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Atlas Energy LP (NYSE:ATLS)

Q3 2011 Earnings Call

November 8, 2011 09:00 AM ET

Executives

Brian Begley – Investor Relations

Ed Cohen – CEO

Matt Jones – President Elect, Atlas Resources

Sean McGrath – CFO

Analysts

Sharon Lui – Wells Fargo

Craig Shere – Tuohy Brothers

Operator

Good day ladies and gentlemen and welcome to the Third Quarter 2011 Atlas Energy LP Earnings Conference Call. My name is Chenille [ph] and I will be your operator for today. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions). As a reminder this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today to Mr. Brian Begley, Head of Investor Relations. Please proceed?

Brian Begley

Good morning everyone and thank you for joining us for today's call. As we get started I’d like to remind everyone that during this conference call we will make certain forward-looking statements and in this context, forward looking statements often address our expected future business and financial performance and financial condition and often contain words such as expects, anticipates and similar words or phrases. Forward looking statements by their nature address matters that are uncertain and are subject to certain risks and uncertainties which could cause actual results to differ materially from those projected in the forward looking statements. We discuss these risks in our quarterly report on Form 10-Q which we expect to be filed later today and our Annual Report also on Form 10-K, particularly in Item 1.

I’d also like to caution you not to place undue reliance on these forward looking statements which reflect management’s analysis only as of the date hereof. The company undertakes no obligations to publicly update our forward looking statements or to publicly release the results of any revisions to forward looking statements and may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

Also in our earnings release we provide a reconciliation from net income to adjusted EBITDA and distributable cash flow as we believe that these non-GAAP measures offer the best means of evaluating the results of our business.

In addition in connection with the planed distribution of common units of our newly formed E&P MLP named Atlas Resource Partners, Atlas Resource Partners filed a registration statement on Form 10 with the SEC in October. The registration statement contains important information about Atlas Resource Partners and the planned distribution including the discussion of risks and uncertainties. When the Form 10 is declared effective by the SEC we advise you to read it carefully.

And lastly Atlas Energy will be presenting at several upcoming industry and Investor Conferences including the DUG East Conference in Pittsburg on November 16th, the Jefferies Global Energy Conference in Houston on December 1st and the Wells Fargo MLP Symposium in New York on December 6.

And with that I will turn the call over to Chief Executive Officer, Ed Cohen for his remarks. Ed?

Ed Cohen

Thanks Brian. Now during the third quarter of 2011 Atlas Energy continued to power forward. Our numbers are excellent, in line with our earlier guidance and compatible with analysts' expectations.

For example distributable cash flow for the quarter at $20.3 million supported a $0.24 per unit quarterly distribution. Income from continuing operations for the third quarter reached $50.9 million compared with a loss of $3.2 million for the corresponding 2010 period.

Sean McGrath, ATLS's Chief Financial Officer will shortly discuss in much greater detail these highly satisfactory markers but for this quarter and up until the present in my opinion the essence of the Atlas story lies in the progress that we’ve been making in expanding Atlas’s E&P operations, getting control of new acreage and key areas, improving drilling results and reaching our goals in our direct placement syndication business and also in our progress toward moving our mid-stream business Atlas Pipeline Partners rapidly forward toward higher per unit distributions.

On the way of course we’ve been working to actuate our Master Limited Partnership, Atlas Resource Partners which is a vehicle of course for acquiring conventional cash flowing properties which, as we discussed in our call three weeks ago have been left relatively undervalued and profusely available because of the industry's fixation on raising money to develop unconventional gas plays.

The spectacular purchases announced by others in the past few weeks have confirmed our thesis of great opportunity for Atlas in this area. The fruits of our continuing efforts in finding and negotiating for conventional properties should become clear in the near future. As for Atlas resources itself once we have obtained SEC clearance for our Form 10, we hope to be off and running within the next 90 days.

