New Source Energy Partners (NSLP) Q1 2014 Earnings Conference Call May 14, 2014 11:00 AM ET
Richard Finley - CFO
Kristian Kos - President & CEO
Dikran Tourian - President, Oilfield Services Division
Michael Gaiden - Robert W. Baird
Suzanne Hannigan - Janney
Abhi Sinha - Wunderlich Securities
Good morning and welcome to New Source Energy Partners First Quarter 2014 Conference Call. (Operator Instructions). With that, I will turn the call over to Mr. Richard Finley, Chief Financial Officer of New Source Energy GP LLC. Thank you, sir. You may begin.
Thank you. Good morning and thank you all for joining us today for the New Source Energy Partners first quarter conference call. I’m Richard Finley, Treasurer and Chief Financial Officer of New Source and with me today is Kristian Kos, our President and Chief Executive Officer and Dikran Tourian, President of our Oilfield Services Division
Before we begin, I would like to remind all participants that our comments today may include forward-looking statements and assumption subject to risk and uncertainties and actual results may differ materially from those projected in these forward-looking statements. We will also make reference to certain non-GAAP financial measures, reconciliation of those non-GAAP financial measures to the applicable GAAP financial measures can be found in our earnings release issued earlier this morning which can be found under the Investor Relations part of our website at www.newsource.com.
And with that I will hand the call over to our CEO, Kristian Kos.
Thank you Richard. Today, I’m going to go over some of the highlights for the first quarter and then Richard will walk you through the financials. It's been a busy start for the year for New Source. So far this year we extended our acreage portfolio further from our core area increased our distribution and provided further stability on the balance sheet to our unit holders.
Let me recap in a bit more detail. In February, we announced our second acquisition in the Southern Dome field which has extended our acreage position beyond our core area, shifted new sources production mix more to oil and boosted our working interest in the area.
We are always on the look-out for accretive and strategic transactions to increase value for our unit holders and we will continue to pursue opportunities as we see fit. We increased our distribution for the third time and they are now 10% above the minimum quarterly distribution that we declared at the time of our initial public offering in February of 2013.
We also welcomed two new Board members to our Board room with the anticipation that their significant experience will help to guide New Source on its next phase of growth.
In addition, we successfully executed an upsize public offering of our common units raising approximately $76 million in capital which has allowed us to increase our liquidity and prepare for our next phase of growth. Tying these things together over the last few months we have created a position of strength for the remainder of 2014 and continued to position our asset base for growth in future periods.
Now on the quarter, during the first quarter our average net daily production was 4566 barrels of oil equivalent per day versus 4019 in the fourth quarter of 2013. This represents a 13.6% quarter-over-quarter increase and was mainly the result of the acquisition we made in 2014. Our production cost rose from our fourth quarter results but at a lower incremental rate. Production cost were $10.96 per barrel of oil equivalent in the first quarter and $10.16 in the fourth quarter of 2013.
Costs have remained in the $10 range as we continue to enhance production volumes through increase work overs in the production areas outside the core IPO properties. We’re working hard to maintain production levels and most of the production levels and our mature and oil gas properties have now stabilized. These cost increases have started to taper off, but we anticipate absolute cost levels will remain around these levels for the near future. In our current inventory we have about 40 net and 161 gross locations to drill. We also have additional unbooked locations in which we can continue to increase our inventory. Adjusted EBITDA for the quarter was $12.1 million which is an increase of 12% over the fourth quarter 2013 and over 2.5 times what we reported for adjusted EBITDA just one year ago.
These strong operational results have propelled our distributable cash flows to $7.4 million for the first quarter and our coverage ratio to over one times. It has been a good quarter, we remain focused on delivering profitable and stable growth to our unit holders and we continue to look for accretive acquisitions.
Our full cycle business model has started to pay off and we’re just at the start of this integration. We will be speaking and meeting with investors at NAPTP next week and hope to see many of you there. With that I will turn the call over to Richard to provide you with the financial review of the quarter. Richard?
