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Constellation Energy Partners LLC (NYSEMKT:CEP)

Q3 2013 Earnings Call

November 15, 2013 9:30 am ET

Executives

Stephen R. Brunner - Chief Executive Officer, President and Chief Operating Officer

Charles C. Ward - Chief Financial Officer, Interim Chief Accounting Officer and Treasurer

Analysts

Michael D. Peterson - MLV & Co LLC, Research Division

Gregg T. Abella - Investment Partners Group, Inc.

Operator

Good morning, and welcome to Constellation Energy Partners' Third Quarter 2013 Earnings Call. [Operator Instructions] The conference is being recorded.

I will now turn the call over to Stephen R. Brunner, President and Chief Executive Officer of Constellation Energy Partners.

Stephen R. Brunner

Good morning, everyone, and thanks for joining us as we review our third quarter results. I'll start the call today with some updates since our last call before turning things over to Chuck for a look at our financials. Before we get started, if you'll turn Slide 2, I'd like to remind everyone that this morning's presentation is being webcast and our slide deck is available on our website, which is www.constellationenergypartners.com. I'd also like to remind everyone that our slides and discussion this morning include forward-looking statements, which are subject to certain risks and uncertainties. These risks and uncertainties are described more fully in our documents on file with the SEC, which can also be accessed from our website.

And finally, we'll again use non-GAAP financial measures in this morning's presentation to help our unitholders and the investment community better understand our operating performance. The presentation available on our website includes an appendix that reconciles these non-GAAP financial measures to GAAP measures.

If you'll turn with me now to Slide 3. For 9 months ending September 30, our total average net production was 3,583 BOE per day. Our oil production, which has run about 564 barrels per day so far this year, has accounted for about 50% of our total sales revenue in 2013, which is right where we expected to be on that metric. We continue to focus our drilling efforts on oil opportunities and our asset base. And in the third quarter, completed 20 net wells using $6.3 million in cash from operations. That brings our total for the year to 59 net wells and recompletions on capital spending of $12.7 million. And we finished the third quarter with 20 net wells and recompletions in progress.

As it has been for quite some time, the focus of our drilling in the third quarter was on oil potential in our Mid-Continent asset base.

Looking ahead, we expect to maintain this focus while, at the same time, taking advantage of new opportunities available to us, as a result of the Sanchez transaction in South Texas and Louisiana, where we anticipate spending up to $2 million of our capital budget in the fourth quarter this year.

During the third quarter, our operating costs, which include lease operating expenses, production taxes and general and administrative expenses, net of certain non-cash items, averaged about $26 per BOE. For the year-to-date, excluding employee severance charges in the first and second quarters of 2013, our operating cost averaged just a little over $25 per BOE, which is a decline of approximately 1%, compared to the 9-month period of 2012.

Our adjusted EBITDA was $7.4 million for the third quarter and $17.4 million for the year-to-date, which is a 20% improvement when compared to the same 9-month period of 2012. Excluding employee severance charges in the first and second quarters of 2013, which are non-recurring, our adjusted EBITDA for the year-to-date was $18.3 million, which is a 27% improvement over the same 9-month period of 2012. So we're very pleased with execution of our plan so far this year and hope to build on the positive momentum we gained this year, as we continue to integrate the assets acquired in the Sanchez transaction and look to build on the business relationship, we've developed with the Sanchez entities.

On that note, I'll mention here, we announced after our last earnings call that CEPM, a wholly owned subsidiary of PostRock, along with 2 of our former Class A managers, filed a complaint in the court of Chancery of the State of Delaware against CEP, certain of CEP's executives and managers and other parties related to the Sanchez transaction.

Now, it's our practice not to comment on pending litigation, but I'll reiterate here, that we believe that the allegations contained in the lawsuit are without merit. The PostRock litigation is currently in the discovery phase. A hearing on Plaintiff's application for preliminary injunction seeking to enjoin our December 5 annual meeting is scheduled for December 2.