In the meantime our E&T and processing operations have both been undergoing fundamental organic transformation. First, at Atlas pipeline all three of our processing divisions continue to operate at or beyond capacity and at very favorable profit margins.

Some $400 million on organic projects are underway in order to alleviate this embarrassment of excess of gas intake including a 60 million cubic foot per day expansion of our Velma facility in Southern Oklahoma.

During the third quarter Velma processed an average 104.9 million cubic feet a day of natural gas, well above its nameplate capacity of 100 million. This excess results from the relatively recent expansion of our Velma gathering systems, and extension which presently brought us into the center of the burgeoning Woodford Shale play before it began to really burgeon.

As a result we simply can't handle over gas coming to Velma and we continue to pursue additional offloading agreements and other expedients to tide us over until this new expansion is complete which will be probability sometime in the third quarter of 2012.

But this is not a question of our building it and then waiting and hoping that volumes will continue to increase and eventually fill the new facility. We will shortly announced an already executed agreement with a strong producer on a fixed fee basis for an extended period of years which will ensure the full and highly profitable utilization of this not yet built new plant.

Now of course I don’t want to slight APLs, two other booming processing divisions which I've spoken about in detail on other locations. Our West Texas division has just placed into operation a new 16 million cubic feet a day expansion already on its way to full utilization and our engineers are already working on plans for a further 200 million cubic feet a day expansion in West Texas. 200 million seems to be our magic number for our West Oklahoma operation is even now awaiting delivery of a 200 million cubic feet a day plant expansion.

Now let's turn to the E&P side where Atlas Energy is already largely restored, with our new strengthened group of professionals enabling us to continue to expand our operations in the Niobrara Formation of Colorado where we control drilling right to 185,000 acres, in Chattanooga Shale of Tennessee where we own mineral rights to some 120,000 acres and once again in the Marcellus.

Our existing 8,500 producing wells contribute cash flow from sale of energy for Atlas's own account and also of course contribute billions of dollars of fees annually for servicing investor's interest.

For 2011 direct investment programs are proceeding extremely well. The summer program of $100 million is completely committed for and marketing of the $100 million year end winter program is about to commence.

With reimbursement for acreage acquisition costs, with contribution to our cash flow for drilling and other services and with a provision of free carried interest that help built Atlas’s reserve position, these programs have obviously expedited the growth of Atlas's E&P operations and will accelerate ATLS’s distributable cash flow.

We now sense real opportunity in Tennessee in the Chattanooga Shale where we’ve refined our technical skills and methods and where early indications suggest that our most recent horizontal well may prove to be among the best, perhaps the very best of the dozens of horizontal wells that we’ve drilled in the volunteer state over the years. And we’re back strongly in the Marcellus. In West Virginia we’re adding three additional horizontal wells to the five that we're already committed for. We expect all eight to be spudded by March 31.

In North Eastern Pennsylvania we expect to drill six horizontal Marcellus wells, again all to be spudded by the end of the first quarter of 2012. Of these six, four will have lateral lengths of about 4,000 feet and two will extend approximately 3,500 feet laterally. But let me not give you too many details now. Of course for a fuller explanation of our E&P operations I turn now to Matt Jones President Elect of Atlas Resources and head of our E&P operations.

Matt Jones

Great, thanks Ed. The first quarter of 2011 marked the second full quarter of operations for Atlas Energy's E&P division. During our first 180 days we focused on building and expanding the foundation of our business. We are very existed about the results of this effort so far and are determined to deploy our resources to fully take advantage of the enormous opportunity that we see in front of us.

Building our business and achieving our near and long term goals begins with our people. The world class technical professionals who recently joined our company working well with the very experienced and capable core operating team that joined us from the former Atlas Energy E&P company.

This combined group is focused on expanding our acreage areas and drilling opportunities, enhancing our current developmental drilling and production efforts, completion and well connection activities and identifying and evaluating acquisition opportunities.

