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Executives

Frank Hopkins – Vice President of Investor Relations

Richard P. Dealy – Executive Vice President, Chief Financial Officer, Treasurer

Analysts

Michael Blum – Wells Fargo Securities

[Steven Lockton – Greenwich Securities Corporation]

Kevin Smith – Raymond James

Leo Mariani – RBC Capital Markets

Ethan Bellamy – Wunderlich Securities

Pioneer Southwest Energy Partners (PSE) Q4 2009 Earnings Call February 3, 2010 12:00 PM ET

Operator

Welcome to Pioneer Southwest Energy’s fourth quarter conference call. Joining us today will be Rich Dealy, Executive Vice President and Chief Financial Officer and Frank Hopkins, 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 and then select investor presentations.

The partnerships’ 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 risks and uncertainties that may cause actual results in future periods to differ materially from the forward-looking statements.

These risks and uncertainties are described in Pioneer Southwest’s news release on page two of the slide presentation and in Pioneer Southwest’s public filings made with the Securities & Exchange Commission. At this time for opening remarks and introductions I would like to turn the conference over to Pioneer Southwest’s Vice President of Investor Relations Frank Hopkins.

Frank Hopkins

Let me briefly review the agenda for today’s call. Rich is going to initially review the financial and operating highlights for the fourth quarter and full year 2009. After that, he’ll update you on what’s happening with the drilling program that Pioneer Southwest recently initiated in the Spraberry field. He’ll then cover the fourth quarter financials in a little more detail and provide earnings guidance for the first quarter. After that, as typical we’ll open up the call for any questions you might have. Rich, with that I’ll turn the call over to you.

Richard P. Dealy

I appreciate everybody taking the time to join Pioneer Southwest’s fourth quarter earnings call. I know you have a busy schedule so we’ll get right through it. I’m on Slide Three to start with on the highlights page for the fourth quarter we did announce adjusted income of $25 million or $0.79 per unit. That is adjusted for mark-to-market derivative losses that occurred during the quarter of $36 million or $1.14 per unit. It was another solid quarter from an earnings standpoint.

Fourth quarter production was slightly above guidance at a little over 6,000 BOEs per day so production came in as we would have expected. When we looked a yearend reserves, as we talked about the last call yearend reserves were based under the new SEC rules which is a 12 month average of commodity prices at the first of each month during 2009. That equated to oil prices at a little over $61 and about $3.87 gas that we ran the reserve report at. That resulted in 44 million barrels of oil equivalent at yearend ’09.

That is compared to or up about four million barrels related to positive price revisions from yearend ’08 reserves. Those reserves were run at $44.60 per barrel of oil and $5.71 gas. If you look at an $80 and $6 case which will generally approximately where the strip is today we’d pick up an incremental about five million barrels oil equivalent in that price scenario.

Cash flow from operations was $18 million for the quarter and then as we announced a week or so ago we announced our quarterly distribution for the fourth quarter of $0.50 per unit. That is payable to unit holders of record on February 4th and that will be paid on February 11th. For a total for 2009 our annual distribution was $2.

As Frank alluded to, back in the fourth quarter we did initiate or talk about in our third quarter earnings call starting our drilling program. We talked about that when we did the acquisition back in August. We got that started in early November and through the end of December we drilled six wells, five of which are producing today and one that’s waiting on completion.

Turning to Slide Four and talking about our drilling program for 2010 specifically, we do have those same two rigs running in 2010. One running in the northern part of the field, one in the southern part of the field. We’re planning on drilling about 50 wells during the year and expect those to run at a cost of about $1 million per well drilling to a depth of about 10,000 feet for each of those wells. We expect with this drilling program that we can grow production for the year albeit modestly but relative to 2009 and that is assuming that 2009 has the acquisition in it for the full year.