Thank you Kristian. For the first quarter of 2014 we reported adjusted EBITDA of $12.1 million, net loss for the first quarter was 1.5 million or $0.12 per weighted average basic common unit outstanding. As Kristian mentioned before average net daily production for the quarter was 4566 barrels of oil equivalent per day. Average net daily oil production for the quarter was about 452 barrels, average daily net natural gas production was 10.98 million cubic feet and average daily NGL production was 2284 barrels. The increases in overall production were due primarily to the acquisition of oil and gas property that we completed in 2014. Production cost for the first quarter were $10.96 per Boe and as Kristian mentioned before the incremental cost increased between sequential quarters has slowed but the absolute cost remained high. This is mainly due to increased work overs to boost production which we continue to do in the first quarter.
Our G&A expense for the quarter was $5.1 million which was almost half that of the same quarter in 2013 is mainly the decrease in equity based compensation. Interest expense for the first quarter was about $1 million which reflects our continued low borrowing cost. During the first quarter we announced a distribution increase to $0.58 per unit or $2.32 per unit on an annualized basis for all outstanding units. The distribution will be paid on May 15th, but all unit holders of record on May 1st.
We boasted our balance sheet with the successful common unit offering in April using proceeds from the offering to pay down debt outstanding under our credit facility. We’re in solid financial shape and have the resources to continue pursuing growth.
With that I would like to open the line for questions.
(Operator Instructions). Thank you. Our first question comes from the line of Michael Gaiden with Robert W. Baird. Please proceed with your question.
Michael Gaiden - Robert W. Baird
Kristian I realized that this is potentially a sensitive area but I think we’re all anxious for any color that you could rely on how you see the partnerships M&A activity progressing over the year especially given your balance sheet is now incredibly well poised for additional transactions. Anything there you can land of the shape, size, timing et cetera would be most appreciated.
Absolutely but in terms of the prospects of where we are today, we have our core E&P footprint in east-central Oklahoma. We have our core services footprint in the Mid-con, South Texas and West Texas. We have as you mentioned a strong balance sheet net debt to EBITDA is roughly 0.4 times. We’re now positioned as a result of that both the footprints we have generated and our liquidity and balance sheet. We’re positioned for our next phase of growth and in positioning ourselves for that next phase of growth our focus is to leverage our people, our knowledge set and the in place infrastructure we have in the Mid-con, in West Texas and in South Texas.
So on that note in terms of size, scale and timing we’re pursuing a lot of acquisition opportunities, reviewing, assessing our view at present similar to when we had our last earnings call covering the 10-K or the full year of 2013. So we feel that for this year we will be in a good position to initially deploy the capital that we have raised in this first equity offering that we performed in April and we will be looking to pursue additional accretive acquisitions beyond that throughout the year. We will utilize the units we have in place, we will utilize our balance sheet to pursue these acquisitions but definitely the liquid we have generated through this equity offering we feel very strongly that we will be in a position over the coming months to deploy that capital into what we view as accretive acquisitions that leverage our core in-place knowledge set and people. Does that help?
Michael Gaiden - Robert W. Baird
If I could just please ask one last follow-up as it relates to your comment. When you talk about leveraging you assets whether they are human capital or fixed assets, in your current footprint does that mean these opportunities are likely to overlay your current base of operations or does that leverage come from expanding your footprint into new areas? That will do it for me.
Yes for us we have spent a lot of time through the last year focused on leveraging what we have in place, the geographic footprint is incredibly important. Human capital is the corner stone of what we do on a day to day basis. So going on and seeking opportunities outside where we have the human capital footprint and infrastructure it will be very difficult and demanding on management unless it was an appropriate size whereby it was something that complemented the size of our current operations and current cash flow and the reason for that Michael is that it's --we would be -- we feel that we would be better suited to focusing where we have in place infrastructure so that we can allocate the human capital to the acquisitions pro forma versus trying to chase deals all around the country and be geographically spread out. Secondary in terms of what we want to leverage is our in place knowledge set, so that’s both the type of reservoir and the means in which we produce and develop our asset base on the E&P side and also the cornerstone of what we do in the services side. So just a brief overview of that.
