New Source Energy Partners' (NSLP) CEO Kristian Kos on Q2 2014 Results - Earnings Call Transcript

| About: New Source (NSLPQ)

New Source Energy Partners LP (NSLP) Q2 2014 Earnings Conference Call August 12, 2014 11:00 AM ET


Richard D. Finley – Chief Financial Officer

Kristian B. Kos – President and Chief Executive Officer

Dikran Tourian – President of Oilfield Services Division


Abhi Sinha – Wunderlich Securities Inc.


Good morning and welcome to the New Source Energy Partners Second Quarter 2014 Conference Call. Just a reminder today’s call is being recorded and your participation implies consent to such recordings. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation.

With that, I’ll turn the call over to Mr. Richard Finley, Chief Financial Officer of New Source. You may begin.

Richard D. Finley

Good morning and thank you all for joining us today for the New Source Energy Partners second quarter conference call. I’m Richard Finley, CFO here at New Source and with me today are Kristian Kos, our President and CEO and Dikran Tourian, the 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 assumptions subject to risks and uncertainties and actual results may differ materially from those projected in these forward-looking statements. We also will make reference to certain non-GAAP financial measures, reconciliations of those non-GAAP financial measures to the applicable GAAP financial measures can be found in our earnings release issued yesterday evening, which can also be found under the Investor Relations tab of our website at

And with that I will hand the call over to our CEO, Kristian Kos.

Kristian B. Kos

Thank you, Richard. Today, I’m going to go over some of the highlights for the second quarter. Dikran will then provide an overview of MCE and then Richard will go over the financial results. It’s been an active first half of the year as we continue to affect our goal of becoming an integrated partnership.

In late June, we completed our acquisition of Erick Flowback Services or EFS and Rod's Production Services or RPS achieving the next phase of our long-term plan. As outlined in our earnings release total cash paid, common units issued, and debt assumed for the EFS/RPS acquisition was approximately $117 million including approximately $9 million of common units issued to EFS and RPS employees in the form of a retention program.

These accretive acquisitions have further transform new source into an integrated energy partnership and are in line with our consistent goal to increase both our distribution and our value to our unit holders. In July, we announced another increase to our quarterly cash distribution to $0.585 per unit or $2.34 per unit on an annualized basis. This increase represents in a 11% increase from the minimum quarterly distribution at the IPO in 2013.

During the second quarter our average net daily production was 4,835 barrels of oil equivalent per day versus 4,566 boe per day in the first quarter of 2014. This represents a 6% quarter-over-quarter increase and was the results of a simulating our Q1 acquisition and the addition of our recently drilled and completed wells coming online.

Production costs were $10.26 per boe in the second quarter roughly inline with the first quarter of 2014. While we are pleased that costs have stabilized this quarter our goal is for these to decrease and we – as the management team are focused on doing what we can to achieve this goal.

Adjusted EBITDA for the quarter was $11.4 million, which includes a contribution of roughly $2.9 million from our oilfield services division. As we closed the EFS and RPS acquisitions at the end of June, they had minimal to no impact on our second quarter results, but are expected to have a significant impact on the second half of the year as we integrate their strong results into the partnership.

Including adjusted EBITDA attributable to the EFS/RPS acquisition based on their historical financial results, we estimate our coverage ratio including these results from the time of the effective date of the acquisition would be roughly 1.15 to 1.25 times. Our balance sheet remains strong and we remain focused on delivering solid returns and creating value for our unit holders.

Now, I will turn the call over to Dikran Tourian to give some details on the services division. Dikran?

Dikran Tourian

Thank you, Kristian. Our presence in the oilfield services segment now covers the shale place of the Mid-con, Permian and Eagle Ford, Marcellus and Utica. The production results from each continue to accelerate as reported in the second quarter earnings calls across the upstream part of the sector. The EFS/RPS acquisitions were timely as well as strategic and the partnership now has the foundation necessary to grow all segments.