In terms of drilling locations we have about 170 40 acre locations left to drill booked as puds in our reserve report and we have about 1,200 20 acre locations that are not booked at this point in time but are future opportunities for PSE. Most of the wells that we are drilling are going to the deeper Wolfcamp formation which I’ve got a slide on the show here in a minute and we’re also completing most of these wells in the organic-rich shale and silt intervals. Now, given the incremental depth where the wells are coming in and current strip prices we are showing these wells at great returns at 50% internal rates of return to drill these wells.

Turning to Slide Five really just a picture of how these wells or where these wells are being drilled and what depth. Like I said we’re drilling to about 10,000 vertical depth. The interval that we’re completing is basically we have 4,000 gross feet of interval. As you can see on the side here most of our completions we’re averaging about seven to 10 frac stages per well completing in the upper Spraberry lower Spraberry, Dean and the upper and lower Wolfcamp area with the goal of improving our EUR on all of these wells.

So the next slide if you look at Slide Six, shows you what we’re expecting from an average from this program of what the gross recovery will be of 110,000 barrels of oil equivalent. We’ve got a 90% working interest and an 80% average net revenue interest in these wells. This shows you the typical climb curve, the statistical climb curve that we would expect related to these wells and the wells we’ve drilled to date have come in as expected.

Turning to Slide Seven, when you look at fourth quarter guidance relative to fourth quarter results, everything is right where we would have expected and came in on target other than production being slightly at the upper end of the range. So we’re real pleased with where the fourth quarter results came in and production really being at the higher end is more just timing of lifting from the tank batteries out there and we had increased work over activity in the quarter that increased some production as well.

Turning to Slide Eight and looking at first quarter guidance, as you can see here we are forecasting production to be up to about 5,800 to 6,200 BOEs per day. So a slight increase in production there. Production costs, DD&A, G&A, interest expense and effective tax rate are all similar to the fourth quarter so really we expect another quarter very similar to the fourth quarter.

Looking at Slide Nine, one of the things that we think is important for PSE and have done this since the IPO is to maintain a strong financial position. At yearend we had $60 million of debt all drawn on our credit facility. We have current availability of $225 million under that credit facility which will be more than adequate to fund our drilling program and future potential acquisitions.

I think when you couple our decline profile on 2,500 wells at a shallow decline of 4% to 6% with the strong hedging position that we have in place through 2013 with 85% of our production hedge for 2010, 75% for 2011 and ’12 and then 60% for 2013, when you combine those plus the drilling program it really provides a solid base for providing distribution sustainability as we go forward. If you layer on some acquisitions on top of that really the potential is to grow distributions in the future.

We think we had a great quarter for PSE and expect to see the first quarter come in equally or better. With that, I’ll stop there and open up the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Michael Blum – Wells Fargo Securities.

Michael Blum – Wells Fargo Securities

Just a couple of questions, one I just wanted to revisit your latest thinking on the distribution, what point would you consider a distribution increase? Is there a target coverage ratio you’re looking at? Anything along those lines.

Richard P. Dealy

I think we’ll continue to look at that. I think when we get to a coverage ratio that is more in the 1.3 range – as you know in 2009 prior to the acquisition we were running right around 1.0. We expect that to improve in 2010 with the drilling program as we move throughout the year but probably when get to 1.3 in that range you’d consider a distribution increase and I think as we’re looking at it, it’s not something we foresee happening in 2010 and has a possibility more in 2011 or beyond. That’s really where our current thinking is at this point.

Michael Blum – Wells Fargo Securities

Then obviously the A&D market is pretty active right now, what are your thoughts in terms of are you even looking at or pursuing third party deals or are you just content to execute on the drilling program? What is your thought there?

Richard P. Dealy

We’re definitely still interested in pursuing acquisitions and so that’s something we are active in data rooms that are out there particularly in the Spraberry area. There have been, as you guys are aware, a number of deals done out there that have been larger deals and particularly those who have got preempted along the way in the process. It’s something that PSE will continue to look at and we’ll be active. We’ve got a balance sheet to do it and so it’s something we’re going to continue to pursue alongside the drilling program.

Operator

Your next question comes from [Steven Lockton – Greenwich Securities Corporation].