Our focus is the efficiency and safety environment. I have Dikran Tourian on the call today and I think it will be a good opportunity just to give a brief segue to give a brief overview of what it is we do on the services side so that you perhaps can have a better picture of what we will be focused on a go forward basis and the net comment as we intend to stick to our netting [ph] and leverage the knowledge and infrastructure we have in place in sticking to our netting [ph]. We’re singularly focused on what we’re good at and we will be expanding on what we’re good at overtime.
So as Kristian stated, we’re going to be focusing primarily on our core niche which is pressure control. Our entire focus thus far has been Michael as you stated both human capital but also in the services space, equipment and platform is important. So we have put a tremendous effort around deploying the software platforms, et cetera that are all going to be scalable. We have expanded the footprint of the services division to cover what we believe to be between the Oklahoma and Texas and Kansas area to be 2/3rds of the drilling rigs in the U.S. and we will continue to as Kristian stated we will continue to look for both organic growth and accretive acquisitions that fit into the core focus of the company.
Our next question comes from the line of Suzanne Hannigan with Janney. Please proceed with your question.
Suzanne Hannigan – Janney
On the topic of unit’s control, it looks like the run-rate this quarter was a little bit above what you had guided for the year -- is this a good run-rate going forward or is there some seasonality to this business in your market?
So that’s correct Suzanne and we were fortunate in our performance in Q1, again I will hand this over to Dikran but prior to handing over to Dikran we had a strong quarter and at present we’re building off that strength so that is not something that’s seasonal. Our business is not seasonal, our business is leveraged to the rig count and the rig count has maintained it's rate and pace in the areas which we operate. Additionally we’re building out the footprints as we alluded to before that the footprints we have created in West Texas and South Texas. So we have maintained the rate and pace in which we’re both generating revenue as well as growing that revenue base. As mentioned before we’re always one where we’re looking to build into strength and we guided towards that $9 million and $36 million of revenue for the full year. Dikran will provide color on where we’re still on the revenue in Q1 and what that is on the run-rate and we’re still guiding towards $36 million plus for the year.
We have been fortunate in our margins, we have been fortunate in the manner in which we will be managing that business and as a result the run-rate for annualized Q1, our run-rate EBITDA is approximately $10 million.
So we would feel confident that we’re able to maintain and build off that but we wouldn’t be confident in giving guidance beyond that at present. So I will pass it over to Dikran.
I would echo Kristian’s comments that it's definitely tied to rig count, having expanded the footprint into South and West Texas. Every week we’re increasing both customers, rigs that we’re working on. We have increased equipment per plan and as Kristian said it's really not affected by seasonality but more as we’re gaining more and more market share every week completely tied to rig count and ultimately at the end of the day we’re new to some of the basins there. So we have a lot of room to grow. So right now it's purely a play of executing and I think the number you will see a direct impact in that light.
And just to revert back possibly on where we stand today Q1. The annualized run-rate on revenue was approximately $35 million. So we have some growth that had been anticipated and planned for this year and the focus point in the $9 million of annualized EBITDA. So we feel that we’re positioned to execute on that $9 million and we’re positioned to maintain the run-rate EBITDA that we generated in Q1 and we look forward to executing on that and if things -- if we strength again in the second quarter then we will continue to readjust our guidance on that but at present our guidance in essence would be to maintain the adjusted EBITDA that we generated in Q1 for that division.
(Operator Instructions). Our next question comes from the line of Abhi Sinha with Wunderlich Securities. Please proceed with your question.
Abhi Sinha - Wunderlich Securities
So just few questions here. One I would like to know some kind of guidance or line of fact to the maintenance CapEx, how you performed this year and what you guys think for the rest of the year?
In terms of maintenance CapEx the total maintenance CapEx for the first quarter was $3.7 million and reading our earnings release there is a bit of description as to how we generate that maintenance CapEx and this is much in line with the theme that we have talked about since first having these calls which is the theory of the 10 glasses, the last 10 years and cost $10 and in-line with that our New Source E&P segment had approximately $3.4 million of maintenance CapEx and then the services division had approximately $0.3 million of maintenance CapEx. So we would see that in and around that we would guide towards $14 million for the E&P segment for this year in maintenance CapEx. We previously stated we’re looking to generate roughly 4700 Boe per day in the out quarters being Q2, through the end of the year.
