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Richard Finley - Chief Financial Officer

Kristian Kos - Chief Executive Officer


Abhi Sinha - Wunderlich Securities

New Source Energy Corp (NSE) Q2 2014 Earnings Conference Call August 12, 2014 11:00 AM ET


Good morning and welcome to the New Source Energy Partners’ Second Quarter 2014 Conference Call. Just a reminder, that 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 will turn the call over to Mr. Richard Finley, Chief Financial Officer of New Source. You may begin.

Richard Finley

Good morning and thank you all of you for joining us today for the New Source Energy Partners second quarter conference call. I am 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 risk 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 on the Investor Relations tab of our Web site at

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

Kristian 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 transformed 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 on an annualized basis. This increase represents an 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 a result of assimilating 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 in line 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 a 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 service division. As we closed the EFS and RPS acquisitions at 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 plays of the Mid-Con, Permian, 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 and RPS acquisitions were timely as well as strategic and the partnership now has the foundation necessary to grow all segments.

We are in the process of integrating EFS and RPS into the partnership and are pleased with how quickly and smoothly the integration has progressed. We are thrilled that we’ve substantially increased 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 will turn the call over to Richard to provide you with the financial overview of the quarter. Richard?

Richard 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 same 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 of 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 were primarily due to our recently drilled and completed wells coming on line.

Our G&A expense for the quarter was $3.5 million which increased year-over-year, mainly due to the acquisition related cost we incurred with the EFS and RPS transactions. 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 $0.585 per unit or $2.34 per unit on an annualized basis for all outstanding units. The distribution will be paid on August 15 to all unit holders of record on August 1. The strength of our financial position provides us with resources to continue our goals of continuing to grow as a vertically integrated partnership.

With that, I will open the lines up for questions. Operator?

Question-and-Answer Session


Thank you. We will now be conducting a question-and-answer session (Operator Instructions). Thank you. Our first question comes from Abhi Sinha with Wunderlich Securities. Please proceed.

Abhi Sinha - Wunderlich Securities

A quick one basically on the distribution. So I see your second half coverage is coming up very high, I mean the coverage build up is very strong. So I was trying to get some kind of perspective on distribution growth that you might have for this year or possibly next year too?

Kristian Kos

Absolutely Abhi, thanks for taking the time to join us this morning. As mentioned on previous calls, we are looking to create a consistent distribution growth quarter-on-quarter. So this quarter we increased our distribution by $0.02 on annualize basis or close to 1%. We feel confident that we can provide distribution growth on a go forward basis in line with where the industry averages are, which is our intent. In addition what we have 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 pro forma basis to increase the coverage ratio, we will be looking to further increase the coverage ratio as we go forward as a partnership on a long-term basis. So we are 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 is 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 the clarity that the distribution growth is achievable and is forth coming.

Abhi Sinha - Wunderlich Securities

And Kristian, when you talked about basically your coverage ratio, what would the impact be excluding the recognition or including the recognition of the effective day cash flow in the DCF or 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 price adjustment basis?

Kristian 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 and 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 to the benefit from the effective date to the partnership and that cash was available for distributions for the partnerships. So we felt it important to display or give a 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 like 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 minimal to no impact on our EBITDA for the period. And so it allows investors to understand based on the projections we previously provided in the call, we had at the time of the acquisition to understand what those are pro forma were on a go forward forecasted coverage ratio looked like? Does the that give clarity in terms of our ability to continue to raise distributions 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 and not only do we have that strength of coverage ratio, the ability to increase our distribution but that we also have the strength of 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 put us in a very good position both overall as a company and very good position relative to our peer group as an industry.

Abhi Sinha - Wunderlich Securities

For NGLs, I just see like there is lot of weakness in this quarter, so what strategy you have for hedges and how do you plan on building bands and hedges based on a going forward basis here. I know the market is ill liquid that way. But I see some companies having still at least one or two years of NGL hedges?

Kristian Kos

Our hedges -- we’ve got -- we feel good hedges in place for the remainder of the 2014. We had forecasted at the time of the IPO for an aspirational realized price in the $35 per BOE, $36 per BOE level. We had received $38 a barrel per BOE that is for Q2 pre-hedges and post hedges, we are in the $35 range per BOE. So that for us, it’s $35.76 per BOE. So that positions us relative to where we stood at the outset in Early 2013 to where we stand today, we feel good. In terms of having been successful in realizing prices that we had forecasted or hoped to achieve. There hasn’t been much liquidity in the NGL market, it has gotten better relative to where it was 18 months ago, there are more 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 NGLs relative to where the market is and where we perceive it to be. So what does that mean net-net? It means that we will continue to add hedges quarter-by-quarter to reduce the risk and get most constant revenue stream from our producing assets, but we are also looking to add at time we feel the more beneficial where there is liquidity in the market and the price is moving in an area that we believe is favorable relative to the curve in the spend and the strip to the front month.

So we look very aggressively at how that performs relative to what were realized prices versus what is 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 NGL as the front month is much better than the out years. And we are trying our best -- we’ve aggressively moved into a phase 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 opportune times to add these hedges versus trying to just outlay hedges today in the summer period of 2014.


(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 Kos

Thank you. We very much appreciate everyone’s time on the call today. I understand we’re in the midst of earnings season and everyone is every busy. We really appreciate the support and the following for everyone who participated on the call and the broad based following we have we do realize we recently had a call concerning our EFS/RPS acquisition and are very excited how we are positioned now for the next phase of growth, how we have, our core services foot print in place to allow us to then expand in our core EMP footprint beyond East-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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