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Atlas Energy, L.P (NYSE:ATLS)

Q2 2014 Earnings Conference Call

August 8, 2014 09:00 AM ET

Executives

Ed Cohen - Chairman and CEO

Matt Jones - SVP, President and COO, E&P

Sean McGrath - CFO

Brian Begley - VP, IR

Analysts

Praneeth Satish - Wells Fargo

John Ragozzino - RBC Capital Markets

Valerie Zhang - Deutsche Bank

Abhi Sinha - Wunderlich Securities

John Abbott - Bank of America

Noel Parks - Ladenburg Thalmann

Wayne Cooperman - Cobalt Capital Management, Inc.

Craig Shere - Tuohy Brothers

Majid Khan - Tourbillon Capital

Sean Sneeden - Oppenheimer

Operator

Good day, ladies and gentleman, and welcome to the Atlas Energy, L.P. and Atlas Resource Partners 2014 Second Quarter Earnings Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions) As a reminder, this conference call is being recorded.

I will now introduce your host for today’s conference Brian Begley, Vice President of Investor Relations. You may begin.

Brian Begley

Thank you. Good morning, everyone, and we appreciate everyone for joining us for today’s call to discuss our second quarter results. As we begin, I’d like to remind, everyone, that during this call we’ll make certain forward-looking statements, and in this context forward-looking statements often address our expected future business and financial performance, and financial condition and also contains word such as expects, anticipates and similar words or phrases.

Forward-looking statements by their nature address matters that are uncertain and are subject to certain risks and uncertainties, which can cause actual results to differ materially from those projected in the forward-looking statements. We discuss these risks in our Quarterly Report on Form 10-Q and our Annual Report also on Form 10-K particularly in Item 1.

I’d also like to caution you not to place undue reliance on these forward-looking statements, which reflect management’s analysis only as of the date hereof. The Company undertakes no obligations to publicly update our forward-looking statements or to publicly release the results of any revision to forward-looking statements that may be made to reflect events or circumstances after the date hereof or reflect the occurrence of our anticipated events. Now on both our Atlas Energy and Atlas Resource earnings releases, we provide a GAAP reconciliation to the non-GAAP measures we refer to in our public disclosures.

And with that, I’d like to turn the call over to our Chief Executive Officer, Ed Cohen, for his remarks. Ed?

Ed Cohen

Thanks, Brian, and hello everyone. I’m glad to report that for the period ended June 30, 2014 Atlas Energy, ATLS and Atlas Resources ARP, both enjoyed solid quarters. For ARP, effective hedging and increased production, especially of oil and natural gas liquids largely offset the negative effects of depressed natural gas prices.

For ATLS, results at Atlas Pipeline Partners, that’s APL and the ARP facilitated increases in incentive distribution payments which allowed ATLS to declare a $0.49 per limited partner unit distribution for the second quarter of 2014 and that was an 11% increase over the prior year second quarter.

I want to point out that Atlas Energy remains the world’s only pure play general partner with IDR income from two distinct and separate streams from APL, ATLS is processing and transportation subsidiary and from ARP which is was the owner of long-lived low declining oil and gas production assets.

Now at ARP oil production grew organically over 30% in the second quarter as compared to the prior quarter and over 60% from the year earlier quarter. It grew to approximately 2,100 barrels per day, while the production of natural gas liquids reached 3,689 barrels per day.

Total production set a new record of approximately 261.3 million cubic feet equivalents per day, that’s net to ARP’s account for the second quarter 2014, a 6% increase over the first quarter. And very importantly margin from oil and liquid production is now roughly equal to revenue from dry natural gas production. That is the margin from dry natural gas production.

During the quarter ARP closed over $0.5 billion of accretive favorable acquisitions. The GeoMet purchase of low decline natural gas assets in West Virginia and the far larger oil rich Rangely Field assets in Colorado.

Adjusted EBITDA for the quarter reached $79.2 million compared to only $68 million for the first quarter of 2014 and $53.8 million for the prior year comparable quarter. Distribution per unit increased to 19, i.e. $0.1966, 19 2/3 cents for the month of June 2014. That’s $2.36 per unit on an annualized basis, and that’s up 8% from the distribution per unit for the prior year second quarter.

Now look that means that from minimal assets producing just under 40 million cubic feet equivalent per day less than 1/7 of our current production when ARP commence business in March 2012, now it was less than 2.5 years ago. Atlas Resources is growing geometrically and now has reached a market cap in excess of $1.8 billion and an enterprise value of approximately $3 billion.

And yet and in my opinion, most disappointingly the stock price of ATLS per unit was up only a little over 4% from March 31, 2014 to June 30, 2014, and the price of ARP actually declined almost 3% during the quarter, mirroring a general weakness in upstream MLPs, the category to which Atlas Resource Partners belongs.

Observers have noted that a major reason for the poor performance of our sector, the upstream MLPs is the canard that read something like this in entity that pays out the bulk of its cash flow periodically is not compatible with the depleting asset base of oil and gas wells.

In my opinion this is like insisting that a helicopter is incompatible with an aero plane and therefore can’t fly because the helicopter does not have wings. E&P MLPs are different entities than E&P Development companies. And ARP has unique advantages that other upstream companies both MLPs and C Corporations lack.

I just want quickly to enumerate them. First of all, ARP is the beneficiary of the all-important for us. Atlas capacity arise funds in the direct investment channel. The syndication network that its provided the Atlas Companies over the years with billions of dollars in fresh retail investor funding and that this year should provide ARP with several $100 million of fresh development funds to allow new drilling and new production for ARP’s account at little or no cost to ARP. This is an avenue not practically available to other upstream MLPs for overcoming the depleting asset base.

