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Executives

Frank Hopkins - VP, IR

Scott Sheffield - Chairman and CEO

Rich Dealy - EVP and CFO

Analysts

Kevin Smith – Raymond James

Gary Paul – Private Investor

William Adams – AMCO

Pioneer Southwest Energy Partners, L.P. (PSE) Q4 2010 Earnings Call February 8, 2011 12:00 PM ET

Operator

Welcome to Pioneer Southwest Energy’s Fourth Quarter Conference Call. Today’s call is being recorded.

Joining us today will be Scott Sheffield, Chairman and Chief Executive Officer, Rich Dealy, Executive Vice President and Chief Financial Officer, and Frank Hopkins, Vice President of Investor Relations.

Pioneer Southwest has prepared PowerPoint slides to supplement their comments today. These slides can be accessed over the Internet at www.pioneersouthwest.com. Again the Internet site to access the slides related to today’s call is www.pioneersouthwest.com. At the website, select Investors, then select Investor Presentations.

The Partnership’s comments today will include forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements and the business prospectives of Pioneer Southwest are subject to a number of risks and uncertainties that may cause actual results in future periods to differ materially from the forward-looking statements.

These risks and uncertainties are described in Pioneer Southwest’s new release on Page 2 of the slide presentation and in Pioneer Southwest’s public filings made with the Securities and Exchange Commission.

At this time for opening remarks and introductions, I would like to turn the call over to Pioneer Southwest’s Vice President of Investor Relations, Frank Hopkins. Please go ahead, sir.

Frank Hopkins

Good day, everyone, and thank you for joining us. Let me briefly review the agenda for today’s call. Scott will be the first speaker. He’ll review the financial and operating highlights for the fourth quarter and update you on the PSE’s drilling program in the Spraberry deal.

Rich will then cover the fourth quarter financials in more detail and provide earnings guidance for the first quarter. And after that, we’ll open up the call for any questions that you might have.

With that, we’ll get the call started now with Scott.

Scott Sheffield

Thanks, Frank. Good morning. Slide Number 3 highlights our fourth quarter 2010 adjusted income at 25 million, or $0.75 per unit, excludes unrealized mark-to-market. Grid of losses of 20 million after tax, or $0.61 per unit. Fourth quarter production averaged a little over 6,500 barrels a day, up 8 %, versus fourth quarter of April of 2009.

We’re also within guidance, down slightly, up from third quarter 2010, due to new oil connection delay. Basically, obviously, we’ll pick that up and solve that.

Twenty-eight wells placed on production during 2010 from two-rig drilling programs; 18 additional wells are waiting completion, or being drilled at the end of the year.

Obviously, we’re seeing tremendous benefits from drilling deeper the lower Wolfcamp opening up the organic-rich shale zones in both the Spraberry and the Wolfcamp.

Cash flow from operations at 21 million. We declared another distribution of $0.50 per outstanding unit for fourth quarter 2010. It’s payable on February 11 to unit holders of record as of February 3, and reflects the annual distribution rate of $2 per common unit.

Reported year-end reserves 2010, of 52 million barrels of oil equivalent is up 8 million barrels from year in 2009; comprised of 6 million barrels of performance improvements from the production curves. Also, we had 4 million barrels of revisions offset by production of about 2 million barrels of oil equivalent.

Slide Number 4, we talked about our drilling program on 2011 going forward. Our capital budget will be about 67 million, 62 million for drilling, 5 million for facilities. We expect to drill 40-45 wells in the two-rig program.

Expected well cost of about 1.4 million, continue to drill deeper to the lower Wolfcamp, and complete the organic-rich shale zones in both the Spraberry and the Wolfcamp zones.

We’ll be testing the deeper strong formation in certain areas of the field. PHD, we talked about on a more recent call where we had fairly significant success. Wells are producing 20-40 barrels a day more, and also it looks like for somewhere around 50-$60,000 we can get maybe 20-40 thousand barrels of oil equivalent. So tremendous economics.

Forecasting production growth of 5 % plus in 2011 compared to 2010. And again, to remind everybody, we have tremendous inventory; 125 locations on 40s, and about 1200 on 20-acre spacing. On a recent call on PHD, we did give an update in the Q-and-A session if you want to look at that on PHD. We talked about the recent activity by PHD on 20 acres. We’re seeing significant improvement on those 20s by opening up those additional zones.

Let me turn it over to Rich to go over the financials.

Richard Dealy

Great. Thanks Scott. On Slide 5, net income for the quarter, as Scott mentioned, is 5 million, or $0.14 per unit. It did include unrealized mark-to-market, gridded losses related to oil prices rising during the fourth quarter of 20 million, or $0.61, so adjusted for that non-cash item are $25 million or $0.75 per unit. At the bottom of the page there you can see where we projected fourth quarter guidance, and our fourth quarter results where they came in at. You can see it was within guidance on all items as we have been for the past couple of quarters.

Turning to Slide 6 and first quarter guidance, as Scott mentioned, we do plan on catching up on getting our wells – complete input on, so we are seeing a production increase of 6,500 to 6,900 BOEs a day for the fourth quarter and production cost, DD&A, G&A, interest, and effective tax rate all similar to where we have been in the past

One thing that many of you may know, Texas has experienced some very severe weather last week and so these numbers don’t reflect some potential downtime that we would have had related to just production being offline given the cold weather we’ve had and the snow. And so that’s not adjusted in these numbers yet just because we haven’t gotten our hands completely around that at this point.

