Sanchez Production Partners' (SPP) CEO Gerry Willinger on Q1 2016 Results - Earnings Call Transcript

| About: Sanchez Production (SPP)

Sanchez Production Partners LLC (NYSE:SPP)

Q1 2016 Earnings Conference Call

May 16, 2016 11:00 AM ET

Executives

Chuck Ward - Chief Financial Officer

Gerry Willinger - Chief Executive Officer

Analysts

Gregg Abella - Investment Partners Asset Management

Matt Niblack - HITE Hedge Asset Management

Operator

Good morning and welcome to Sanchez Production Partners First Quarter 2016 Earnings Conference. My name is Allison and I will be moderating today's call. [Operator Instructions] As a reminder, today's call is being recorded; and if you object to such recording, you may disconnect at this time. I would now like to turn the call over to Chuck Ward, Chief Financial Officer of Sanchez Production Partners. Mr. Ward, you may begin.

Chuck Ward

Good morning and thanks for joining us. With me this morning is Gerry Willinger, our Chief Executive Officer; Pat Sanchez, our Chief Operating Officer; and Tony Sanchez, Executive Chairman of the Board of Directors of our General Partner. Before we get started, I'd like to note this morning we posted an updated investor presentation on our website, www.sanchezpp.com. That slide deck is available as part of today's webcast. We may make reference to certain of those slides during the course of this morning's discussion.

Also note that our slide deck and the discussion this morning will include forward-looking statements, which are subject to certain risks and uncertainties. These are described more fully in our documents on file with the SEC, which are also available on our website.

Finally, we will use non-GAAP financial measures in this morning's discussion to help our unit holders and investment community better understand our operating performance. The investor presentation available on our website includes an appendix that reconciles these non-GAAP financial measures to GAAP measures.

I'd now like to turn the call over to Gerry Willinger for some introductory comments.

Gerry Willinger

Thanks, Chuck. During the first quarter of 2016, we demonstrated the capability of both our unique structure and relationship. To that end, we exceeded our volume and revenue expectations on the Western Catarina Midstream system for the quarter, with throughput at 136% and 132% of the minimum quarterly quantity for oil and natural gas, respectively; and began to realize the benefits of continuing Catarina development, which includes further delineation of the south-central region of the lease by Sanchez Energy.

Our performance allowed us to declare a cash distribution of $0.4121 per common unit, which represents our second consecutive increase of 1.5% over our initial distribution. Including the effects of March 31, 2016 conversion of the Class A preferred units to common units, we had a distribution coverage ratio for the first quarter of 2.65 times, excluding the Mid-Continent assets targeted for divestiture, and 1.95 times including the Mid-Continent assets.

Additionally, we ended the quarter with a strong liquidity position of approximately $97 million, which consists of $91 million in borrowing capacity under our credit facility and approximately $6 million in cash and cash equivalents, and a pro forma leverage ratio calculated in accordance with the terms of our credit facility of 1.9 times.

Taken together, we continue to believe that we offer one of the most compelling investment opportunities in the MLP space today. We will continue to focus our near-term efforts on midstream transaction development to take advantage of our recent market conditions, our liquidity, and the strength of our balance sheet. As part of those efforts, we have received instrumental support from both Stonepeak and our lending institutions.

With that overview, I would now like to turn the call back to Chuck for a closer look at our first-quarter 2016 results.

Chuck Ward

Thanks, Gerry. I'll refer everyone on the call to page 24 of the slide deck we posted this morning for this portion of the discussion. Our revenue totaled $23.2 million during the first quarter 2016. Included in this amount is revenue for midstream sales of $13.9 million, revenue from Mid-Continent production activities of $2.3 million, revenue from other production activities of $3 million, $7.1 million related to hedge settlements, and a $3.1 million loss on mark-to-market activities, which is a noncash item.

Our total production for the quarter was 303 MBoe for average net production of 3,334 BOE per day during the quarter. Net oil and liquids production for the first-quarter 2016,which accounted for approximately 36% of our total production during the quarter was 1,185 barrels per day, which was up about 3% over fourth-quarter 2015.

Our operating expenses during the first quarter 2016 totaled $14.5 million, which includes $3.2 million in operating expenses related to the Western Catarina Midstream system and $2 million in production operating expenses not related to the Mid-Continent assets.

Our general and administrative expenses during the quarter, excluding $1.7 million in noncash items related to unit-based compensation and asset management fees, totaled $4.4 million, which included $400,000 related to Mid-Continent assets.

Our adjusted EBITDA for the first quarter 2016 was approximately $13.5 million, which compares to $12 million in the fourth quarter 2015,m and $4.9 million in the first quarter 2015, after about $5.3 million in adjustments for nonrecurring items in that first quarter 2015. Our capital spending during the first quarter 2016 totaled approximately $1.1 million.

We currently have $109 million in debt outstanding under our credit facility, which has a borrowing base of $200 million. As noted in our press release, our borrowing base is scheduled for redetermination by the lenders during this quarter.

For the balance of 2016, we have hedged approximately 3 Bcf of our natural gas production at fixed prices of approximately $4.14 per Mcf, and approximately 320,000 barrels of our crude oil production at a fixed price of approximately $74 per barrel. Additional information on our hedge positions can be found in the appendix to the slide deck we posted this morning.

With that overview of our results, we'd now like for the moderator to open the line for some questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question will come from Gregg Abella of Investment Partners Asset Management. Please go ahead with your question.

Gregg Abella

Good morning, guys. Can you hear?

Chuck Ward

Yes. How are you doing?