Secondly, ARP’s actual annual decline rate on its assets, the vast majority of its production is around 11%. The decline that is easily offset by new production funded by investor programs and by its own organic growth projects. And finally, there is financial conservatism. We hold it self evident that stability of cash distributions to limited partners is paramount at ARP. Therefore, as is well-known the vast majority of our future production is hedged largely through conventional swaps.

We’ve always avoided the complex mechanisms that have raised issues at other companies that have not followed our hedging slogan of “keep it simple, keep it safe.” And we seek to maintain a conservative balance sheet, as Sean McGrath, our CFO, will discuss shortly in considerable depth.

Next, however, Matt Jones, ARP’s President will layout our accomplishments in the field and through the drilling bit during the second quarter. Matt?

Matt Jones

Thank you, Ed, and thank you all for joining our call. At ARP our primary objective is simple and that is to increase the stability and growth of our cash flow per unit. Our strategy emphasizes our core strength of acquiring and assimilating long-lived oil and gas properties and exploiting our inventory of liquids rich and high yielding dry gas drilling prospect.

We fund the vast majority of our drilling activities by raising capital through our tax advantage direct investment program business. Raising capital on this forum service to reduce to the capital intensity of our organic growth, enhances our rates of returns and increases monthly recurring cash fees that we generate further adding to the stability and magnitude of our cash flow. All of these elements contributed to the 9% growth in our distribution this quarter compared to the second quarter of 2013.

In 2014 second quarter, we completed over $500 million of acquisitions and continue to solidify the successful assimilation of previous acquisitions. Through our drilling operations, we organically grew net oil production by more than 30% compared to the first quarter of this year and in our field operations we continue to focus on bringing forward additional value from our large inventory of mature producing oil and gas wells.

We also initiated drilling activity for our present drilling program. The drilling program will be a catalyst for anticipated growth in our cash flow per unit in the second half of this year. The acquisition of the Rangely Field asset brings to our Company roughly 47 million barrels of oil equipment reserves composed of 90% crude oil and 10% heavier grade liquids from a proven world class oil field.

The long-lived, low-decline and high margin oil and liquids production will serve to further reduce our portfolio decline rate, further diversify our production mix and add to the stability of our cash flow stream for years to come. For the closing of the Rangely acquisition and including the 30% organic growth in oil production, during the second quarter that I will address more fully in a moment.

As Ed had mentioned, our production margin is now approaching an even balance between contributions from liquids and dry gas production. The acquisition of the GeoMet assets adds roughly 70 Bcf of long-lived, shallow declining natural gas reserves to our portfolio of long-lived and low-decline CBM assets. Together these acquisitions had meaningfully increased our producing asset base, added to our cash flow per unit and lowered our portfolio decline rate.

The outstanding growth in ARP’s oil production in the second quarter was primarily attributable to the drilling and operational success of our Marble Falls team that is exclusive of production generated from recent acquisitions. In past quarters we’ve highlighted some of the successes of our technical and operating gains in a number of our other operating areas, particularly with our liquids rich Miss Lime asset in Oklahoma and on our Marcellus Shale position Lycoming County and Pennsylvania where we’ve produced powerful wells.

However, because of the sequencing of our drilling schedule this year, the success of our second quarter drilling activity was primarily dependent upon our Marble Falls drilling efforts and operations focused. I’m happy to report that our Marble Falls team did a terrific job, increasing oil production from our Marble Falls position by more than 50% and exceeding the oil production type curve on average for the wells that we connected in the quarter.

As a reminder, our type curve for these wells suggests a 30-day peak rate of roughly 50 barrels of oil per day. We significantly advanced our ability to drill complete and target wells on our 75,000 plus acres prospected for the Marble Falls. Our geoscience and operating teams have worked closely to integrate well data and 3D seismic interpretation to better target well locations.

We scheduled the inclusion of a substantial number of Marble Falls wells drilling opportunities in our present drilling program. In the third and fourth quarters of 2014 we scheduled this by 45 additional Marble Falls wells, with average connections of six wells per month in the third quarter and seven wells per month in the fourth quarter.

I’d also like to mention that our Company benefited from our Marble Falls team success and bringing back production that have been curtailed in the first quarter because of severe weather conditions.

I’d also like to note our progress in the simulating required assets and enhancing the performance of our wells across our systems. I mentioned on our last earnings call that the low-decline, long-lived assets that we acquired in July of 2013 from EP Energy, our largest acquisition to date continue to produce at or above expected levels based on acquisition assumptions. This remains the case through the second quarter and continues into the current quarter.

Our CBM team continues to focus intensely on low cost solutions to enhance production and we’re evaluating a number of projects to bring forward additional value. In Appalachia, our operating team continues to find ways to increase production from mature wells with minimal capital investment. ARP’s Appalachian team has found creative ways to increase oil production from mature tenancy wells and suspend decline rates on some of our legacy production in Pennsylvania and Ohio. This of course is an important skillset for a company like ours, that targets the acquisition of mature producing properties as well as the components of our growth strategy.

Also in Appalachia and on our Utica/Point Pleasant position we recently connected three wells from a single pad side on our Columbiana County property where we hold roughly 1,200 contiguous acres. With each of the wells, we targeted a Point Pleasant formation as the primary reservoir with average lateral length of roughly 5,400 feet. We completed a total of 51 frac stages. The wells have so far produced according to plan with initial gross daily production rates collectively of 25 million to 26 million per day or 7 million to 8 million a day per well. The wells are funded through our series 33 direct investment program.

