New Source Energy Partners' CEO Discusses Q4 2013 Results - Earnings Call Transcript

Mar.27.14 | About: New Source (NSLPQ)

New Source Energy Partners LP (NSLP) Q4 2013 Earnings Conference Call March 27, 2014 11:00 AM ET

Executives

Richard Finley - Chief Financial Officer, Treasurer

Kristian Kos - President, Chief Executive Officer, Director

Analysts

Dan Guffey - Stifel

Michael Gaiden - Robert W. Baird

Operator

Good morning, and welcome to New Source Energy Partners Fourth Quarter and Year-End 2013 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 would like to turn the call over to Mr. Richard Finley, Chief Financial Officer of New Source Energy. Thank you, sir. You may begin.

Richard Finley

Thank you. Good morning and I thank all of you for joining us today for the New Source Energy Partners fourth quarter and year-end 2013 conference call. 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. 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 the 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 should be found in our earnings release. You can obtain a copy of our press release under the Investors tab of our website at www.newsource.com.

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

Kristian Kos

Thank you, Richard. This morning I will summarize the financial and operational highlights for the fourth quarter and year ended 2013. 2013 was a year of solid growth for New Source. Our average net daily production during the year was 3,658 barrels of oil equivalent per day. For the fourth quarter ended December 31, 2013, it was 4,019 barrels of oil equivalent per day. These results represent a 14% year-over-year increase from the year ended December 31, 2012 and a 23% increase for the fourth quarter 2013 compared to the fourth quarter 2012.

The majority of our production for 2014 is hedged at $90.20 per barrel of oil, $4.09 per Mcf for gas and $40.47 per barrel of NGLs. For the year ended December 31, 2013, our production costs were $9.46 per barrel of oil equivalent as we continue to enhance production volumes through increased workovers. As a result, much of the production levels at our mature producing oil and gas properties have stabilized. While we recognize there was an increase year-over-year, we believe that these costs have stabilized.

Our estimated proved reserves for the year ended December 31, 2013 were approximately 20.6 million barrels of oil equivalent, which is an increase of 45% from the year ended December 31, 2012. Currently, New Source has 306 gross, 142 net PDP wells and 161 gross and 40 net proved undeveloped drilling locations.

With the addition of our January 31 acquisition from CEU, our reserves are approximately 22.5 million barrels of oil equivalent based on internal estimates, which represents an increase of 57% from December 31, 2012. We increased our distribution twice in 2013, raising our distribution from $2.10 at the IPO to $2.30 on an annualized basis. This represents roughly a 10% growth in distributions to our unitholders.

In addition, in our most recent redetermination, our borrowing base was increased from $87.5 million to $102.5 million. Throughout 2013, we made four acquisitions of oil and natural gas properties from members of the New Source group as well as a third-party acquisition of oil and natural gas properties increasing our production as well as our proved reserves. By completing these acquisitions, we have expanded our footprint from six townships to 23.

Focusing on our goal of becoming a fully integrated partnership, we also completed the acquisition of MCE LP, an oilfield services company that specializes in increasing efficiencies and safety in drilling and completion processes. 2013 was a year of growth and profitability for New Source, and we look forward to 2014 being much of the same.

Our primary objective remains to deliver profitable and stable growth for our unitholders and we will continue to make acquisitions that make sense for our portfolio, at the right value and at the right time. We continue to work towards a full cycle model as we integrate our new oilfield services division.

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

Richard Finley

Thank you, Kristian. For the fourth quarter of 2013, we reported an adjusted EBITDA of $8.7 million. Net income for the fourth quarter was $21.9 million or $2.05 per weighted average basic common unit outstanding.

As Kristian mentioned before, average net daily production for the quarter was 4,019 barrels of oil equivalent per day. Average net daily oil production for the quarter was 360 barrels per day, average net natural gas production 8,789 million cubic feet per day and average daily NGL production was 2,194 barrels per day. The increases in overall production were due primarily to the acquisition of oil gas properties that were completed in 2013.

Production costs for the fourth quarter were $10.16 per Boe, and as Kristian mentioned before, the cost increase was primarily due to increased workovers to boost production. Our G&A expenses were approximately $3.3 million for the fourth quarter which includes the cost associated with the two acquisitions completed during the fourth quarter of 2013.

Interest expense for the fourth quarter was approximately $800,000, which continue to reflect our low borrowing costs. During the fourth quarter, we paid a distribution of $0.575 per unit or $2.30 per year on an annualized basis for all outstanding units. The fourth quarter distribution was paid on February 14, 2014 to all unitholders of record on January 31, 2014.