In the coming months as a result of these efforts our natural gas production will significantly expand because of three identifiable growth drivers. First we continue to progress with our current partnership drilling program, our first partnership fund raising program of 2011.

We are in various stages of drilling, completing and connecting developmental wells in the Marcellus Shale in West Virginia where we're drilling 13 wells and the Niobrara play in Eastern Colorado, in the high BTU Chattanooga Shale play in Tennessee and in the shallow Clinton Formation in Ohio where we're drilling oil wells.

A vast majority of these wells are scheduled to turned in line during the fourth quarter of this year, in the first quarter of next year. Secondly and in addition to this wells we continue to progress with the drilling and completion of 11 horizontal Marcellus wells allocated in Fayette County Pennsylvania that are being funded through a 2010 drilling program. All these wells have now successfully been drilled to total depth and are in various stages of completion.

These wells are scheduled for connection in the first quarter of next year. Separately and additionally we’ve drilled completed five horizontal Marcellus wells in Westmoreland and Fayette Counties, again in Pennsylvania that are scheduled for connection early next year upon the completion of required infrastructure.

All of these wells including those currently in development in our first 2011 drilling program and the 16 Marcellus horizontal wells that are ready for connection or in various stages of completion led substantially to our production in the coming quarters.

Of course our efforts have neither stopped nor slowed. In fact we're accelerating our efforts. We have worked diligently to expand and create new drilling opportunities for our upcoming winter drilling program and periods beyond. We're in the process of establishing an acreage position in North Eastern Pennsylvania and intend to include horizontal Marcellus wells on this acreage in our winter program.

Also in Marcellus shale we will include several horizontal wells in West Virginia in cooperation with our joint venture partner headquartered there. In addition to the Marcellus wells we will continue to exploit developmental opportunities in the Niobrara where we're drilling natural gas wells with our joint venture partner based in Denver.

Last quarter we established an office in Denver to oversee this effort and to expand opportunities in the Rocky Mountain and Mid-Continent Regions. So far in the Niobrara we farmed into roughly 180,000 acres where our 3D seismic shoot continues to aid us in identifying new drilling locations. In Tennessee where we control over 100,000 acres we’ve identified additional Chattanooga Shale drilling locations where we're now using a nitrogen based fracing approach.

We began deploying the nitrogen base completions approach on the Chattanooga horizontal wells included in our summer drilling program and based on the initial flow back from the first of these wells we're very encouraged by the early production indications.

Also we’ve identified additional shallow oil locations on Ohio acreage and will include these in our winter program. We'll continue to fully utilize our uniquely advantage business model that allows us to raise capital through investment partnership programs where we believe we're the largest issuer of energy programs in the United States. With this advantage we will have the ability to more rapidly extend cash flows generated from strategic acquisitions and organic development while minimizing our capital requirements.

With this and the recent announcement of the formation of Atlas Resource Partners our Exploration and Production Master Limited Partnership we're pursuing growth opportunities that will allow us to build upon our producing asset base and expand drilling opportunities to enhance organic growth.

In Appalachia where we currently have a home field advantage to use an athletic term we are busy reviewing a variety of expansion opportunities in North Eastern Pennsylvania, West Virginia and Ohio for acreage positions and drilling opportunities in the Marcellus and Utica shales.

In many cases these situation include existing oil and natural gas production in undeveloped drilling locations. We believe that we were uniquely well positioned to take advantage of these opportunities that have both production and drilling locations and will pursue those that allow us to most effectively execute our business plan so we can achieve the greatest cash returns possible for our stakeholders.

The opportunities are abundant and our company is well prepared to accelerate growth.

Thank you all for taking the time to participate in our call I’ll now turn the call to Sean McGrath our Chief Financial Officer., Sean

Sean McGrath

Thank you, Matt and thank all of you to joining us on the call this morning. We appreciate your interest in Atlas Energy. Overall, Atlas Energy generated adjusted EBITDA of $22.8 million and distributable cash flow of $20.3 million or $0.40 per unit for the period. Production margin for the period was up $12.3 million or $3.84 per Mcfe was both of our strong commodity hedge positions as we are protected on 80% for natural gas production at $5.15 per Mcfe.