We’ve targeted four additional Utica wells to be developed from a single pad side on our Columbiana County acreage for inclusion in our present drilling program. These wells will benefit from significantly longer average lateral length of 6,600 feet compared to the recently connected wells and will be drilled from a single pad side. We scheduled the spud wells early in the fourth quarter.

Staying with Appalachia for a moment, I’d also like to quickly note that the eight Marcellus Shale wells that we connected about a year-ago continue to produce at a high level. After about one-year of production, the wells have collectively produced nearly 17 Bcf and averaged about 32 million a day of gross production in the second quarter.

Today we operate in 12 states in multiple basins across the country. In addition to providing a substantial core of long-lived, low-decline oil, natural gas liquids, and natural gas production, the breadth and diversity of our operations in assets provide a sizeable inventory potentially high returning drilling locations creating meaningful organic growth opportunities.

In the second half of 2014 we are looking forward to an active program at Plaintiffs spud 29 wells in the third quarter and 43 wells in the fourth quarter largely through the exploitation of our liquids rich Marble Falls and Miss Lime position. We discussed our Miss Lime position extensively on past calls. We anticipate funding the vast majority of our drilling activity with proceeds from our present drilling program.

Thanks for taking the time to listen and now on to Sean McGrath, our CFO.

Sean McGrath

Thank you, Matt, and thank all of you for joining us on the call this morning. Regarding our second quarter financial results for ARP, we generated adjusted EBITDA of approximately $79 million and distributable cash flow of approximately $54 million -- $54.5 million or $0.37 per unit. These amounts are pro forma for a full quarter of gross margin as well as interest expense and maintenance CapEx associated with our acquisition of the Rangely asset, which closed on June 30 and the GeoMet asset which closed on May 12.

We recently declared a cash distribution for the month of June of $0.1966, on a quarterly run rate of $0.59 per limited partner unit. An increase of approximately 2% from the previous $0.58 run rate and a 9% increase from the prior year second quarter.

ARP’s coverage ratio for the second quarter was approximately 1x inclusive of four quarters margin from our recent acquisitions and our associated financing. Production margin for the second quarter was almost $62.5 million, which represented 120% increase compared with the prior year second quarter and a 5% increase from the sequential quarter. The approximate $3 million increase from the first quarter consisted of $2.3 million of margin contributed by the GeoMet assets from its May 12 acquisition date and $6 million of additional margin associated with higher liquids volumes, partially offset by a $6 million unfavorable impact due to lower natural gas and NGL pricing between the periods.

Production volumes were over 261 million cubic feet of equivalents per day for the second quarter compared with the sequential quarter production volume of approximately 247 million per day. While the majority of the increase in equivalents was due to the additional GeoMet natural gas volumes. Higher liquids volumes drove production margin significantly higher.

Crude oil volumes increased our 500 barrels per day and NGL volumes increased approximately 270 barrels per day from the first quarter. As Matt’s operations teams continue to execute on our development strategy in the liquids rich Marble Falls and Mississippi Lime regions. And we recover from the severe winter weather during the first quarter.

With regards to commodity prices after our first quarter which witnessed natural gas hitting recent highs due to severe winter weather and record low storage levels. Prices were slightly lower due to a mild start to summer and above average storage injections.

Henry Hub first of month gas prices for the second quarter $4.67 or $0.25 lower compared with the sequential period, a 5% decrease between periods. While ARP’s natural gas production was almost -- was approximately 80% hedged for both the first and second quarters of 2014, realized prices for the period of $3.78 or approximately $0.30 lower than the first quarter of 2014, due to lower base differentials at a number of our sales points.

With regards to liquids, oil prices stayed strong during the second quarter as WTI prices averaged almost $103 per barrel. However, NGL prices particularly propane were weaker during the second quarter as we realized $0.56 per gallon compared with $0.76 for the sequential quarter both net of transportation and fractionation expenses.

Unhedged propane prices averaged $1.06 per gallon for the second quarter compared with the $1.33 per gallon for the first quarter, a 20% decrease due to supply shortages during the first quarter that eased during the second. I think prices were also lower during the second quarter of 2014, as our realized prices averaged $0.27 a gallon compared with $0.33 per gallon for the sequential quarter.

Before I move on to our partnership management segment results, I’d like to take a quick moment to mention how pleased our management team is with the results of the recently acquired Rangely and GeoMet assets. The combined DCF generated by these assets during the second quarter was approximately 16 million compared with 13.5 million of cash distribution associated with the units issued to partially fund these acquisitions representing a coverage ratio of 1.2 times on the newly issued units during the quarter. Given the combined low decline of these assets and potential development opportunities, we expect these assets to continue to be accretive in the future.

Regarding our partnership management segment, margin for the quarter was $10.2 million or $1 million lower than the sequential quarter due to an almost $2 million decrease in margin associated with lower amounts of capital deployed for our partnership programs, partially offset by $1 million in ongoing fees associated with managing our partnership wells.

As a reminder, our second quarter is generally the trough period for capital deployed for our partnership programs with the third and fourth quarter amounts historically being much higher, a trend we expect to continue in 2014. The increase in fee-based well service margin was due to additional wells connected for our partnership programs during the first half of 2014.

Moving on to general and administrative expense, net cash G&A was $10.5 million for the period, which is $1.2 million lower than the first quarter, due to the moderation of syndication costs associated with our partnership programs. Historically ARP syndication of marketing costs for its partnership programs are much higher during the first quarter and significantly moderate during the subsequent quarterly periods.