Our distributable cash flow for the fourth quarter was approximately $5.6 million, resulting in a coverage ratio on our fourth quarter distribution of 1.98 times, excluding the units issued to CEU on our January acquisition. We are in solid financial shape and have the resources to continue pursuing growth.

With that I would like to open the line for questions. Operator?

Question-and-Answer Session

Operator

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions) Our first question comes from the line of Dan Guffey with Stifel. Please proceed with your question.

Dan Guffey - Stifel

Good morning, guys.

Richard Finley

Good morning.

Dan Guffey - Stifel

Kristian, can you give a little bit of detail around, you talked about the full cycle integrations and kind of synergies that you think you may see and realize from the MCE acquisition. I guess, we'll start that with few details where you are missing [specifics]?

Kristian Kos

Absolutely. Thanks. Hope you are doing well and thank you for taking the time to join us on the call today. Prior to answering your question, one of the things we focused on just to give a summary of 2013 was we positioned ourselves at the IPO with an expectation of what our production would be for the full-year and the expectation of our distribution would be for the full-year and we achieved beyond those measures on both fronts and we took the time to position ourselves in the East Central Oklahoma and expand our footprint, so the first attempt, the first premise of the year was to expand our footprint as we had described at the outset during our IPO.

Then during the course of the year, we set our goals and tasks on becoming this more full cycle entity, so some of the things that we have done in the East Central Oklahoma that has positioned ourselves for the future would be to expand our footprint, increase our R-P ratio from 12-plus years at the time of the IPO to 15-plus years today, reduce our tenure decline on our asset base from 13-plus percent to 10.6% today.

Increased our footprints in the townships from six townships at the IPO to 23 townships at present, which give us a deep inventory of assets both, in the Hunton horizon as well as the additional horizons we have added, so taking that into consideration when we look and reflect upon our goals of being a full cycle entity, we now have a company that has positioned itself with human capital and infrastructure outside of the state of Oklahoma.

Currently, those we have two locations outside of the Mid-Con area. One is in West Texas, in the Midland-Odessa region and the other is in South Texas, in and around San Antonio, positioned in the Eagle Ford area.

What this allows us to do on a go-forward basis is to look at opportunities and have the people in place to allow us to capitalize on those opportunities, so having the base infrastructure and assets in place, having a balance sheets in place to allow us to explore look at these opportunities that we are continuing to see on a day-to-day basis.

We now have the human capital to execute on those opportunities as we see the appropriate ones come across our desk, and that's really the synergy on an ongoing basis that is the most valuable to us. In addition, Mid-Central of MCE LP has the opportunity to expand its portfolio, expand its presence into other basins and other regions which will then give us those same synergies on a go-forward basis, so about that, we are very, very excited. We see a lot of potential in that region or that area or segment of our business and we feel that the basis of our business with our oil and gas properties in East Central Oklahoma have now stabilized and we spent the appropriate amount of capital to grow the asset base to a level that we think is appropriate and can now focus further afield both, on the Services segment and then the oil and gas or E&P opportunities that we can derive outside of this core operating area.

Dan Guffey - Stifel

Okay. Yes. Thanks for the color. I guess, kind of getting a finer detail on MCE business, would you be willing to provide kind of a revenue estimate going forward? How quickly do think this company can ramp and grow. Then second part of the question I guess, pretty stout margin in the fourth quarter. Do you see that as being sustainable or do you expect that to lower a bit as you grow?

Richard Finley

I think, as we grow we will see some lowering of the margin without doubt just in terms of the opportunities set in that space, you always have a degradation of margin in any sector, so I would see in terms of guidance specifically, I would still guide towards the $9 million of EBITDA. I think there is an opportunity to wrap beyond that. We would like to get the first quarter under our belt to get more confidence in guidance around that number, but we still feel confident as we did on the last call of where we would like to guide towards.

In terms of the revenue, in and around that, we are looking at possibly somewhere in the vicinity of $36 million for the full year in MCE LP. We believe that we can, again, wrap beyond that. As we've done in the past, we are now trying to guide towards both, on the E&P division and now in addition to MCE LP subsidiaries. We are now trying to guide towards the true potential growth. We believe, we can we can ascertain. We are trying to guide towards what we believe is in place and that we can execute on, so from that perspective we feel confident and we feel that over time, in terms of the additional actions we will take to expand upon that business, we will be able to give better color of what those results should bare or what will come, what we will bring to fruition via that subsidiary and we will do the same for the E&P division.