Total production cost for the period were relatively consistent with the second quarter, although least operating expenses per Mcfe were higher compared with the sequential quarter due to lower production lines during the current quarter, as the majority of our production cost relatively stable from period to period.

The 60 Marcellus horizontal wells that we expect to complete and can act during the fourth quarter of 2011 and the first quarter of 2012, will have a significant payroll impact on lowering lease operating expenses per Mcfe in 2012.

Partnership management margins for the period were $10.4 million, and approximately 70% increase from the second quarter 2011. As a reminder, we recognize well drilling and completion revenues as we invest our drilling partners’ capital, administrative and oversight revenues when drilling program wells are spud.

During the current quarter we deployed $35.7 million of our drilling partners’ capital. At the end of the quarter, we had approximately $33.2 million of funds raised that remained to be deployed including $22 million of funds raised in 2010, for the 11 Marcellus horizontal wells which we expect to deploy to the remainder of 2011 and the early part of 2012.

With regard to Atlas pipeline, our third quarter results reflect cash distributions from Atlas pipeline of $4.9 million, a 32% increase from the second quarter 2011, which includes incentive distributions of 1.3 million. This reflects APLs recently declared $0.54 per unit distribution for the third quarter and 15% increase from the prior sequential quarter.

APL continues to execute its drill through strategy and our current quarter results reflect the exponential impact it will have in our financial results from the coming period. I would like to note that we have changed our presentation format to reflect ATLS cash distributions on an earned basis rather than fee basis and the tables of the release have been adjusted to reflect this presentation.

Net cash, general and administrative expense was $5.1 million for the period compared with the $9.6 million for the second quarter of 2011. The decrease was principally due to timing of the second quarter of 2011 partnership fund raising costs and cost related for the Chevron transaction.

Net cash G&A expenses for the period is presented net of a $5.6 million reimbursement from Chevron, net outs $600,000 of associated cost for service that provided by us and our transition service agreement. Under that agreement Atlas will receive net reimbursements from Chevron for multiple administrative and operational services provided between the parties, generally through November of this year subject to various extension options.

Total capital expenditures for the period were $21.9 million including $2.3 million of maintenance capital expenditures, total capital expenditures consist principally of $19.4 million for our investment in drilling programs. Maintenance capital expenditures for the period reflect management’s estimated cost to maintain current levels of production.

With regard to risk management activities, we continue to be methodical yet opportunistic in adding to our hedge positions just to mitigate for that potential downside volatility associated with movements in natural gas and oil markets and provide us with better clarity with respect to anticipating cash flows.

Currently, we have hedges covering 24.6 pc of production for periods through 2015 consisting of a combination of SWAPS and colors, that’s provides us with downside protection but outside potential and this allow natural gas price environment. Based on third quarter production levels, our natural gas production is approximately 80% protective for the fourth quarter of 2011, 63% protected for 2012 and 53% protective for 2013 and in effective average floor price of over $5.30 per Mcf for those periods.

We are committed to any protection to our business and we will continue to do so as we have demonstrated in the past. Please see the tables within our press release for more information about our hedges.

Moving to our deposition and liquidity, we ended the quarter with no amount stronger or revolving credit facility which is current borrowing base of $169 million. In addition, we have a cash position of $72.2 million at the year end.

With that I thank you for your time and I will turn the call to our present CEO, Ed Cohen.

Ed Cohen

Thanks Sean and Chenille I think we are ready for questions now.

Question-and-Answer Session

Operator

(Operator Instructions). The first question comes from the line of Sharon Lui of Wells Fargo.