Total capital expenditures were approximately $55 million for the second quarter including approximately $13 million associated with maintenance capital compared with $40 million for the sequential quarter. The second quarter amount included $30.5 million for direct well drilling and investments in our partnership programs in the Marble Falls and Mississippi Lime regions. But the remainder associated with leased acreage, gathering costs, and other corporate items.

Maintenance capital expenditures for the second quarter included approximately $2.3 associated with the Rangely product margin recognized during the period. For the remainder of 2014, we expect maintenance capital expenditures to be approximately $25.5 million to $27.5 million in the aggregate.

With regard to risk management activities, we continue to execute our strategy methodically yet opportunistically mitigating potential downside commodity volatility for both our legacy and acquired production.

Overall, we have hedge positions covering approximately 167 billion cubic feet of natural gas production an average floor price of approximately $4.30 per Mcf for periods through 2018. In addition, we have hedged an average of approximately 85% of our current run rate crude oil production through 2015 at an effective average floor price of over $90.50 per barrel with additional hedges through 2018. Please see the tables within our press release for more information about our hedges.

Moving on to ARP’s liquidity position and leverage, at the end of March, we had approximately $240 million of availability under our $825 million revolving credit facility, with a leverage ratio of approximately 3.7x. We expect to exit 2014 with a leverage ratio comfortably below 3.5x for the long-term target of approximately 3x.

With regard to Atlas Energy LP, we generated distributable cash flow of over $25.5 million and distributed $0.49 per unit for the period, representing a coverage ratio of 1x for the quarter on an LTM basis. This distribution represented 11% increase from the prior year second quarter.

Atlas DCF for the period was 4 million higher than the first quarter 2014, as it recognized an approximate 2 million of additional cash distributions from APL and ARP combined, including 1.5 million of additional IDRs. In addition, ATLS recognized over a $1.5 million less G&A expense during the second quarter compared with the first due to higher annual shareholder and compliance costs during the first quarter.

Finally, I’d like to quickly mention, ATLS’ strong standalone balance sheet at year-end, which has $13 million of cash and an undrawn $50 million credit facility, along with leverage of 2.15x.

With that, I thank you for your time. I’ll return the call to our CEO, Ed Cohen.

Ed Cohen

Thank you very much and Ashley we’re now ready for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from Praneeth Satish of Wells Fargo. Your line is open.

Praneeth Satish - Wells Fargo

Hi, guys. Good morning.

Ed Cohen

Hi.

Praneeth Satish - Wells Fargo

Just a couple of quick questions, I guess, the first is could you provide any update on Atlas growth partners and where you’re on the fund raising there versus I guess whether tracking in line with your original expectations?

Ed Cohen

We really cant comment on that company, because as we have said previously it is a private offering. However, for those who've been following SEC filings, you can understand why we are extremely pleased with how that's going.

Praneeth Satish - Wells Fargo

Okay. And I guess I was just wondering about the decision to raise the distribution this quarter. Coverage was slightly below one times, I guess below your target. Is it because you have good line of sight for the balance of the year with your operations for coverage improving or I guess what are some of the drivers that you see in the second half?

Ed Cohen

I really don't have to answer that question, because you have already answered it. Good line of sight and our Board took everything into consideration. We are satisfied that it was a safe and secure decision to make.

Praneeth Satish - Wells Fargo

Got it. And then, just last question for me, I think Sean you provided an update on maintenance CapEx for the year, I was just wondering if you could provide any color on growth CapEx for the balance of the year?

Sean McGrath

Sure Praneeth. Yes, we got -- at the start of the year, we’re going to have total CapEx somewhere in the range between $185 million to $200 million. That's including the maintenance capital amount. So not much has changed as we get through the midpoint of the year. We are still evaluating the second half projects. So we still expect to be somewhere near that range. We are evaluating potential projects with the Rangely assets that we recently acquired even though it’s a non-opposition there is the -- there is potential for some improvement projects there that may or may not added this small amount of CapEx, but we still believe we’re within that range.

Praneeth Satish - Wells Fargo

Okay. That’s it for me. Thank you.

Ed Cohen

Thank you, Praneeth.

Operator

Thank you. Our next question comes from John Ragozzino of RBC Capital Markets. Your line is open.

John Ragozzino - RBC Capital Markets

Good morning, guys.

Ed Cohen

Hi.

Sean McGrath

Hi, John.

John Ragozzino - RBC Capital Markets

Just kind of big picture question. Could you comment on the role of secondary and tertiary recovery assets in, because you called upstream MLP land, it seems like it has been a significantly accelerated trend over the last, I guess, call it 12 months and what kind of opportunities that you see as in the lower 48 for the entire group?

Ed Cohen

Well as you heard we’ve been doing very well with that and Matt you might want to comment in detail?

Matt Jones

That form of asset that’s well as you know John inside the MLP structure generally the tertiary and secondary recovery projects provide relatively stable cash flows. They were oil and liquids oriented projects. We obviously entered that subsector of the oil and gas business with our acquisition in the Rangely Field. Our position is a non-op position, but it’s a highly valuable one. Its one that gives us entry into that subsector and it has value to us for all the reasons that the -- that those form of assets work well inside the MLP. Our future associated with the -- with recoverable oil assets I think has been expanded now with the entry that we’ve into the Rangely Field and we think that we and others in the sector are likely to expand with secondary and tertiary asset recovery.

John Ragozzino - RBC Capital Markets

All right. And, I guess, does the existence of the partnership management business bear any influence on this ideal structure of ARP, in particular its asset base, or does it prohibit you from kind of leaning more towards those types of assets as opposed to maintaining the necessary inventory pud locations with the adequate returns that are required by your retail investors?