Dan Guffey - Stifel

Okay. Great. Thanks for the color. Just one last one for me, can you provide some clarity I guess on two things? One, you mentioned reporting that PUDs that you have to drill currently in inventory. Then also can you talk about your inventory that remains at the level and other existing acquisition opportunity you have from third parties throughout the region.

Kristian Kos

In terms of the 40 net 161 gross locations we have on our books, it's more of the same in terms of Hunton locations that are in this 23 township area, adjacent to the properties we produce currently. Those locations, we have additional unbooked locations or areas in which we can continue to increase our inventory.

In addition to that what remains as apparent is there are multiple horizons behind pipe, some of which are now inside of our asset base and those other horizons where they are not inside our asset base. Our horizons that still require a certain level of de-risking and delineation, so if you were to imagine of the 120,000-plus gross acres in which we have a position, throughout those areas, there multiple behind pipe horizons.

Now, should they turn into other opportunity sets and these reside in the parents or rather the affiliates I should say now. These reside in the affiliates and should they turn into something else? Absolutely. Will they turn into something else? There is experimentation and de-risking and development that needs to occur. Certainly that is a very big focus of David Chernicky, our senior geologist now. He has had the vast amount of success in that historically and he is very much focused on that at present to de-risk and delineate in our affiliates to allow us to then dropdown, so what is the total amounts in there? I can't give specific guidance to that, but I can give guidance that we do have a lot of residual assets left in there.

In terms of third-party acquisitions, we are seeing some good opportunities, but again in terms where we stand and what we found ourselves at the year-end, for the for the fourth quarter we are producing just in excess of 4,000 barrels a day and we feel confident that we see a firm footing around 4,300 4,350 barrels of oil equivalent per day for the first quarter and beyond and so that that gives us some view for growth vis-à-vis, where we were in the fourth quarter and where we were for full year 2013 relative to where we are today, so we feel confident with that growth and we think that that brings value to the unitholder and we will be looking to deliver beyond that with either increased drilling activity, organic growth as such and looking for acquisitions from affiliates. Specifically now, given our foothold in East Central Oklahoma, we will be definitely looking at acquisitions from third parties beyond the East Central Oklahoma. That will be a big part of our strategy on a go forward basis.

I would just make note on that. I think that at present where assets are priced, I think we want to be very prudent as the market has shifted from go through the period of the first quarter of 2012, a land grab environment to now the development phase that firmly I believe, possibly two years into the development phase. I think we will continue to do that and so it's very important to focus on netbacks, efficiencies and the ultimate profit per barrel of or Boe produced, so in this phase we will want to look prudently at opportunities under which we invest to avoid trying to just grow production for the sake of growing production or trying to acquire assets in what are deemed exciting place to be in.

We want to make sure we acquire assets that will deliver our unitholder value over the long-term, so I know that's very non-specific and non-descript, but it really is to say we are looking at a lot of opportunities. We have seen quite a few exciting opportunities over the last 9-12 months period, but we are looking for ones that fit the range and scope of both, what we deem as is good for us over the long-term as well as what's appropriate for our human capital position, which we are expanding on.

Dan Guffey - Stifel

Great. I appreciate all the color, Kristian. Congrats guys on a very successful 2013.

Kristian Kos

Thank you very much.

Operator

Thank you. Next question comes from the line of Michael Gaiden with Robert W. Baird. Please proceed with your question.

Michael Gaiden - Robert W. Baird

Good morning, Kristian and Richard. Thanks for taking my call.

Kristian Kos

Good morning. How are you?

Michael Gaiden - Robert W. Baird

I am good Kristian. Thanks for all the color. We really appreciate it. If I could follow-up and ask for a little bit more color now that we talked about production. That's most helpful. Could you give us any sense of contemplated mixed shift that you anticipate into your production as it's increased sequentially into the first quarter?

Kristian Kos

Is this regarding that the product type and volumes or percentages of product type associate with the volumes?

Michael Gaiden - Robert W. Baird

Yes. Please, Kristian. That would be helpful.

Currently, we are seeing roughly 73% of our volumes associated with liquids. We have seen a slight increase in our volumes of crude oil. We think we will maintain the product mix that we saw in the fourth quarter versus what we saw in the full year. We added additional crude oil through the acquisition of the assets from CEU, on January 31 of this year, so we will probably see an increase of crude oil relative to what we saw in the fourth quarter, but we will maintain a relative liquids production in and around that 73%.

