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Executives

Scott Sheffield – Chairman and CEO

Rich Dealy – EVP and CFO

Frank Hopkins – SVP, IR

Analysts

Michael Blum – Wells Fargo

TJ Schultz – RBC Capital Markets

David Demuth – Howard Weil

Kevin Smith – Raymond James

Steve Tabb – Tocqueville Asset Management

Pioneer Southwest Energy Partners L.P. (PSE) Q3 2011 Earnings Conference Call November 2, 2011 2:30 PM ET

Operator

Good day, welcome to the Pioneer Southwest Energy’s Third Quarter conference call. Joining us today is Scott Sheffield, Chairman and Chief Executive Officer, Rich Dealy, Executive Vice President and Chief Financial Officer and Frank Hopkins, Senior Vice President of Investor Relations.

As a reminder, today’s call is being recorded. Pioneer Southwest has prepared PowerPoint slides to supplement their comments today. These slides can be accessed over the internet at www.poineersouthwest.com. Again, the internet site for access to the slides related to today’s call is www.pioneersouthwest.com.

At the website, select Investors, then select Investor Presentations. A replay of today’s webcast will be archived on the internet site through November 23rd. 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 to – 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 two of the slide presentation. And in the Pioneer Southwest pubic filings made with the Securities Exchange Commission.

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

Frank Hopkins

Thank you Lisa [ph]. Good day everyone, and thank you for joining us. I’ll briefly go through the agenda for today’s call. Scott’s going to be up first, he’ll review the financial and operating highlights for the third quarter, and he’ll update you on PSE’s drilling program in the Spraberry field.

Rich will then cover the third quarter financials in more detail, and he will give you earnings guidance for the fourth quarter. After that, we’ll open up the call for your questions. With that, I’ll turn the call over to Scott.

Scott Sheffield

Thanks, Frank and good afternoon. If you have access to our slides, start off in slide number three, the highlights. Our third quarter, a great quarter, adjusted income at 27 million, $0.81 per unit. It excludes unrealized mark-to-market gains, 62 million.

Third quarter production had a great quarter regard to production over 7400 barrels of oil equivalent per day, up 11% versus the second quarter of ’11 primarily due to the success of the 2-rig drilling program also going deeper and strong.

The addition of incremental oil transport trucks in third quarter which covered a tracking shortfall during the second quarter. 13 wells are placed on production on the third quarter, 33 wells year-to-date from a 2-rig program. Additional wells were waiting completion at the end of the quarter.

As I mentioned earlier, we benefit from the drilling deeper, the Lower Wolfcamp and Strawn intervals, and also completing throughout the entire pay zone and the organic-rich shale/silt intervals.

Cash flow at 32 million from operations, distribution at $0.51 per outstanding unit for third quarter. On November 11th the unitholders of record date October 31st equates to a 2.04 for common unit on annualized basis.

Our drilling update on slide number four, expect to drill approximately 40 wells with 2-rigs, capital expenditures about 65 to 75 million including facilities. Again, all the wells are going down to the Lower Wolfcamp and completing in the organic rich shale/silt intervals.

In addition, majority of the wells are being drilled to the deeper Strawn interval. 60% of the partnership acreage position has Strawn potential, that’s primarily in the middle of the Martin County, the northern part of the field.

We continue to evaluate the Atoka interval in certain areas, we expect to have three Atoka wells down by year-end. And if you look on PXD’s website, PDX has had three Atoka wells, their first three wells all came in around 150 barrels a day equivalent. A very exciting – that would be added on top of anything coming from the Spraberry Wolfcamp or the Strawn.

Forecasting production growth of 5% in ’11 compared in ’10. And as we always mention, tremendous inventory inside the partnership with over 100 acre locations, that’s about two and half years with the drilling, and over 1200 in 20-acre locations.

And again, our 20-acre locations at the BHD level on our website continue to exhibit tremendous success, are getting closer and closer to the original 40-acre type well.

Let me now turn over to Rich over our earnings for the quarter.

Rich Dealy

Thanks, Scott. Let’s turn to slide five. As Scott mentioned, net income of $89 million or $2.69 per common unit for the quarter include $62 million or 1.88 per unit related to unrealized mark-to-market derivative gains, primarily due to the decline in oil prices at the end of the quarter.

So adjusting for those non-cash unrealized mark-to-market gains $27 million or $0.81 per common unit. At the bottom of page five, we show our results relative to our Q3 guidance. You can see that production was above our guidance range, the 7400 was a great result for the quarter.