Ed Cohen

I don’t think there is any incompatibility. The company is now large enough that we can proceed to exploit secondary and tertiary development and still have more than enough opportunity to handle the -- our partnership business.

John Ragozzino - RBC Capital Markets

All right. Then just one more, perhaps you can shed some light on this because I’ve been trying to figure this out for a while, but you look at the performance of the group over -- maybe not perhaps the last couple of weeks, but there was a few months there where kind of the rising tide was raising all ships with the exception of ARP and for some reason I just can't identify a tangible factor that would cause such underperformance. What do you attribute that to?

Ed Cohen

As I indicated, the underperformance has been disappointing to us. But we are very hopeful that the overperformance in the real world will be reflected in a subsequent over performance in the stock market price. Obviously, I don’t want us to come to the a feeling of virtually every CEO he’s disappointed with his stock market price, that Mr. Market is not responding rationally instead our response is to show Mr. Market just how excellent our performance can be and our expectation is that the market will be responsive.

John Ragozzino - RBC Capital Markets

All right. Thanks very much guys. That’s all I have.

Ed Cohen

Thank you.

Sean McGrath

Thank you, John.

Operator

Thank you. Our next question comes from Valerie Zhang of Deutsche Bank. Your line is open.

Valerie Zhang - Deutsche Bank

Good morning.

Ed Cohen

Good morning, Valerie.

Valerie Zhang - Deutsche Bank

On 2014 guidance we are eight month into the year. Are we still targeting $2.40 to $2.60?

Ed Cohen

We are although with the disappointing prices so far this year we’re obviously at the lower end of that spectrum. However my own expectation is that prices will firm, and I’m hopeful that we not only will be within the spectrum but that we might surprise people favorably.

Valerie Zhang - Deutsche Bank

Then what would it take to get to closer, say to the mid point of the range?

Ed Cohen

Higher gas prices would help a lot.

Valerie Zhang - Deutsche Bank

Okay. Now on acquisitions, so you completed over $500 million year-to-date, what is you EBITDA for more deals for the rest of the year?

Ed Cohen

The one thing we’re not going to do is to issue additional equity at the present price unless a deal which we don’t think will be the case is so incredibly valuable as to make us rethink that basic orientation. But there are lots of deals out there and our hope is that our stock price will recover to the point where we are able to take advantage of that situation. On the other hand we’re in the happy position that our organic growth is so strong and as I indicated earlier the availability of these hundreds of millions of dollars from direct investment programs really is helpful to us in making it unnecessary for us to make acquisitions and still to grow and prosper.

Valerie Zhang - Deutsche Bank

Okay, that’s fair. Now, lastly on the drilling program; are we still on target then?

Ed Cohen

Excuse me.

Valerie Zhang - Deutsche Bank

Drilling program, the fund raising; are we still on target?

Ed Cohen

Well again we can't comment with specificity, but as I indicated previously we’re very pleased with how things are going. And I think that our investors will be extremely pleased by the end of the year.

Valerie Zhang - Deutsche Bank

Okay. Thank you very much.

Ed Cohen

Thank you.

Operator

Thank you. Our next question comes from Abhi Sinha of Wunderlich Securities. Your line is open.

Abhi Sinha - Wunderlich Securities

Hi, good morning everybody. A quick one on LOE, I see that gripping up a little bit this quarter, but I’m more considered about next two quarters when you see more liquids coming up from Rangely acquisitions. How does that impact the LOE? Where do you see the trend going for the year?

Ed Cohen

Matt?

Matt Jones

Yes, I’ll let Sean answer it. But with respect to LOE obviously what is most important to us is production margin. And you had mentioned that we expect through the Rangely acquisition and our internal activity greater oil and liquids production going forward in the second half of the year and so, there maybe some impact to LOE cost, but there’ll also be a positive impact to production margin, but Sean why don’t you answer the question.

Sean McGrath

Sure. It’s a good question. Yes, I think its right in line with where we expect it to be going. I think as you pointed out we’re doing, continuing to do more liquids drawing, we’re growing that level of production. So, I think you will see it tickup, but it’s really not a reflection of inflation of cost of higher cost across the board. It’s more just a reflection of the units of production, and obviously if you’re more gas oriented its going to drive that lower. So, we haven’t really seen an uptick in the overall cost of our operations. And as Matt is saying, that’s reflective of our overall gross margin per unit production.

Abhi Sinha - Wunderlich Securities

Sure, be it. And on the Marble Falls I think you conducted some surveys, seismic survey last quarter and had some positive results. Just trying to get some idea, so is that change -- has it changed anything in terms of your location count that you’re expecting before versus now? How should we think about that in terms of what's your prospective drilling locations there?

Matt Jones

Yes, I appreciate the question. We’re shooting -- right at the moment in fact we’re shooting additional 3D seismic on our Mississippi Lime acreage. We think that will be beneficial. We expect that will be reveling in terms of not only having an opportunity to better target wells in the future, but also to bring forward greater inventory from our Mississippi Lime acreage. The same is true, but 3D seismic that we have already shot on our Marble Falls acreage its lead to better targeting of our well efforts which is partly responsible certainly for the better results that we’re seeing from the Marble Falls. We just recently interpreted another section of our acreage through 3D seismic. I think I mentioned on our last call that it was revealing to us and we found substantial number of additional, what we believe to be additional high quality locations. We’re shooting another 3D effort on the northern extend of our acreage in the Marble Falls that we’re hopeful that that will be equally as beneficial. So, we are proving up additional locations but at least as importantly I think that the 3D seismic the other geotechnical analysis that we’re undertaking is improving our ability to target wells, and we’re seeing that come through in the quality of the wells that we’re drilling.