Michael Gaiden - Robert W. Baird

Great. Thanks, Kristian. Can I follow-up while we are talking about production and ask about LOE? It is it fair to expect LOE to continue to trend in the $10 in exchange range in 2014? Relatedly, can you characterize the return on investment that that you expect from the increased workover expense that have accompanied the sequential increase in LOE, in the fourth quarter of 2013?

Kristian Kos

Absolutely, I'll give an attempt in terms of answering that. It's a very good - and if I don't do a good job, please don't hesitate to call me and we can continue this discussion further. In terms of what we are looking at from a total production costs in that sort of 946 range for the full-year $10 exchange for the fourth quarter. In adding additional oilier assets, we have had an increase of our production cost in addition to the overall cost increase we experienced during the full-year 2013 from workovers and so forth.

We think that we have firmed up our production cost price range in and around that level, so the trend of escalating costs, I think has ended. We feel comfortable in this specific asset base, East Central Oklahoma in and around the full-year 2013 levels or the fourth quarter 2013 levels that we firmed up that cost range.

In terms of the overall returns of our investment, I think one of the things we have done, if you look at all of our capital spend and I will try and give color in terms of how we are functionally looking at it. We drilled 28 gross wells and 10.6 net wells during the full-year 2013. In addition, we made a number of acquisitions and also we did substantial amount of work at workovers and that positioned ourselves both, to increase dramatically relative to everything else, our reserve base 22.5 million of barrels, including the CEU internal estimates reserve addition from this recent acquisition, so now we have increased drilling inventory. We are looking to drill roughly 28 gross wells in 2014, of which we will end up with probably roughly seven to eight net wells.

We have drilled roughly 16 of those thus far. They won't all be completed today or they haven't been completed today, so those will continue to be completed throughout apportion of the second quarter, so we positioned ourselves by spending that capital since the IPO to present day, to now being in a place where we have got greater our R-P ratio. We have got a deep set of inventory in terms of years of drilling inventory at the current rate and pace. We have lowered our tenure decline on the asset based, which means our treadmill has dropped.

Finally, more importantly, our lowering of our pace of drilling throughout the remainder of 2014 will continue in the out years also, which means that we have gone from a position of growing through the drillbit and through acquisition, spending capital fairly aggressively relative to our size in the prior 12 months to a position where we are stacking cash so to speak whereby our revenue minus our production cost, minus our capital expenditures on a month-to-month basis, excluding any acquisitions, our free cash flow is in excess. We have reached that point in time in the field we were aiming at earlier in 2013 to increase our activity levels to a point in time, where we can then benefit from reaching that's a production level, where we can generate free cash flow as a company.

Michael Gaiden - Robert W. Baird

Great. Kristian, thanks for all from that perspective. Can I travel just a bit further down the P&L with my last question please and ask about as G&A expense? Can you please, if you are willing and able to break out fourth quarter cash SG&A expense between the Services business and the base production business? Then can I also ask for expected cash SG&A run rate going forward?

Kristian Kos

If it's possible, perhaps we could take this question, I don't have that detail in front of me, so unfortunately if it's possible to take this later on today and give you full clarity on what that means, but we would be guiding, we spent in 2013, in the fourth quarter, we spent money on acquisitions and positioning ourselves in terms of legal and so on for further possible opportunities, one of which was the first quarter acquisition.

In terms of the regular day-to-day operating G&A and overhead, I think we are still positioned on a per BOE basis as we have been in the past. Then we have the costs associated with attempting to grow via acquisitions, which includes the various accounting and legal and other elements, third-party elements associated with those activities. We look at those costs as part of the total cost structure of a consummating a transaction, so we would look at it from an ROI if we would add that to the total cost of the acquisition and then being, what is an appropriate acquisition relative to the cash flow it generates on an ongoing basis.

In terms of the G&A at the Services business, it's a very labor-intensive business, so total staff in that business has escalated. I believe now we are in excess of 180 people at present and looking to grow from there. I could give you a break out of that later. I know that of the 180-plus people, there were probably 35 people associated with managerial or back-office support structure in and around the operation, so that's not to say there are 35 people sitting in an office that's to say that 35 people are out in the field with oversight and few people of that 35 are in the office providing backbone support.