We had guided towards 43 - 43.50 on Q1 Boe per day and we had come in at over 4500 barrels a day. We’re not adjusting our out quarters as of yet, we will maintain that position that we have previously and we’re looking to guide towards that. In terms of the services division we would guide towards the one, two for the year in maintenance CapEx. So we would be in that roughly $15 million range of total maintenance CapEx for the partnership for 2014.
Abhi Sinha - Wunderlich Securities
One thing I wanted to know is maybe not -- correct me if I’m wrong maybe I have not understood this clearly. What I’m reading through is like so you would be looking to expand more on the services side on a geographically diverse basis and you will try to focus more in the Mid-con than the E&P side, is that correct?
No. It's not. The premise or the concept was initially we had focused on east central Oklahoma where we had our platform and infrastructure in place on the E&P division. Then in bringing in so we had the concept of, we wanted to stay focused from the constraints of human capital. Then in bringing in Mid-central we then found ourselves with human capital platforms in the Mid-con region as well as South Texas and West Texas. So our concept whether we’re focused on the E&P side or the services side is to leverage that in place human capital. We now have offices and people in those various locations which allows us to focus on the variety of things that we have inside of our partnership in each of those regions. So it's not definitively that we have human capital of one subset, our focus as a business is this full cycle economics that we talk about a lot internally and on these calls and in that full cycle business model it's leveraging -- what we have in each area to enhance the full cycle business model. And so we now find ourselves as a result of the integration of MCE into the partnership with three regions we can focus on for both E&P and for services and in leveraging the skill sets we have in both those, the pressure control and the services division and the manner in which we have developed these conventional resource reservoirs in the Mid-con region, they are globally present and it allows us to then utilize whether it's the horizontal drilling knowledge that we have or the down hole pump and handling large fluid volumes that we have in the Mid-con region.
We can then go further a field and then apply that knowledge set and that skill set in other areas and we will continue to expand, it's our intent overtime to expand the geographic footprint of the partnership. We will do that as it makes sense to do so and what makes sense is having enough size in a region to afford ourselves the ability to put in place the strength of management that we’re comfortable with to be in a region and that’s really the only focal point for us. We need to feel confident that there is enough volume of revenue be it from the E&P division or the services division to afford ourselves the appropriate management and the skill and expertise to be in that region and have a firm foothold for many years to come.
We’re not interested in jumping into a play for the sake of a view that we will be there for a few months or building up a position and selling it. This is a partnership and our intent is to acquire, build organically, acquire assets, hire people, acquire businesses overtime to build the footprint of this partnership and to compound the growth and cash flow of this partnership overtime.
Abhi Sinha - Wunderlich Securities
The next one is a follow-up in the services space, out of three geographic regions, which one did you see exceeding your expectations in terms of growth or was it more uniform across the whole regions?
There was more uniform across all the regions and for perspective we have been in the Mid-continent region performing these services since 2011 specifically this service set since 2011 is when that was organically started from scratch. The South Texas portion was in the middle of 2013 and the West Texas portion was in December, at the middle of December of 2013. So all of them -- we have been fortunate that they have all met our expectations. I wouldn’t say we’re – its not vastly above it's in-tune with where we want to be slightly above definitely slightly above where we want to be or where we had hoped we would be in Q1 but it's uniform across the board and I think that that uniformity comes from the manner in which we’re managing those assets and managing the people in the management base that’s in place in terms of how this is done and Dikran alluded to it previously but the human capital portion lines up very well with this software that we have implemented and that allows us to scale to any size and leverage what we have at our headquarters which is Oklahoma City.
Mr. Kos we have no further questions at this time. I would now like to turn the floor back over to you for closing comments.
Well thank you all for taking the time today. We greatly appreciate it. We are thankful that we had a successful quarter and we are now positioned for the next phase of our growth. So thank you very much to all for taking the time and we look forward to speaking to you all at the next earnings call. Thank you.
Ladies and gentlemen this does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.
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