Abhi Sinha - Wunderlich Securities

Sure, thank you. That’s all I have. Thank you very much.

Ed Cohen

Thanks, Abhi.

Sean McGrath

Thanks, Abhi.

Operator

Thank you. Our next question comes from the line of John Abbott of Bank of America. Your line is open.

John Abbott - Bank of America

Good morning. Thank you for taking my question.

Ed Cohen

Hi, John.

John Abbott - Bank of America

Hi. I just had really one question regarding the accretiveness of the range of the acquisition. If I sort of look at your distribution for the first quarter it was about $45.7 million. And then, if I look at your cash flow, prior to the cash that will be received from the acquisitions in the second quarter, and I assume with some additional cash for GeoMet would your coverage ratio have without the acquisition range be coming closer to 0.9 times and in fact this was really pretty accretive for you guys.

Ed Cohen

CFO.

Sean McGrath

Yes, John, I apologize I was trying to catch -- I was trying to pull my sheet out, but yes the acquisitions in the second quarter as I mentioned are about 1.2 times covered on the distribution. So we issued equity for GeoMet and Rangely are probably combined about 21 million units. And so, we covered those distributions first in second quarter, GeoMet obviously just the first, and then GeoMet and Rangely in the second. The basis I pointed out had a coverage ratio of about one times in the first quarter. We are affected in the second quarter by commodity prices I mentioned, few cash prices coming back in. So I apologize I kind of missed this, I was looking for my numbers. Was that your -- point of your question?

John Abbott - Bank of America

Yes, I was just trying to say -- I was just too looking at the numbers. I mean in the first quarter we didn’t have Rangely. Your distribution at time was about $45.7 million.

Sean McGrath

Right.

John Abbott - Bank of America

And then if I look at to your – if I look at your financial statements for this quarter, prior to the net cash received from acquisition, that $39.7 million. If I take the distribution of the first quarter and I look at the cash flow that does not include Rangely from the second quarter, to me that give a little bit of cash flow for GeoMet, would your coverage ratio without the Rangely acquisition coming closer to 0.92 times versus 1. So it looks, because I’m looking at it looks pretty accretive to me.

Sean McGrath

Right I believe that’s correct, yes. I think you’re doing the math right. So, yes Rangely was extremely accretive and we expected to continue to be that based on the unites that we issued to fund it over the remainder of the year and in the future.

Ed Cohen

And John, as I think you indicated the decline in prices in the second quarter has to be taken into consideration.

Sean McGrath

But also to with regards to the partnership management margin remember that the second quarters are trough periods so the third and fourth quarters are going to be much higher and so when you look at the overall base business that will continue to grow in terms of coverage and distributions.

Ed Cohen

Good point, Sean. John, do you have anything else?

John Abbott - Bank of America

That’s it. Thank you very much guys.

Ed Cohen

Thank you.

Operator

Thank you. Our next question comes from Noel Parks of Ladenburg Thalmann. Your line is open.

Noel Parks - Ladenburg Thalmann

Good morning.

Ed Cohen

Hi.

Noel Parks - Ladenburg Thalmann

Couple of things. Actually, since you just mentioned the Marble Falls 3D, what sort of cost was that going to be?

Sean McGrath

In the Marble Falls we’re paying between $40,000 and $50,000 an acre. It’s interesting we’re fining various ways to lower that cost. We’re participating in some of our extent of our 3D shoots with some other industry participants in the area. But generally speaking it’s about $40,000 to $50,000, pardon me square mile, I said in acre. $40,000 to $50,000 a square mile.

Noel Parks - Ladenburg Thalmann

Okay, thanks. And as you look at the way that ARP has really extended the number of regions that is operating and, over the last couple of years? What you think now about, as opposed to sort of large transactions. The opportunity for bolt-on in your areas; is there any area that stands out as having particularly good opportunities?

Ed Cohen

When you refer to bolt-on, are you talking about acquisitions?

Noel Parks - Ladenburg Thalmann

Yes, exactly.

Ed Cohen

The opportunities are there. Unfortunately our stock market price stands in the way as I indicated. We will forego opportunities rather than issue equity at this price.

Noel Parks - Ladenburg Thalmann

Sure. And I guess just a broader question looking at the Marcellus. Do you have a sense there that, there’s opportunities as far as, well I guess most of the acreage the big blocks up there and drilled to be held by production by various operators. As far as farming in the acreage, stuffs that’s held but where there really is a good capital. Do you see much opportunity around the particular regions of the Marcellus?

Ed Cohen

We think there is great opportunity. We retained the knowledge that we build up over decades of operating in Appalachia. We’re free of the restricted covenant that came with the Chevron acquisition that expired a few months ago. So, we are in a good position. We think that opportunities of modest size are available and from what we hear in the press release there is some disenchantment on the part of the very largest companies because their cost structure is, they say very incompatible with present pricing. That being said, we have assets, we have funding. We’re able with our existing assets to expand exponentially and until such time as we get a fair reading from the stock market we are not going to be candidates for a bolt-on acquisition.

Matt Jones

I was just going to add to that, that right at the moment we don’t have to look outside of our company for additional drilling locations in the Marcellus particularly in North East Marcellus. We have another, call it 10 to 15 high quality drilling locations that remain to be exploited at our Lycoming County acreage. So we have some inventory of high quality locations yet to be drilled in North East Pennsylvania.

Ed Cohen

Good point, Matt.

Noel Parks - Ladenburg Thalmann

Okay. I mean in the event that we see better pricing heading into the winter, particularly if it brings the strip up. Do you see yourself getting potentially more active there?