The trial in the PostRock litigation is scheduled for December 16, 17 and 18 in Wilmington, Delaware. We do not know, however, how long it will take for decision to be rendered in the case after the trial.

With those updates, I'd like now to turn the call over to Chuck to look at our financial results.

Charles C. Ward

Thanks, Steve. On Slide 4, we compare our third quarter 2013 results to the second quarter 2013 and the third quarter 2012. In each case as we have seen since the beginning of this year, we're showing results for continuing operations, which is to say that we've adjusted the Robinson's Bend assets out of the prior quarter's reported results.

Our total production during the second quarter was 335 MBOE, which is up about 9% versus the prior quarter. Third quarter 2013 oil and gas sales revenue of $16.5 million compares to $13 million in the prior quarter and $13.4 million in the third quarter 2012.

Since you can see, our summer drilling activity in the Sanchez transaction positively impacted our production and revenue in the third quarter of the year. The balance of our revenues is impacted by a mark-to-market loss on the value of our hedge portfolio, which is a function of higher commodity price levels quarter-on-quarter, as compared to the fixed prices under our hedge contracts.

As you recall, this is non-cash item that is removed from net income in arriving at our adjusted EBITDA.

On the topic of hedges, for the remainder of 2013, the company has hedged approximately 1.7 Bcfe of its natural gas production in an effective NYMEX fixed price of $6.18 per Mcfe, with Mid-Continent basis hedges on of 1.2 Bcfe of this amount at an average to mid-differential of $0.39 per Mcfe.

The company also has hedges in place on approximately 65,000 barrels of its oil production at a fixed price of $99.93 per barrel.

We'll continue to look for opportunities to layer on additional hedges to lock in revenue and we'll update you in the normal course as we do.

Our operating expenses were up about 8% in the third quarter of 2013, compared to the second quarter 2013, which comes as a surprise to no one given our high level of production during the quarter. Note that our operating expenses were down about 3% in third quarter 2013, when compared to the third quarter 2012.

As Steve mentioned, our adjusted EBITDA for the third quarter 2013 was $7.4 million, which was up over 50%, compared to the $4.9 million we discussed last quarter, which you recall excludes an employee severance charge of about $0.2 million recorded during the second quarter 2013.

Before turning the presentation back to Steve, I want to mention that we finished the quarter with debt outstanding of $50.7 million under our reserve based credit facility, which has a borrowing base of $55 million, leaving us $4.3 million in borrowing capacity at the end of the quarter. And we finished the quarter with $3.7 million in cash on the balance sheet. We continue to fund the drilling activities with cash from operations and anticipate we'll be very close to the low-end of our capital spending forecast of $19 million to $21 million based on plans for drilling for the remainder of the year. Back to Steve.

Stephen R. Brunner

Thanks, Chuck. So again, we've made really good progress on the execution of our plan this year, and we look forward to building on the positive momentum gained since selling the Robinson's Bend assets, refinancing the business and executing the Sanchez transaction earlier this year.

With those updates, I'd like to now turn the call back to our moderator to open the lines for some questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Michael Peterson.

Michael D. Peterson - MLV & Co LLC, Research Division

I had a couple of questions this morning. If I can start on kind of the broad strategy perspective first. Can you give us a little bit of color on the development of your association with Sanchez. How that's unfolding some of the things that you might look for into 2014? In addition to that, if you could provide any perspective, I suspect the communications with PostRock have been a little bit more muted, given some of the legal proceedings, but any color you want to prospect -- any color you’re in a position to share on that would also be helpful.

Charles C. Ward

I think, I guess the 2 parts of that question the first is that, you'd be correct in assuming that the litigation has put a chill on some of the things we hope to be engaged with Sanchez parties at the current time. So other than the drilling opportunities, which came with the assets and we're participating in, that's kind of put a little bit of a pause on that, but we look forward that to move forward -- as we resolve litigation. Similarly for PostRock, it's a plaintiff defendant . I think natural relationships evolve that way.

Michael D. Peterson - MLV & Co LLC, Research Division

Sure.