We’re in the process of integrating EFS/RPS into the partnership and are pleased with how quickly and smoothly the integration has progressed. We are thrilled that we’ve substantially increase the human capital for New Source from less than 10 people at the time of our IPO to more than 700 people working for the partnership today.

With that I’ll turn the call over to Richard to provide you with the financial overview of the quarter. Richard?

Richard D. Finley

Thank you, Dikran. For the second quarter of 2014, we reported adjusted EBITDA of $11.4 million. Net income for the second quarter was $1.6 million or $0.11 per weighted average basic common unit outstanding. The revenues for the quarter were $26.8 million.

As Kristian mentioned earlier revenues from the EFS and RPS transaction will be seen in the second half of the year as the transaction closed at the end of June. Average net daily production for the quarter was 4,835 barrels oil equivalent per day versus 3,523 barrels of oil equivalent per day in the second quarter of 2013 and 4,566 barrels of oil equivalent per day in the first quarter of 2014. The increases both year-over-year and sequentially we’re primarily due to our recently drilled and completed wells coming online.

Our G&A expense for the quarter was $3.5 million, which increased year-over-year mainly due to the acquisition related costs, we incurred with the EFS and RPS transaction. Maintenance CapEx was approximately $3.9 million for the quarter including about $300,000 for Oilfield Services Division.

As Kristian mentioned before, during the second quarter we announced a distribution increase to $58.5 per unit or $2.34 per year on an annualized basis for all outstanding units. The distribution will be paid on August 15 till all unit holders of record on August 1. The strength of our financial position provides us with resources to continue our goals have continuing to grow as a vertically integrated partnership.

With that I’ll open the lines up for questions. Operator?

Question-and-Answer Session


(Operator Instructions) Thank you. Our first question comes from Abhi Sinha with Wunderlich Securities. Please proceed.

Abhi Sinha – Wunderlich Securities Inc.

Hi, good morning everybody. Quick one basically on the distribution, so I see your second half is, well coverage is coming up very high, I mean, the coverage buildup is very strong. So, as trying to get some kind of perspective on distribution growth that you might have for this year or probably next year too?

Kristian B. Kos

Absolutely, Abhi, thanks for taking the time to join us this morning. As mentioned on previous calls, we’re looking to create consistent distribution growth quarter-on-quarter. So, this quarter we increased our distribution by $0.02 on an annualized basis or close to 1%. We feel confident that we can provide distribution growth on a go forward basis inline with where the industry averages are, which is our intent In addition what we’ve been looking to achieve over the last three quarters is to generate growth to our coverage ratio or coverage levels on a go forward basis. We feel very pleased with what we’ve done in this last quarter on a proforma basis to increase the coverage ratio will be looking to further increase the coverage ratio, as we go forward as a partnership on a long-term basis.

So, we’re not looking to increase the distribution to lower our coverage ratio, but maintain strong coverage and continue to – on a quarter-by-quarter basis increase our distribution and what we feel that will provide our unit holders as both the comfort and confidence that we have excess distributable cash flow that we can redeploy into organic opportunities or further acquisitions. In addition to giving good foresight and good knowledge that we have the ability to further increase our distributions on a quarter-by-quarter basis. So, we’re very much focused on the coverage ratio, which allows people and the clarity that the distribution growth is achievable and his forthcoming.

Abhi Sinha – Wunderlich Securities Inc.

Sure. Thank you for the color. Kristian, I see or when you talked about basically your coverage ratio what would the impact we excluding the recognition or including the recognition of the effective debt cash flow in the DCF for acquisitions basically. So, I’m just trying to think that, so going forward, would you be including that or would you continue to report on basically purchase by suggestion basis?

