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Executives

Frank Hopkins – VP, IR

Scott Sheffield – Chairman and CEO

Rich Dealy – EVP and CFO

Analysts

Richard Roy – Citi

Pioneer Southwest Energy Partners, LP (PSE) Q1 2011 Earnings Call May 4, 2011 12:00 PM ET

Operator

Welcome to Pioneer Southwest Energy’s first quarter conference call. Joining us today will be Scott Sheffield, the Chairman and Chief Executive Officer; Rich Dealy, Executive Vice President and Chief Financial Officer and Frank Hopkins, Vice President of Investor Relations.

Pioneer southwest 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 and 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 prospects of Pioneer Southwest are subject to a number of risks and uncertainties that may cause actual results and future periods to differ materially from the forward-looking statements.

These risks and uncertainties are described in Pioneer Southwest’s news release on page 2 of the slide presentation and in Pioneer Southwest’s public filings made with the Securities & Exchange Commission. Just a reminder, today’s call is being recorded.

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

Thanks, Matt. 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 will review the financial and operating highlights for the first quarter and update you on PSE’s drilling program in the Spraberry field. Rich will then cover the first quarter financials in more detail and provide earnings guidance for the second quarter. And after that we will open up the call for your questions.

So with that intro, I will turn the call over to Scott.

Scott Sheffield

Good morning. Thanks, Frank. We are on slide three on highlights. For the first quarter, PSE had adjusted income of $24 million or $0.75 per unit. That does exclude mark-to-market derivative losses of $37 million due to the run up of commodities or $1.13 per unit. First quarter production averaged close to our midpoint of 66.48 barrels of oil equivalent per day, up 4% from first quarter due to the extremely cold weather affecting the Permian Basin. We have some down time.

We have 11 wells placed on production during the first quarter from a two-rig drilling program. We have got 13 wells in our fracback awaiting completion at March 31st. We’re continuing to see excellent results from our drilling deeper at the lower Wolfcamp formation and also opening up the organic rich shale/silt intervals.

Cash flow from operations were $27 million, and we did announce a distribution increase to $0.51 per outstanding unit for the first quarter payable on May 12 to unit holders as a record of May 2nd; equates to $2.04 per common unit on an annualized basis.

Slide number four on our drilling program, our CapEx $67 million is broken out between $62 million for drilling, $5 million for facilities and expect to drill about 40 to 45 wells with that program. Well costs are still staying much cheaper than our peer group – other companies, at 1.4 million continuing to drill deeper, as I mentioned earlier in the Wolfcamp.

Organic rich shale zones, seeing obviously great results there, starting to test deeper Strawn formation in certain areas of the field. Earlier this morning PXD reported a tremendous success from the Strawn interval, adding 20,000 to 40,000 barrels equivalent for a cost of about roughly $60,000.

We’re forecasting our production growth of 5% in ‘11 compared to ’10, and just remind everybody we do have a significant number of 20 acre locations, 1,200. And earlier this morning PXD Pioneer, the general partner, reported tremendous success in its recent 20-acre drilling. We’re exceeding our 40 acre type curve in those wells, so again, that gives plenty of upside for PSE to significantly grow by just drilling for the next several years.

Let many turn it over to Rich to go over our financials.

Rich Dealy

Thanks. I will start on slide five. As Scott mentioned net loss of $13 million or $0.38 per unit did include unrealized mark-to-market derivative losses attributable to the run up in commodity strip prices of $37 million or $1.13 per unit adjusting for that $24 million or $0.75 unit on a normalized basis.

In the text box below, you can see where first quarter guidance where we forecast we come in versus first quarter results as you can see from all of those were in the middle part of the guidance where we would have expect it to be. And as Scott mentioned on production, given the weather impacts we had about 50 barrels a day that we lost from our results as a result of weather downtime.

Turning to slide six, and looking at second quarter guidance, as a result of our continued successful two-rig drilling program we are continuing to increase our guidance quarter-over-quarter. So it’s 6,600 to 7,100 BOEs per day for the second quarter and then each of the other line items here for guidance are equivalent to what they have been for a number of quarters now and expect results to be right in that range.

Turning to slide seven, as we have seen in the past, the PSE still maintains great financial flexibility. We have a solid derivative position with 80% of our production hedged for ‘12, 60% for 2013, 25% for 2014 and – 70% for 2011. So, well good balance sheet and good hedges in place, and look forward to continued production in cash flow growth over the coming quarters. So we are happy to report another great quarter and open it up for questions at this point in time.

Question-and-Answer Session

Operator

(Operator Instructions) And the first in line will be from Richard Roy with Citi. Please go ahead.

Richard Roy – Citi

Good afternoon.

Scott Sheffield

Hey, Richard.

Rich Dealy

Hey, Richard.

Richard Roy – Citi

Given the strong opportunities that you just discussed, is it fair to say that the focus is going to continue to be on development as opposed to making acquisitions?

Scott Sheffield

Yes, Richard. The returns that we are getting are 50% plus returns from drilling, and so there is no way we can make acquisitions at those type of returns.

Richard Roy – Citi

Right.

Scott Sheffield

So that’s why – because the Permian Basin is the hottest basin right now in the US, people are just way overpaying. That’s the primary reason.

Richard Roy – Citi

Are you considering increasing your CapEx program for 2011 or is that setting stone [ph]?

Scott Sheffield

Not for 2011 at this point in time. We’ll continue with the two rigs. We’ll have to decide about 2012, 2013; the more results we get from the 20-acre drilling, it will give us more and more confidence whether or not to go ahead and start bringing in several 20s, whether or not to at additional rigs in ‘12, ‘13.

Richard Roy – Citi

Great. And just one last question. As we look to the properties at PXD, are there any properties that you feel are suitable to be drilled down to the MLP over the next, say, 12 to 18 months?

Scott Sheffield

At this point in time, we do not anticipate any more dropdowns at this point in time.

Richard Roy – Citi

Great. Thank you very much.

Operator

And at this time, we have no further questions in the queue. I will turn it back over to our host for any additional or closing remarks.

Frank Hopkins

Okay, again, we appreciate everyone listening and taking the time, effort. Look forward to the next quarter and to participate – participation. Again, thanks. Bye, have a great summer.

Operator

And again, this does conclude today’s conference call. Thank you for your participation.

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