As Scott mentioned, we got our trucking situation fixed and we’re able to reduce our inventory levels about 175 barrels a day. So around 7200 on a normalized run rate for production. The rest of the items here are consistent where they’ve been in past quarters and within the guidance range.

Turn to slide six, fourth quarter guidance. Production estimated 7100 to 7600 BOEs a day for the fourth quarter, and then the remaining items are consistent with where they’ve been or similar to where they’ve been in past quarters.

Turn to slide seven, the partnership still, you know, has a great balance sheet, have $203 million available under our credit facility we’ve got 5 million cash sitting on the balance sheet at the end of the quarter, and so we’ve got plenty of capital to fund our 2-rig drilling program, and continue to look at acquisitions.

Partnerships still benefits from a strong derivative position with 70% of our production hedge for the fourth quarter, 80% for 2012, 60% for 2013and 25% 2014 where we continue to watch you know, particularly the out years, and we’d like to add to those positions and are you know, waiting for the right time.

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

Question-and-Answer Session

Operator

Thank you. The questions and answer session will be conducted electronically. (Operator instructions). And our first question comes from Michael Blum with Wells Fargo

Michael Blum – Wells Fargo

Hi good afternoon guys.

Frank Hopkins

Michael.

Rich Dealy

Hi.

Michael Blum – Wells Fargo

Just a couple of questions for me. One, just curious if you have a CapEx for next year? Is it fair to say it will be similar and a similar type of drilling program?

Rich Dealy

Yes, our – still contain with the 2-rig program so it will be in the similar range.

Michael Blum – Wells Fargo

Okay, and then we assume that after that – assuming you ran out of 40-acre locations you’d – by then you’d probably transferred to the 20s?

Rich Dealy

We would, I mean with the success we’re seeing at PXD level and you know, most of those 20s sitting at Strawn in that whole area that we would think you know, logical sense to move right into drilling more of those.

Michael Blum – Wells Fargo

Okay. And then you know, you mentioned the issues with you know, with the trucks and gathering the infrastructure, has that, from your perspective, has that been resolved or you anticipate, you continue to – been challenged in terms of be able to get your accrued [ph] to market?

Rich Dealy

I think as we move into the third quarter, we still have some challenge, but we’ve got that all corrected now and think we’re good for many months to come now or years. I mean we’re ahead of the game.

Michael Blum – Wells Fargo

Okay.

Rich Dealy

Basically, as we talked about on the PXD, we continue to add trucks, we’re you know, a lot of that stuff that we’re trucking today, we’re adding pipelines. So I don’t foresee any future issues.

Michael Blum – Wells Fargo

Okay, got it. Thank you.

Operator

(Operator instructions). We’ll now go to TJ Schultz with RBC Capital Markets.

TJ Schultz – RBC Capital Markets

Hey guys, good afternoon, good quarter. I guess just first on the hedges, you know, I guess you said, you look for the right time and obviously it goes back, bounce back here, kind of what level are you comfortable looking to add additional hedges on?

Rich Dealy

Yes, I think we’d like to do something similar to what we have in 2014 already out there with three ways or something with you know, $90 floor and then some upside potential from there.

TJ Schultz – RBC Capital Markets

Okay.

Rich Dealy

We’re still targeting.

TJ Schultz – RBC Capital Markets

Okay. I guess just the other thing you said you’d continue on the two 2-rig drilling program, you know, just curious, you know, what if anything would trigger you to consider adding an additional rig to the program here or, you know, do you think a 2-rig program is sufficient for the next several years here?

Rich Dealy

I think, you know, we will continue to monitor and we’re going to continue to look at it but right now we’re given the amount of cash flow it has and the distribution funding is the right mix so not to rule it out but today we’re comfortable with the 2-rig program.

TJ Schultz – RBC Capital Markets

Okay. Great. Thanks, guys.

Operator

And for our next week we’ll go to David Demuth with Howard Weil.

David Demuth – Howard Weil

Hey, guys. Good quarter. Just a quick question on the dropdown. What’s your forecast for the next call it 12 to 8 months for dropdowns?

Rich Dealy

Yes. We really don’t give that information out in terms of picking when we’re going to do it. I mean, it’s something that’s always out there and available but it takes both PXD and PSE to come to that so it’s not something that we forecast it in terms of when we’re going to do one.

David Demuth – Howard Weil

Okay. That’s fair. Thank you.

