta

70.

Tim Miller

70?

Chris Butta

Yes.

Kevin Smith - Raymond James

And then maybe you can talk about what you’re seeing for basis differentials, starting to hear that Midland is getting a little tougher?

Jaime Casas

Yes Kevin, this is Jaime. We have seen the Midland differential widen out a little bit. It’s currently about $2 per barrel, but as you know we’re well hedged on that. Earlier this year we hedged about 75% of expected PDP through 2014. For the rest of this year we’re hedged at $1.25 and next year we're hedged at $1. So we actively monitor that and if it gets down to levels that we're comfortable with, you should expect us to add additional oil differential hedges in 2014.

Kevin Smith - Raymond James

And then are you seeing anything active up there in the A&D market?

Eric Mullins

Kevin this is Eric. The A&D market is extremely robust right now. We're running flat out just in terms of evaluating different opportunities. We have made several offers over the course of the last six to 12 months or so, and we'll continue to do that. So we're optimistic about it. Pricing is a bit of a challenge, several transactions have gone for pretty high prices. So we're being patient, but participating, we're active in it. We're seeing both properties with - that are oil weighted, as well as some properties that are more gas weighted. So we're seeing a combination of both, but it's been very busy.

Operator

Your next question comes from the line of John Ragozzino with RBC Capital.

John Ragozzino - RBC Capital Markets

Eric, you mentioned the general pricing trends in the A&D market. Could you maybe quantify what you are seeing and compared to say the last 12 months are the high watermarks of the same as fourth quarter last year?

Eric Mullins

It really varies John. We are seeing -- it's typical that the fourth quarter perks up, third and fourth quarter, in terms of activity as people are shaping their portfolios and rationalizing assets and maybe managing for taxes for the next year. So that's not unusual and we're seeing the exact same thing for this year.

I would say generally speaking kind of year-over-year we focus on flowing metrics on a dollar per barrel or a dollar per Mcfe basis. And I would say over the course of the last couple of years you are starting to see in particular for oil, those numbers trend up a little bit from 100,000 per flowing barrel to north of that. So we’re observing that. Depends obviously on where the properties are and what the natures of those properties are, and how many development locations are associated with those properties. So it just depends, but generally speaking I would say that we're seeing a trend upwards in terms of…

John Ragozzino - RBC Capital Markets

And you started to touch upon -- is this a concentrated phenomenon or it’s just specific to the Permian or is it more of a widespread trend that you are seeing across the entire Lower 48?

Charles Adcock

Hey John, this is Charlie. It’s more widespread, I mean we’ve looked at deals in the Rockies recently and they have been oil deals, but they’ve commanded pretty substantial premiums. So we just had to pick and choose. As Eric mentioned, I mean, I have been doing this a long time and you just have to be patient and we keep plugging at it and we'll get our fair share of deals.

John Ragozzino - RBC Capital Markets

And I apologize if I may have missed this. I got dropped off for a second there. But redetermination this October, do you expect any material changes in the borrowing base or any increase on organic reserve adds?

Jaime Casas

Yes, John this is Jaime. We’re in the middle of that process. Expect to have an answer in the next two weeks. And at this point do not expect a material change to our current borrowing base, it's 250 million.

John Ragozzino - RBC Capital Markets

And then was there any impact to the quarter as far as infrastructure constraints in the Permian curtailment that kind of thing?

Tim Miller

Yes, John this is Tim Miller. We have -- our main curtailment has been at Pecos Slope and Red Lake. At Red Lake the gas gathered there [is showing] [ph] additional compression, which is hopefully going to be on here in the matter of next couple of weeks. So should relieve some of our flaring that we have had at Red Lake, the Pecos Slope is still scheduled for next year before that relief comes there. But we haven't seen anything new. There has been a little tightening of oil trucking, so we’re just having to manage through that.

John Ragozzino - RBC Capital Market

And then just one more, I know I’d usually strike out when I ask this question, but I got to try. Is there any comments you care to make on what you expect for 2014 CapEx, maybe even just on a directional basis, relative to 2013?

Jaime Casas

Yes John, it is Jaime. We are in the preliminary stages of that and obviously we need Board approval. We expect to get that early next year, but based on what we know today we would expect the total budget to be similar to what our 2013 budget is, and again focused on liquids projects.

Operator

Your next question comes from the line of Michael Peterson with MLV & Company.

Michael Peterson - MLV & Company

Couple of operational questions; first, with regarding LOE, the gains that you have posted year-to-date, do you feel like you are at a steady state or is there some expectation we might see a continued improvement into the fourth quarter in 2014?

Tim Miller

Yes Michael, this is Tim Miller again. I think there is going to be slight steady improvement in the metric, as depending on what the production does. But we have done most of the saltwater disposal projects where we had planned, so we’re pretty steady at this point.

Jaime Casas

Yes, Michael, this is Jaime. Obviously, the wildcard there is workover activity, which as Tim mentioned in his comments, is extremely hard to predict and estimate. But assuming we don’t see any wild swings on that, I think LOE should be consistent in the fourth quarter.

Michael Peterson - MLV & Company

Given the new drilling that you’re adding to the portfolio, what are you expectations for decline rate in 2014?