Sharon Lui – Wells Fargo

Sean can you just repeat I guess how much capital was deployed during the quarter for the drilling partnership and…..

Sean McGrath

It was, sorry Sharon, what was the end of your question.

Sharon Lui – Wells Fargo

And what remaining?

Sean McGrath

We have approximately $33 million remain to be deployed and we also deployed about $33 million during the period.

Sharon Lui – Wells Fargo

Okay. Great. And maybe if you could just walk through I guess your thoughts behind or your assumptions behind the production forecast in that 10 form filing and how that builds up, is it primarily due to I guess contributions from all those Marcellus wells that you have outlined?

Sean McGrath

Yes. The forecast in the Form-10 for production included the 60 Marcellus wells coming online during the first quarter. It also reflects the new partnership programs which we are playing to reap $250 million and the wells we expect to drill resulted the net cash

Sean McGrath

Okay. And have you guys experienced I guess any delays in terms of connections with the wells in the Marcellus?

Matt Jones

We have experienced some delays and we have experienced some advancement in the well connections schedule certain wells that we had thought would be connected in later periods and now going to be connected in the earlier periods. Some wells that we had expected to be connected earlier will be connected later. All of these circumstances are dependent upon micro-issues related to permitting and the construction of infrastructure and other elements that drive timing but generally I think that we are very close to being on the this schedule that was embedded in the production forecast that we have put forth in the Form-10

Operator

Your next question comes from Craig Shere of Tuohy Brothers.

Craig Shere – Tuohy Brothers

Do I understand the distributable cash flow is almost 1.65 times for distributions for the quarter and how are you thinking about the distribution coverage ratio longer term, does it complete the resource, the partial spin off of Atlas resource?

Ed Cohen

You understand correctly, Craig this is Ed, hi. But it’s not indicative of any policy decision, because we’re in the process of setting up Atlas resources for technical reasons, we retained a larger amount of reserve, but once Atlas Resources on the E&P side as well as a APL of course are both functioning the reserves at those levels will mean that at the ATLS level we anticipate that virtually all of the money’s that become available in distributable cash flow will be distributed to our unit holders.

Craig Shere – Tuohy Brothers

Okay. So a study state would be say under 1.1 times.

Ed Cohen

We might be even closer to 1.0, we have some continuing expenses in the company but relative to in the parent company but very, very small, so we don’t anticipate the need for a hold back because the hold back, the conservative policies taken place at the operating levels of APL and Atlas resources.

Craig Shere – Tuohy Brothers

Understood and then the Form 10 and I believe you already alluded to us that there is the presumption on the EBITDA and cash flow projections for 2012, there is $250 million partnership raise and there is also a delta provided that a 10% change in that partnership raise up or down within that cash flow by $2.8 million or about 11%. And I’m trying to understand does this sensitivity assume that any delta and partnership raise effects the joint CapEx for the year?

Sean McGrath

You are correct Right you are correct well that is with regard to adjusted EBITDA so obviously it will effect CapEx but the number that’s included within that document within that disclosure is only the impact on adjusted EBITDA?

Ed Cohen

Now as far as first part of your question the $250 million that’s obviously a best guess as of the time the preparation that the material was prepared historically if you go back I think you can see I was embarrassed from time to time because there are 35% cumulative annual growth rate which we enjoyed for a number of years 50% growth rate and the amount of investor program funds rates this year you can see that the anticipated total amount to be raised exceeds the minimum that we are projected earlier in the year and one can project that if we get back to the historical rate of growth that perhaps the $250 million is unduly conservative.

It’s our best guess and it's nothing more than that and that’s why we had the illustration of what the dealt might be.

Craig Shere – Tuohy Brothers

I understand the reason from my question was trying to determine how to extrapolate potentially higher capital raises and whether the EBITDA was already incorporating the full benefit of the margin uplift and the greater CapEx deployment if you assume that something instead of 250 it's just a ground number lets you raised 300, are we assuming that extra 50 is actually put in the drilling cost but then you get some extra margin out in the same year?