Ed Cohen

There’s no reason why we would not be active there. It really is our area of prime expertise and we have always done well there.

Noel Parks - Ladenburg Thalmann

Okay. That’s all for me. Thanks.

Ed Cohen

Thank you.

Operator

Thank you. Our next question comes from Wayne Cooperman of Cobalt Capital. Your line is open.

Wayne Cooperman - Cobalt Capital Management, Inc.

I was going to ask about Atlas Growth Partners, but you already answered my question by refusing to answer it. So, anyway, how you’re doing? Talk to you later.

Ed Cohen

Thanks, Wayne.

Operator

Thank you. Our next question comes from Craig Shere of Tuohy Brothers. Your line is open.

Ed Cohen

Hi, Craig.

Craig Shere - Tuohy Brothers

Hi. I guess my last name is as tough to pronounce as my firm?

Matt Jones

We are going to start calling you Shere.

Ed Cohen

(Indiscernible) well received.

Craig Shere - Tuohy Brothers

Well looking forward to seeing you guys next week. Couple of quick ones here, Matt piggybacking on I think it was Abhi’s question on the benefits of the 3D Marble Falls shoots, it sounds like -- correct me if I’m wrong the 2Q IP rate improvement was driven more by better rock and well locations than any changes in the drilling techniques or completion efforts. And if that’s correct, do you have a sense for how long an inventory of these more prolific locations you believe you have?

Matt Jones

We have a substantial inventory Craig, now we have about 75,000 acres I mentioned that. We have drilled a decent number of wells now in the position probably a 100 or so. We drilled around the perimeter of our acreage in many areas. We have burnt an off a lot over the course of that progression. We have many, many positions that remain to be drilled, to be exploited in the program. The 3D seismic opens up new opportunity for us and as I have mentioned its not only new opportunity but its higher quality opportunity because of our the targeting effort that we have in place. I wouldn’t dismiss the notion that our drilling and completion practices have improved. They have -- they continue to improve and that’s part of the uplift as well. We are targeting what I think is higher quality rock on average but our field practices are improving also.

Craig Shere - Tuohy Brothers

Okay. Can you put in terms of the higher quality rock and what's know, do you feel like you have one or two years of known inventory there where you continue with the seismic?

Matt Jones

Well I think we have at least one or two years of inventory and likely beyond that.

Craig Shere - Tuohy Brothers

Very good. And recognizing that the Miss NGL production was starting from the higher first quarter base. The Miss oil production I think was up over 45% sequentially, was just dramatically higher versus I think was a 12% number for NGLs and lower for nat gas. Can you comment on the latest well production mix and any efforts to turbocharge oil output with ESPs or other processes?

Matt Jones

In the Miss Lime particularly?

Craig Shere - Tuohy Brothers

Yes.

Matt Jones

In the Mississippi Lime we didn’t, we haven’t addressed the Miss Line to a great extent on this call. But we were active in the Miss Lime in the second quarter. We spud about eight wells in the Mississippi Lime. We continue to advance and build out our infrastructure particularly with respect to salt water disposal capacity which is so important in the play. We’re preparing of course for A, significant amount of activity on a Miss Lime acreage in the third and fourth quarters. We also brought into production four wells in the second quarter. Two of the wells have produced above tight curve, two below tight curve. I think a couple of the wells what we refer to as non-shallow in nature. They were intermediate deep wells and a couple of the wells were shallow. So, the production results were decent to good. We have had now three or four quarters of improving production in the play in the last couple of quarters preceding the second. Our production exceeded tight curve on, almost all the wells that we drilled during that period. So, the trend continues positively and we’re optimistic about what we’re going to see in the third and fourth quarter. And the second quarter was the quarter where we’re preparing for that growth.

Craig Shere - Tuohy Brothers

Sure. So, in terms of the production mix out of the Miss, are you targeting higher oil zones or are you actually deploying enhanced oil recovery mechanisms?

Matt Jones

We’re targeting the Miss Lime on our average is about 500 to 550 feet thick. And so through our geoscience interpretation in various areas of the field where they’re drilling to a deeper part of the Mississippi Lime formation or more shallow part of the Mississippi Lime formation depending upon what our historical drilling results suggest in the particular area or our geoscience interpretation suggest in a particular area. You probably know also that SandRidge is drilling stacked laterals on some of their acreage with the Mississippi Lime being as tick as it is in the area. The temptation of drilling stacked laterals is there obviously SandRidge is pursuing stacked lateral development in the play. We’re watching to see what happens. It could very well work. Stacked lateral development has worked in other plays particularly the Austin Chalk, certain areas of the Gulf of Mexico, the nature of the rock in the Mississippi Lime was a little bit different than those plays. The ability to move water off the formation is critical in the Mississippi Lime who stack laterals have potentially different dynamic in the Mississippi Lime but obviously we were hopeful that SandRidge is successful and we potentially could adapt our drilling program going forward based on their success.

Craig Shere - Tuohy Brothers

Good color. I appreciate it. Last line of questioning, Sean what was the exact partnership capital deployed in the quarter again, and can you elaborate on expectations of the ARP fund raising expanding to I think you said several $100 million in size versus last years $150 million?

Sean McGrath

Right, Craig. Yes, we got it at the beginning of the year that the funds we’re raising this year we’re targeting $200 million that’s up from $150 million we were targeting last year. I think as Ed mentioned, I mean so far indications have been good. So we have not -- we’re not wavering off that target. With regard to capital deployed during period, it was about $16 million -- little over $16 million during the period which was down about $33 million from the first quarter. But as I think we mentioned in my comment that that’s a reflection more of the -- to the timing of the fund raising. We expect that to ramp up significantly in the second half of the year.