[Steven Lockton – Greenwich Securities Corporation]

Looking at this chart six, can you be a little more specific? It’s hard to tell from this chart what was the initial production of these four wells or five wells that you just brought on?

Richard P. Dealy

Well, as I said they’re going to be as this chart shows in the at 60 to 70 barrels per day or BOEs per day type wells.

[Steven Lockton – Greenwich Securities Corporation]

That’s what they were? That was the experience on those four wells?

Richard P. Dealy

Yes. On average, that’s where they all came in, yes.

Operator

Your next question comes from Kevin Smith – Raymond James.

Kevin Smith – Raymond James

Just curious about the timing of the wells and when they came on in November? I little bit I guess in trying to look at your guidance I would have figured they would be fairly positively impacting Q1?

Richard P. Dealy

Well, we started drilling in early November. None of the wells were completed at yearend or maybe one was just getting started so they’ve been completed in January and they’ll be influencing Q1. That’s why we’re showing production up in Q1 and we’ll continue the drilling program.

Kevin Smith – Raymond James

Then as you look at drop downs kind of going forward, what are you looking for, for drop downs from Pioneer? I mean what’s maybe the perfect market or perfect scenario for you guys to participate in more of those?

Richard P. Dealy

I think the short answer is PXD, the C Corp parent has some volume metric production payments out there and so those roll off at the end of 2010 so I think it will be something post 2010 would be the next one that really has from a practical standpoint could be done. I think we’ll evaluate that as we get both at the PSE level and the PXD level when we get later in to 2010.

Kevin Smith – Raymond James

The two rig program, is that optimal? Even if you see some movement in crude is two really where you want to be?

Richard P. Dealy

We’re studying it. It’s something that we’re looking at to see whether or not we should be at more than two. So we continue to analyze that but we think starting out it was the right level but we’re going to continue to evaluate it.

Operator

Your next question comes from Leo Mariani – RBC Capital Markets.

Leo Mariani – RBC Capital Markets

On these two rigs you have running, do you have those contracted for a certain period of time? I know at the parent level you guys have locked in a number of other costs, have you done the same thing at the PSE level in terms of some of the tubulars and the sand?

Richard P. Dealy

I guess two answers, one on the rigs, they are contracted for a year out there on those rigs similar to what we have on the C Corp level and in terms of the tubular in the sand, PSE will benefit from that contracting, PXD has an ownership interest in these wells. They are the operator so they’re drilling them and so PSE will get that benefit of those locked in tubulars and bumping units and sand contracts.

Operator

Your next question comes from Ethan Bellamy – Wunderlich Securities.

Ethan Bellamy – Wunderlich Securities

Just a follow up on what Leo said, what trends are you seeing in service costs? What type of inflation, if any, does your guidance bake?

Richard P. Dealy

We haven’t seen any yet even though the activity in Spraberry itself has picked up the Permian Basin over all is up but mainly just in the Spraberry area. We haven’t seen any increases yet. I think the key ones that are likely if we have higher gas prices would be electricity, labor as you get more drilling going on in the Permian Basin would be the two that we would anticipate potentially seeing but today, we haven’t seen any. On these other services we’ve felt like we’ve done a good job of controlling our costs. At the C Corp they’ve done a good job of adding ancillary services such as pulling units, oil trucks, salt ware disposal trucks, transportation trucks that allow us at the operator level to control costs so we think that will be a mitigant to any cost increase.

Ethan Bellamy – Wunderlich Securities

But you haven’t backed any inflation in to your guidance?

Richard P. Dealy

No.

Operator

We have on further questions in the queue. I will turn the conference back to our speakers for additional or closing remarks.

Richard P. Dealy

I appreciate everybody taking the time. If you’ve got any further questions please feel free to call myself or Frank. I look forward to either seeing you out there at investor conferences or on the next quarterly call. Thank you.

Operator

That does conclude today’s conference. We do appreciate your participation.

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Source: Pioneer Southwest Energy Partners Q4 2009 Earnings Call Transcript
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