Stephen R. Brunner

And, I guess, just to give you an example of how we believe it's a good transaction and it's meaningful in the [indiscernible] we talked about spending about $2 million in capital on Sanchez opportunities that were brought to us for the transaction, I can tell you that we've drilled and completed 1 well in Louisiana, actually operated by Zachary, it was in Acadia Parish, it was 9,300 Frio clump sand test. It was successful and is completed and producing a little over 60 BOE per day. We have about a 20% working interest in that. For example, another well in South Texas, Matagorda County, which was operated by Sanchez, was a 9,100 Frio test. The well has been drilled, logged, it looks like it's successful. We don't have it producing yet, but think it will probably do 500,000 cubic feet a day and about 150 or so barrels of liquids. And there we have a 72% working interest. So what I can tell you, even at the very early stages, the Sanchez transaction has allowed us to take advantage of opportunities that we just wouldn't have had without it.

Michael D. Peterson - MLV & Co LLC, Research Division

That's helpful, Steve and I appreciate that. If I can switch to operations. Can you give us a sense as to when we might look for maybe a capital budget for 2014 and a sense once you've digested the incremental production of the recent acquisitions, what we might look at in terms of production trajectory and growth in the next year?

Charles C. Ward

We actually haven't -- we haven't officially established, we're going to put out our guidance for next year. I think, we would typically thought to do it at the annual meeting or shortly thereafter, but depending upon how schedules work and the timing of the litigations and other things, that might be until beginning of next year.

Michael D. Peterson - MLV & Co LLC, Research Division

Would it be reasonable to kind of look at what your run rate for '13 and '14 has been and use that as a benchmark you have? I know, you've been focused a lot on cost, as well as some of the liquids potential you have within the portfolio. Safe to assume that there's not a meaningful departure from kind of where you're exiting 2013?

Charles C. Ward

Yes, that's safe in there in the meantime.

Michael D. Peterson - MLV & Co LLC, Research Division

Okay. Last 2 questions -- I'm sorry Stephen. Okay, last 2 questions, Chuck, would be on the financial side. Expecting a borrowing base redetermination sometime in the fourth quarter, can you give us a sense for timing? And then the next question would be, you have a shelf registration that will expire in February of 2014, is that something that would be renewed with the K?

Charles C. Ward

The first one is redetermination, is underway and we'll get out the update as soon as that's complete, hopefully, before the end of the month. And then the second one is the shelf. Yes, we look to post the litigation in connection with the K take a look at doing a refresh on that.

Operator

Our next question comes from G. Abella.

Gregg T. Abella - Investment Partners Group, Inc.

I just wanted to ask, I guess with respect to the capital expenditures on the Sanchez properties. Have you been drilling on those entire quarters since, let's call it, October 1? Or is it something you've basically looked at in the last say couple of weeks?

Stephen R. Brunner

Well, post the transaction, these opportunities were available, their technical team and our technical teams started looking at the asset base. One of them was, in fact, initiated by Zachry Exploration, the company that operated the Macfarlane #1 Louisiana, they wanted to drill the well and we had to either option in our out. We and Sanchez team believed it was a good opportunity, so we optioned in. And likewise, there was an opportunity in South Texas that we've been working on since the transaction quite frankly, but only recently drilled it and logged it, I'd say within the past 2 weeks. So we started working right away with the Sanchez organization on opportunities that were available.

Gregg T. Abella - Investment Partners Group, Inc.

Okay. So I guess then that this plan of being able to spend an extra a couple of million dollars has been an ongoing throughout the whole quarter and not just something like this is kind of a look forward?

Charles C. Ward

That's correct.

Stephen R. Brunner

Yes.

Operator

At this time, there are no other questions.

Stephen R. Brunner

Okay. Well, thanks, again, for joining us this morning. We look forward to speaking to you, again, in February. And we'll review our fourth quarter and full-year 2013 results.

Operator

Thank you for joining today's conference call. All parties may disconnect at this time.

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