Turning to Slide 7, we talk a little bit about PSE’s financial position; still in great position. We have $81 million of debt outstanding at year end. We’ve got $219 million available under our credit facility, so lots of liquidity.

On the derivative front we have added in 2014, 2000 barrels a day of oil collars, similar to what we did before with collars with a short put, but generally in our minds it’s protecting us; a $90 floor and participating in oil prices up to $133 in 2014. So with that derivative, it brings our overall position to 70 % for 2011, 80 % for 2012, 60 % for 2013 and 25 % for 2014. So everything is going according to plan, and continue to move forward.

So why don’t I stop there, and we’ll open up the call for questions.

Question-and-Answer Session

Operator

(Operator instructions). Our first question comes from Kevin Smith with Raymond James.

Kevin Smith – Raymond James

Hey. Good morning, gentlemen.

Scott Sheffield

Good morning.

Kevin Smith – Raymond James

Just one quick, well, two questions here. It looks like you’re borrowing base bumped up, is that correct?

Rich Dealy

Well, we really don’t have a borrowing base, we have a PD test, but in essence, yes, the bank pricing has moved up and so we have full access to our $300 million credit facility.

Kevin Smith – Raymond James

Okay, that makes sense. The other question is what type of environment makes sense for you guys to perform more drop downs? I know you talked about with the deduction in PDP volumes, maybe that makes sense. But when you look at it, what are you kind of monitoring for in the marketplace, and how do you go about making those decisions?

Scott Sheffield

Yeah, well, the first thing we’re focusing on is PDP, Proved Developed Producing Properties, as we’ve said before, the value that people are giving for Spraberry properties, and especially ones that have upside drill locations, people are paying 15-20,000 per acre now. So we’re focused on PDP acquisitions, and we’ve had some recent success, so we’ll be talking more about those.

We’re starting to see some opportunities come in for PSE. We’re going to try that approach first, focus on PDP acquisitions, more – with less upside in drilling, and we’re going to focus on that before we start looking seriously at any type of drop down. Probably an ‘12, ‘13 potential event.

Kevin Smith – Raymond James

Okay, so, you’re looking more third party in 2011 versus drop downs.

Scott Sheffield

That’s right. That’s assuming we still have a big drilling inventory of 40s and obviously a real big inventory of 20s.

Kevin Smith – Raymond James

And when do you expect to get in to your inventory of 20s? I know this year, but do you have any targeted dates?

Scott Sheffield

We’ll drill a couple this year on 20s and we’ll see how those perform. Obviously, the PHD level, we’ve seen some good performance we talked about it on our call earlier today, and we’ll progress from there.

Kevin Smith – Raymond James

And one last question, if I may, an accounting question. I probably should know this, but can you explain the difference in that the 20 million in non-cash derivatives versus what you’re showing in the cash flow number which is 17.6 million in non-cash? Is that 17.6 a net number?

Rich Dealy

It is net. I’m just trying to think of what else is in there. I can give you a call back, Kevin, and tell you. I don’t have it right here in my hands, but the 20 obviously is just the future curve, relative to our derivative position, and where oil prices have moved versus the strike price in derivatives.

Kevin Smith – Raymond James

Right. Okay. All right, well, thank you very much, gentlemen.

Rich Dealy

Sure.

Operator

We’ll now take our next question from Gary Paul who is a private investor.

Gary Paul – Private Investor

Hello?

Scott Sheffield

Hello, how are you doing, Gary?

Gary Paul – Private Investor

Fine. Most of the MLPs after a couple of years start seeing distribution increases, and if memory serves me right, your target is to retain 25 % of cash flow for capital expenditures. At $0.75 that then implies about $0.56 available. Is there any likelihood over the next couple of years of seeing a distribution increase?

Scott Sheffield

Yeah, Gary, we’ve stated in the past, you know, the past two or three quarters that in 2011 we’re going to seriously evaluate an increase. And so we’ll be having board meetings and we’ll be looking at that potential.

Gary Paul – Private Investor

All right. Thank you.

Operator

(Operator instructions). Our next question comes from William Adams with AMCO.

William Adams – AMCO

Good morning. I just wanted to follow up on your comments about your looking at doing PDP acquisitions from third parties. Would you be doing acquisition in just oil? Would you consider natural gas? And what regions of U.S. would you consider? Would it just be the [inaudible] or would you look elsewhere?

Scott Sheffield

Yeah, right now we’re strictly looking at West Texas oil where PDP so fits in with the profile of PSE. We have not – we’re not looking at conventional gas acquisitions. The price that people are paying for conventional gas is still very, very high based on what we can tell, and so we’re focused on the oil side where we can hedge and get good economics.

William Adams – AMCO

Okay. And then can you maybe repeat again, I missed the PHD call. You said for an additional 50-$60,000 you could create an additional 20-40,000 barrels a day?

Scott Sheffield

That’s only in potential for the strong wells.

Rich Dealy

That’s 20-40 barrels a day.

Scott Sheffield

20,000-40,000 ultimate recovery. And for that, for about $60,000, that’s on the wells that PHD, the parent, has drilled to date. And so we’re going to try some of those on PSE.

So, it’s incremental cost and incremental reserves and production.

William Adams-AMCO

Okay, great. Thank you.

Operator

And gentlemen, there are no further questions. Mr. Sheffield, did you have any additional or closing remarks?

Scott Sheffield

Okay. Again, we appreciate you all listening to the call, and if you’ve got any further questions, please call our investor relations group. And we look forward to seeing you in the next quarter. Thank you.

Operator

And that does conclude our conference for today. We thank you for your participation.

You may now disconnect.

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