Chris Butta

You are talking about the average decline rate for the individual well?

Michael Peterson - MLV & Company

Yes, just the -- no I am sorry the underlying decline rate across the portfolio. Sorry for that.

Jaime Casas

Yes, so our PDP kind of three year average decline is about 12%. Is that kind of what you’re asking?

Michael Peterson - MLV & Company

Yes, exactly. You’ve added some new production recently and I just wanted to know if that had any acceleration in terms of the decline, but it sounds like you’re going to be relatively stable.

Jaime Casas

Yes, Michael, that’s correct. Even with the additional activity this year as the previous wells in the prior years mature, we expect that to offset. So, we expect kind of PDP decline rate to be consistent even with the increased activity this year.

Michael Peterson - MLV & Company

Last one, heading into year-end, any expectations in terms of impairments or other types of things we might see in concert with full year numbers?

Jaime Casas

Not based on current commodity prices.

Operator

Your next question comes from the line of Mike Schmitz with Ladenburg.

Mike Schmitz - Ladenburg Thalmann

Can you just provide any update, if there is any changes you’re seeing in your Red Lake results? And then also I think you have said in the past some offset operators are testing 5 acre and it’s all potential, any update there?

Tim Miller

Hey, Mike, this is Tim Miller. We just went with an exercise on the Red Lake drilling. The compare results, the drilling results are amazingly consistent. The results, average IPs for our 2013 program have been about 81 barrels of oil per day, which matches exactly what the average IP was for our 2012 drilling. And now we are seeing improvement in our recompletions of the San Andres where we’re seeing IPs in some wells high as 100 barrels a day, but the average is probably closer to about 50 versus recent expectations in the 35 barrel of oil per day range. What was the second part of that?

Mike Schmitz - Ladenburg Thalmann

Any thoughts on potential for 5 acre down spacing base off for other operators who are doing on nearby acreage?

Tim Miller

Yes, we are still tracking that. We haven’t seen a lot of activity very close to our leasehold here. It’s been a little further East about 5 to 6 miles. And it didn’t seem to be accelerating at this point.

Operator

(Operator Instructions) Your next question comes from the line of Daniel Guffey with Stifel Nicolaus.

Daniel Guffey - Stifel Nicolaus

Just curious, can you walk through what you have at Fund I and Fund II in terms of potential future dropdowns, say in 2014 and kind of a status of those assets and maybe the size of those assets as well?

Eric Mullins

Yes, Dan, this is Eric. We don’t have any properties that are operated in Fund I remaining at all, all we have in Fund I are about 8.6 million units in LRE. Fund II has just over 30 million Boe approved reserves. Most of those are oil weighted and we’re actively working on all of those properties. So, those properties are in various stages of development and our expectation is that overtime they will be -- some of those would be potential candidates for dropdowns for LRE.

In our view, we need to get those properties to a higher percentage of approve, develop, producing and then when they’re ready, we will drop -- our plan would to or they would be potential candidates for dropdown.

I will mention -- I think you know that we had been in the market earlier this year raising Fund III, and now as of about a month ago, we have officially closed that Fund. It did close at a hard cap of $750 million. We typically use about 50% leverage associated with acquisitions. So we are very active on the partnership side, targeting about $1.5 billion worth of properties to put in those funds which potentially will become candidates for future dropdowns for LRE as well. So that side is accelerating in terms of the potential acquisition opportunity at the Fund level.

So, we are optimistic, we are excited about that. We do have some properties that are in and around the property locations for LRE. So from that standpoint as well they will be quite complementary to some of the assets that are already existing in LRE.

Daniel Guffey - Stifel Nicolaus

So I guess Fund II, I mean it could be a 2014 dropdown story for a portion of the assets?

Eric Mullins

We evaluate that all the time and we're continuously looking at that and making judgments about when the right time is to complete a potential dropdown, so that's something that we look at all the time.

Operator

Your next question comes from the line of Michael Gaiden with Robert W. Baird.

Michael Gaiden - Robert W. Baird

My question, just a couple of points of clarification if I may, Jaime can you remind us what seasonal increases we can expect in G&A in the fourth quarter?

Jaime Casas

Yes, because of our year-end processes, the first and the fourth quarter are the highest and the second and third are the lowest. And so we’re probably compared to this quarter approximately about $300,000 higher than where we were for the third quarter.

Michael Gaiden - Robert W. Baird

And then can I lastly ask on Pecos Slope the nitrogen facility there, it sounds like now that's scheduled for the first quarter of '14, is indeed that correct and is that delayed at all versus your expectations which I thought were for the fourth quarter?

Tim Miller

Michael, this is Tim Miller. No, we've been -- our prior guidance has been that coming on in the first quarter of 2014, that's still our thinking at this point. It has a very minor impact on our revenue. It’s about a 1.5% impact on our revenue, so it's a production impact, but the revenue impact is pretty small.

Operator

(Operator Instructions) At this time there are no more questions.

Jaime Casas

Alright, well we appreciate everyone participating on the call this morning. Don't hesitate to call us, if you have any additional follow-up questions. Thanks a lot.

Operator

Thank you, ladies and gentlemen. This concludes today's conference call. You may now disconnect.

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