Sean McGrath

You do, the only thing is with reduction in that margin for the 2012 period, a lot of that capital will be deployed in 2013 we spot the well before March 31st for 2013, so we can get tax benefits but some of that margin you want realize until 2013.

Craig Shere – Tuohy Brothers

Okay. Right. So there is definitely some carryover that, so it’s trying to get to.

Ed Cohen

But there may be more carryover from this present year than perhaps analyst have been anticipating. Because of the possibility of higher arrangement had been indicated.

Craig Shere – Tuohy Brothers

And how should we think about the ongoing drag from gathering, if I understand this mostly relates to a 3% negative spread on reimbursement for Appalachian projection. Should that remain static or decline overtime as you move into other basins?

Ed Cohen

We think it will decline overtime.

Craig Shere – Tuohy Brothers

Great. And the well services margin that’s supposed to be extremely stable but it seem to have a nice level uptick in the third quarter. Should we see that annualized $2.9 million figure for margins for those fees as minimally sustainable, would you expect comfortable growth if you have successful partnership raises?

Ed Cohen

We think that was not necessarily a blip and we are hopeful that the upward increase will continue be annualized and be expanded.

Operator

(Operator Instructions). Your next question comes from the line of (inaudible) Advisors

Unidentified Analyst

We see with the most of these E&P, MLP’s as well as the right MLP’s that there is debt that’s a permanent part of the capital structure of this up go types of groups just because that I guess optimizes the return on equity, are you going to be getting debt at the spun off E&P, MLP and if you are what are you going to be using the money for, is it the distribution or just a reinvestment in to the business?

Ed Cohen

Hi, obviously we are probably the only company in the country of our size that has not debt and that is not going to continue. As for usage, we don’t intend to, people are owing to make distributions but we do intend to utilize conservative be borrowing to make distortions but we do intend to utilize conservative borrowing practices to enhance the operations of our business

Operator

(Operator Instructions). And you have a follow up from Craig Shere of Tuohy Brothers

Craig Shere – Tuohy Brothers

I know you all are working to fill the pipeline of our opportunities so that very shortly after the partial spend you are ready for some potential growth count backs, acquisitions that can be dropped down to the partnerships overtime, but at the same time the 2012 gas of this envelope, four bucks for the first time I believe and I guess I’m wondering if there is any real time valuations of optimal opportunities that you all are looking at on the one hand to your point everybody is trying to get rid of gas properties and you’ve the lower cost capital. On the other hand gas is getting pretty anemic in terms of pricing, can you comment on what you’re really working for.

Ed Cohen

Well I think in the real world, there is response to prices becoming anemic, so that the prices that somebody who is selling existing production can hope to get reflects in the competitive situation of so much being available the anticipated price deck. So I think there is automatic adjustment, it isn’t that the opportunities will be worse. We have an advantage of course in that we haven’t already committed and whatever the real time changes are we can put into our situation.

Craig Shere – Tuohy Brothers

And can we assume that you’d be hedging out immediately to protect the value of any acquisitions.

Ed Cohen

That’s one of the really attractive aspects of the E&P business that futures markets are so highly developed and as you know and others know who have followed us, we really hedge, hedge, hedge, so yes we would immediately hedge.

Operator

Ladies and gentlemen that concludes the Q&A session I’ll now have to turn the call over to Mr. Ed Cohen.

Ed Cohen

It’s been a pleasure to speak you again only three weeks after also last conference call the one that dealt with the organization the Atlas Resources. We have so much going and so much to do that I hope no one takes this personally but hopefully we will now speak to you until after the end of the year.

But if something should develop be sure that with no debt we will able to afford the telephone charges of have a conference call. Thank you all, bye-bye.

Operator

Ladies and gentlemen that does conclude the presentation. Thank you for your participation. You may now disconnect. Have a great day.

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