Craig Shere - Tuohy Brothers

Great. Thanks guys. I appreciate it.

Ed Cohen

Thank you.

Operator

Thank you. Our next question comes from Majid Khan of Tourbillon Capital. Your line is open.

Majid Khan - Tourbillon Capital

Hi, guys, good morning. Thank you for taking my question.

Ed Cohen

Hi, Majid.

Majid Khan - Tourbillon Capital

I guess, if you are saying that there's plenty of opportunity to do things at ARP, but you’re averse to assuring equity at this price. The preferred market has been pretty open. I am wondering if you are just as averse to topping that or if it doesn't make sense to do that with the kinds of deals that are available.?

Ed Cohen

Well, we’ve never been criticized for lacking creativity and there are means of doing deals which don’t include equity. We don’t have anything specifically creative in mind right now. We tend to find situations and not be reactive but we also can be reactive. But all that being said, what I wanted to emphasize was at this level we’re not going to issues additional equity as I tried to make clear, that should not mean that the company can't move forward on many fronts.

Majid Khan - Tourbillon Capital

Got it, fair enough. And, I guess someone has already sort of asked you this question, but this stock performance has been fairly tragic. I know you guys raised your dividend quite nicely after three quarters of not raising it and yet the stock continues to trade at a bid discount to GPPAs especially adjusted for your growth profile. I mean its, -- you guys are certainly no strangers to monetizing your assets and given the M&A environment I’m sure there’s been interest in your assets and I’m sure your equally adverse to letting your babies go, but at what point do you have to say these assets are just worth more in the private market than the public markets are giving them credit for?

Ed Cohen

We will see to it that our shareholders are happy shareholders to the extent that we can and while we do love our babies and we’re sad that Mr. Market doesn’t seem to love the children as much as it should. We won't let that affection stand in our way. Whatever is useful to our shareholders we will pursue. And we’re not unaware of the fact that we have properties that are of enormous value. And that people in the industry covet and that prices in the industry have been at record highs, we noted all that and nobody I think finds that in the past we haven’t been responsive to opportunity.

Majid Khan - Tourbillon Capital

Fair enough. Thank you Ed, and keep up the good work.

Ed Cohen

Thank you so much, Majid.

Operator

Thank you. Our next question comes from Sean Sneeden of Oppenheimer. Your line is open.

Sean Sneeden - Oppenheimer

Hi, good morning.

Ed Cohen

Hi,

Sean McGrath

Good morning.

Sean Sneeden - Oppenheimer

Maybe as a follow-up to the question on LOEs. But, Sean, can you give us an indication of what LOEs and taxes are specifically at Rangely?

Sean McGrath

Yes, well overall, I mean I think we’ve guided that when we announced the acquisition that the overall production cost which included taxes, transportation and other items will range between $25 and $30 per barrel of production. What we’ve seen so far is kind of within that range and so I still believe -- we think it will continue to be there through the remainder of the year.

Sean Sneeden - Oppenheimer

Okay. That’s helpful. And then maybe along the same lines just to clarify, that $79 million of EBITDA for the quarter, is that a good run rate that includes what would have been a full quarters contribution from GeoMet and Rangely, or is that kind of what pro forma would be for GeoMet?

Sean McGrath

No, that includes the margins from the Rangely assets that we got because of the structure of the agreement. So that certainly includes all those Lime, so that is a good run rate going forward.

Sean Sneeden - Oppenheimer

Okay, that’s helpful. And then maybe just one last one perhaps for Ed. On the strategic side, I certainly appreciate the comments on the E&P market and kind of where you are right now? But as you think about growth opportunities especially for next year and beyond, I’m sure you saw the legacy announcement with, the partnership with WPX. How do you guys think about that structure -- would that ever fit or make sense for you?

Ed Cohen

Well, of course we have noticed not only the legacy situation but over in the processing area. Now I’m speaking from Atlas’s point of view. The enormous value that’s been unleashed by situations like Devon COSPEC’s -- Williams acquisition of the general partner, improvement in its position in the general partner of access, the KMI Copano situation. So, obviously those situations suggest the true underlying value that our assets both at ARP and at APL have and one would expect but not only we will be live through it. Not only other companies would be live through it, but the shareholders would take that into consideration in valuing our company.

Sean Sneeden - Oppenheimer

Okay. That’s helpful. Thank you very much.

Sean McGrath

Hey, Sean real quick, just to clarify from my comment earlier, we’re talking -- you talked about run rate EBITDA, just that we’re clear, we expect to continue to have additional function margin recon on second half of the year and grow our production. So, I don’t want to act like that as a run rate number going forward. We expect to continue to grow through the remainder of the year.

Sean Sneeden - Oppenheimer

Right. Now I just wanted to make sure that we’re okay, for apples-to-apples comparison.

Sean McGrath

Absolutely -- absolutely, yes, 100%.

Sean Sneeden - Oppenheimer

Great. Thank you.

Operator

Thank you. I’m not showing any further questions in queue. I’d like to turn the call back over to Ed Cohen for any further remarks.

Ed Cohen

I just want to thank everyone for the skill of questions and the opportunities that they offered us to elaborate on our company. And we look forward to talk with you at the next call.

Operator

Ladies and gentlemen, thanks for participating in today's conference. This concludes today program. You may all disconnect. Everyone have a great day.

Ed Cohen

Thank you.

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Source: Atlas Energy's (ATLS) CEO Ed Cohen on Q2 2014 Results - Earnings Call Transcript
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