Kristian B. Kos

In terms of the GAAP reporting we will be looking to – we’ll look on a quarter-by-quarter basis, but all our financials will be reported on a GAAP or per GAAP methodology in GAAP basis so in terms of what we wanted to provide color here is the 117 purchase price did not include a purchase price adjustment that cash in order to the benefit from the effective date to the partnership and that cash was available for distributions for the corp partnerships we felt and important to display or give sense of what our coverage ratio was on a cash basis for the period and then also to give an indication of what it will look on a pro forma basis going forward.

The effective date was at the beginning of Q2 the purchase was right at the end of the second quarter whereby there was a minimal to no impact on our EBITDA for the period. And so it allows investors to understand based on the projections previously provided in the call we had at the time of the acquisition to understand what does our pro forma were on a go forward forecasted coverage ratio look like what does that give clarity in terms of our ability to continue to rise distribution on a go forward basis and the strength overall strength of the partnership as a combined entity.

In addition it should give good clarity we hold to the market that not only do we have that strength of coverage ratio the ability to increase our distribution but that we also have the strength at balance sheet to go with it. The numbers reported here would demonstrate that we have on a pro forma basis under 1.5 times debt to EBITDA which would we put as in very good position both overall as a company and very good position relative to our peer group as an industry.

Abhi Sinha – Wunderlich Securities Inc.

Sure, thanks, Kristian. And just for NGOs I just see like there is a lot of weakness this quarter. So what strategy you have for hedges and how do you build sort of plan on building off and hedges are based on going forward basis here? And the market is illiquid that way but I see some companies having still at least one or two years of NGO hedges?

Kristian B. Kos

Yes, we have our hedges we’ve got we feel good hedges in place for the remainder of 2014 we forecasted at the time of the IPO for an aspirational realized price in the $35, $36 per boe level we had received $38 a barrel per boe that is for Q2 pre-hedges and post-hedges we’re in the $35 range per boe so that for us its $35.76 per boe. So that positioned us relative to where stood at the outset in early 2013, to where we stand today we feel good in terms of our have been successful and realizing prices that we had forecasted or hope to achieve, there hasn’t been much liquidity in the NGL market that it has gotten better relative to where it was 18 months ago. There are more participants – active participants in that market. So we see the ability to add hedges we were more aggressive in adding oil and natural gas hedges for 2015 in the second quarter.

But we have not been as aggressive other than for 2014 on NGL relative to where the market is and where we preceded to be. So what is that mean net-net it means that we will continue to add hedges quarter-by-quarter to reduce the risk and get a more constant revenue stream from our producing assets, but we are also looking to add at times that we feel them more beneficial where there is liquidity in the market and the prices moving in an area that we believe is favorable relative to the curve in the spend and this strip to the front month.

So we look very aggressively and how that performed relative to what were realized prices versus what does the outward month or what do the outward months look like. So with lack of liquidity we are finding that for the most part in NGLs the front month is much better than the out years and we’re trying our best we’ve aggressively moved into a face of looking at our strategy around hedges on a week-by-week basis versus a quarter-by-quarter basis. But we still are looking for opportunity and times to add these hedges versus trying to just outlay hedges today in the summer period of 2014.

Abhi Sinha – Wunderlich Securities Inc.

Got it, got it. Sure, thank you, that’s all I have. Thank you very much.


(Operator Instructions) There are no further questions at this time. I would like to turn the floor back over to Kristian for closing comments.

Kristian B. Kos

Thank you, we – very much appreciate everyone’s time on the call today. I understand we are in the midst of earnings season and everyone is very busy. We really appreciate the support in the following for everyone who participate on the call and the broader base following we have – we do realize we recently had a call concerning our EFS/RPS acquisitions and are very excited how we are positioned now for the next phase of growth, how we have our core services footprints in place to allow us to then spend on our core EMP footprints beyond e-central Oklahoma. And we look forward to the next quarter and to continue dialogue with all of our investor base. Thank you very much.


This concludes today’s teleconference. You may disconnect your lines at this time. And thank you for your participation.

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