Rich Dealy

Sure.

Operator

And again that is star one if you wish to ask a question. We’ll now go to Kevin Smith with Raymond James.

Kevin Smith – Raymond James

Hi. Good afternoon, gentlemen. Following up on Michael’s question. Would the truck infrastructure and you think it’s largely solved. What type financial impact does that have? I assume that’s showing up an operating cost and assume that – you’re obviously doing a much cheaper but, you know, how much – is that removing on for operating cost which we think of that going forward after this stuff is solved?

Rich Dealy

Actually most that’s just sits in your price realizations and so at this point, I don’t expect, you know, we’re wilder trucking cost were higher, but they’ve come back and normalized, you know, in a dollar to a barrel in terms of trucking and most of that comes over a price realization.

Kevin Smith – Raymond James

Okay. So none of us didn't know [ph]?

Rich Dealy

No.

Kevin Smith – Raymond James

Got you. And then the other thing you mentioned the Atoca formation potentially drilling to that. Is that something you’re planning on comingling or is that going to be an isolated zone?

Rich Dealy

We started off isolating it and then after a few weeks, we apply for a comingling permit to the commission and they give it all the time approval. That’s the process we’re going to PXD. Eventually, we’re going to the commission and add the Atoca to the field rules which will allow us to comingle immediately but it’s only about a 90-day delay.

Kevin Smith – Raymond James

Okay. Because I’m thinking of it – I would assume Atoca is much higher pressure in largely gas. Is that correct in the area you’re doing?

Rich Dealy

I mean, there’s going to be more gas. This primary team Wolfcamp well is about 2,000 GOR. The Atoca wells are up in the 3,000 4,000 GOR so a little bit more gas but still getting huge amount of oil. As I mentioned, we’re producing about 350 – I mean, 150 barrels a day, oil equivalent per day on our first three wells with Atoca.

So, you should add substantially growth rates as we do more and more going on ’12 and ’13 inside PSE.

Kevin Smith – Raymond James

Okay. How much more incrementally is it – do you expect it to impact overall cost?

Rich Dealy

We’ve been estimating about $1.9 to $2 million but that incremental was about 300 to 350, 000.

Kevin Smith – Raymond James

Got you. Great. And then lastly no dollar question but can you remind me on your distribution policy and really where you want to be on your coverage ratio?

Clearly this was a solid quarter on the coverage ratio and I’m expecting to be similar if not a little bit higher in next quarter so where – what’s comfortable and, I guess, the other thing is this something you’re waiting to get your hedging done in 2014 before you relook at your distribution policy.

Rich Dealy

Yes, we continue to look at it or come for a ratio in – or comfort levels more in the 1.2 to 1.3 range as we move above that then, you know, something you consider doing a distribution increase. And so that’s what we continue to monitor. Obviously, we’re higher at this quarter but we do have better hedges that roll up into this year too.

Kevin Smith – Raymond James

Yes, fair enough. Okay. Thank you very much.

Rich Dealy

Sure.

Operator

And we’ll now take our next question from Steve Tabb with Tocqueville Asset Management.

Steve Tabb – Tocqueville Asset Management

Hi. Yes, production went up very nicely this quarter and what do you expect for next year in the way of production because you’re adding number of producing wells but, of course, you have fall off in the range of production especially in the first two years. So, how much would you expect your production to increase percentage wise in 2012 over 2011?

Rich Dealy

Yes. I mean, like it somewhat depends on how many of the wells we go deeper in the Strawn and the Atoca and the contribution there so that could add to it but, you know, I’d say it’s still similar to this year in the mid single digit.

Steve Tabb – Tocqueville Asset Management

Yes. All right. And if you own shares of the PSE for the whole year from the beginning to the end approximately what percentage of the distributions would be currently taxable?

Rich Dealy

Steve, I have to come back to you on that. I don’t – I don’t have that – those numbers in front of me and haven’t done the calculation myself, so I'll have to get back to you with that.

Steve Tabb – Tocqueville Asset Management

Okay. Thank you very much.

Rich Dealy

You’re welcome.

Operator

And it appears there are no further questions at this time. I will now turn the conference back to our speakers for any additional or closing remarks.

Scott Sheffield

Again, thanks for listening. It’s been a great quarter. I hope everybody has a good afternoon and we’ll talk to you next quarter. Thank you.

Operator

And ladies and gentlemen, this does conclude today’s call. Thank you for your participation.

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