One of the things that we discussed previously or alluded to previously and that we have seen now come to fruition as we have now additional support from that group of people into the New Source structure, so you have HR components that are highly beneficial to us as an overall group. We have people with expertise in insurance. We have people with expertise in accounting and so forth and we are seeing from a strategic planning basis of an overall business, the benefit of having them involved from an accounting back-office support having them involved and from the HR and other components having them involved, we are getting that added benefit at New Source from the MCE LP group.

Michael Gaiden - Robert W. Baird

Kristian, thanks for all that detail on the personnel and G&A. I really appreciate it. I look forward to following up with you later on, on this topic. That's it for me. Thank you.

Kristian Kos

Great. Thank you. Thank you very much.

Operator

Thank you. (Operator Instructions) Our next question comes from the line of [Ben Roy] with Stephens. Please proceed with your question.

Unidentified Analyst

Good morning, guys.

Kristian Kos

Good morning, Ben.

Unidentified Analyst

Kristian, you guys have touched on quite a bit, I think, just the acquisition opportunities, but trying to get a sense of maybe what 2014 looks like. If we look at it or think about it from maybe the amount of capital you guys spent in 2013, is that kind of the same level of acquisitions we could see in '14 or maybe just looking for a little guidance on what you guys are thinking.

Kristian Kos

Yes. Certainly. In terms of the capital for the actual drilling capital, last year we spent roughly $28 million on drilling and we spent roughly $58 million on acquisitions. We have done one acquisition thus far this year. We are looking at roughly a $20 million a drilling budget for 2014. As mentioned before, we spent a considerable amount of that thus far already in the year, which positions ourselves for strong free cash flow from our asset base.

In terms of the acquisition amount, I would assume it's very hard for us to give guidance given we would like to give facts and circumstances and things to look and point to relative to opportunities that we are seeing or actual things we are looking to consummate, but I would assume from where we stand, we grew our asset base and our size of the company throughout the period of time through acquisition and through the drillbit and so on, and that we would guide towards a much more aggressive acquisition schedule in 2014 relative to 2013. There's absolutely no criteria in terms of what amounts specifically or what the rate of EBITDA multiples we will be paying and so on, but I would definitely guide towards the fact that we will be aggressively increasing our rate and pace of acquisitions and that's largely due to the fact that as we had mentioned both, at the outset during our IPO and throughout the year, we were looking to position ourselves in 2013 to create the fundamental platform of both, in terms of infrastructure as well as more importantly the human capital and building that out so that we would be in a position to grow as well as performing with them, demonstrating to the market that we can perform, demonstrating to the market that we can guide and deliver on that guidance. Then, now, positioning ourselves with the balance sheet and utilizing our position as a public company to more aggressively build out from that platform, so without giving specifics I would say that we would be looking without doubt to significantly increase our total acquisition rate and pace for 2014 relative to 2013.

In doing that, we will be looking to build out from the platform in which we have in place. I am not guiding towards randomly looking to acquire assets or companies that don't fit within our purview. We are looking to acquire assets and companies that directly fit into our overall global strategy, which is both, more integrated type partnership, but specifically leveraging the skill sets and building out on the skills sets we have in place. Also, looking to acquire assets in areas in which we have human capital and will build out human capital and looking to acquire assets that are of the appropriate size to allow the overhead components to benefit from the size of those acquisitions.

We have seen a number of smaller acquisitions or bifurcated opportunities that we don't think gives us the critical mass to focus in a specific area and really build out in that specific area as we have done in East Central Oklahoma over the last period of time, so that that guidance is, we are definitely going to be aggressive and we are going to be looking to do it in a specific focused framework both, from the skills set we have in place and then from a geographic perspective where we can add a lot of value and build out further afield organically from the acquisitions in which we in which we take a position.

Unidentified Analyst

That's perfect. I appreciate it, Kristian, and the other guys have touched on my other questions, so I appreciate everything and keep up the good work.

Kristian Kos

I appreciate it. Thanks a lot, Ben.

Operator

Thank you. Since we have no further questions at this time, I would like to turn the floor back over to management for closing remarks.

Kristian Kos

Well, thank you very much. We just want to thank everyone involved for taking the time to discuss both, our full year 2013 and Q4 2013 results, to also listen to our discussions of our future plans and expectations as we continue to develop our business plan and execute on our overall business plan.

We really are always open to anyone who would like to further discuss this beyond this call. Our phone lines are always open, our doors are always open and we greatly appreciate everyone taking the time and look forward to communicating with all parties on an ongoing basis. Thank you very much.

Operator

Thank you. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your times at this time and thank you for your participation.

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