Gregg Abella

Doing fine. Operationally, really very pleased with how things are going, and this is good progress. You're checking off a lot of boxes. And as somebody alluded to earlier in the call, that this is a - we're doing well. This is what it was supposed to look like. But I know on conference call we're not supposed to maybe talk about the stock price, but it is something I'd like to discuss, largely because I think it impacts the cost of capital for future transactions with the stock trading down at these levels, with a 16% yield. And this doesn't seem like a fair valuation. So, would you guys want to comment? I have some thoughts on it; but before I get into it, do you have some thoughts as to why the share price in your opinion is trading down here?

Chuck Ward

I guess I'd be interested in hearing what your thoughts are, Gregg.

Gregg Abella

Well, I think that this Company and/or Partnership now is, one of the issues that plagued it has been the various degrees of overhang, whether it's from financing transactions or dropdowns or whatever it is. We just don't seem to have an ownership profile currently of people that just want to hold this thing. So, I don't know to what degree you can continue to do your buyback and sop up the overhang. But I think it's something that really is imperative, because having the units trade down like this is going to make it more difficult for you to do future dropdowns that are accretive, I think.

And secondarily, I guess, if the overhang that seems to be out there is from folks that put money in last year or if it's from SEP I, from the dropdowns, I guess what I would say is, some help is sort of like no help at all. If anybody that's going to drop down an asset or put money into the company intends to turn around and just treat the long-term holders as feed bags. I just don't see why you should continue to do business that way. If SEP I, for example, doesn't want to hold the shares, find another dropdown from somebody else. Similarly, anybody that put money in last year that doesn't have a long-term view, I wouldn't call them again. So I'd be interested in your thoughts on that.

Gerry Willinger

Sure. I think we start with that we're a relatively small cap, and I think for certain institutional holders that's always been and will continue to be – until we're able to increase the market cap – the restriction to being able to grow the way we'd all like to grow. And that’s one of the top number five things that we continue to work on is trying to do that. We're going out about once a month on non-deal road shows and working and being with different institutional investors trying to build that base that you speak about and that we're conscious of a need to have.

The second, I think that inevitably as people hold our equity as part of other portfolios and other activities and actions and/or surprises happen in the remainder of that portfolio, that sometimes elicits and causes somebody who is otherwise an erstwhile a longtime holder to need to liquidate a position. And I think perhaps some of what we've seen here in the last bump in volatility post the conversion of the A's might be related to that. If that's the case, from looking at the amount of volume that we had about our historic volume before that period, before that conversion, it would look like we should be about through that incremental number of units having been rolled out through the market.

And if that's the case, then that should take that selling pressure off. As we know for a small market cap company, that their selling pressure once it's relieved it, then things will return to a norm relatively quickly. Our obvious goal would be to limit any equity issuance done during a time period of that. I note that we have such a low leverage that gives us a lot of capacity to think about transactions without necessarily having a need to access the equity market to close the transaction.

Gregg Abella

I can appreciate that.

Gerry Willinger

The only other thing I would add is that you address SEP I. There hasn't been any sales from insiders into this Partnership of note. And so the one thing I'd say is, what you are seeing potential is sales from others in. So I'll just address that. That says right now we're looking to continue to look at transactions, using our balance sheet to do so and looking to be accretive.

Gregg Abella

I'm glad to hear that. Because as a really long-term holder and looking forward to distribution growth and dropdowns, I just want to make sure that our interests are aligned with the other folks that are in this. Because it just has been more recently painful to watch the disconnect between what I think is really good value and the share price.

Gerry Willinger

We agree.

Gregg Abella

That's all for me.

Gerry Willinger

Gregg, you still there?

Gregg Abella

Yes, I am. That was all I had, but I appreciate it. Again, operationally you are doing great. On that front, keep it up.

Gerry Willinger

Thanks.

Operator

Our next question will come from Lin Shen of HITE [HITE Hedge Asset Management]. Please go ahead.

Matt Niblack

Hi, this is Matt Niblack for Lin here. Thanks for taking the question and congratulations on another solid quarter. Just wanted to see if you could provide more color on the status of the Mid-Con sale? Seems like that's the next big catalyst here to hopefully generate some additional cash and also improve coverage as that's been a bit of a capital sink. Some thoughts there?

Chuck Ward

Yes, sure. I think from when we got the sales process started and got the data room up and running, for a while for the bidders it was a situation in which – to reevaluate their value that they would associate with the asset – seemed to improve for them, to our detriment as the curve slid during the back half of last year and the first part of this year. With the resurgence in the front end, that's helped our prospects of being able to do something there. There was a recent legal decision in Osage that was beneficial for the part that's on the Osage tribal properties and for the off-Osage, they generally help from the uplift in the commodity price market. So those, I would say, make it a better environment for us to be able to effect a transaction now than just three months ago, much less six month ago. But there is still not a definitive timeline that I'd say that the appetite and interest is better than it was before.

Matt Niblack

Great. And there has been a lot of interest in the energy sector on NGLs. There has to be a decent NGL cut in those assets, right?

Chuck Ward

We're to the other side of the Nemaha [ph], so the NGL cut isn't near as high. It's just on the other side, over towards say the Mississippi line, right on the other side of the ridge there. That's always actually been one of the challenging parts there. The gas has been pretty dry and the oil has been pretty basic stripper wells, so it's never been quite the product mix.

Matt Niblack

Given that this has generally hurt, cash flow isn't where you want to access capital, if you're not able to sell it is there a thought to allocating less capital there so it doesn't become a negative drag on cash flow?

Gerry Willinger

We're actually not allocating capital there right now. The $1.1 million that we spent during the quarter was on some stuff inside of the pipeline asset that we're able to trade – change how we treat H2S and actually pick up some savings in operating costs going forward. So we haven't actually allocated capital this year there.

Matt Niblack

Understood. So if that sticks around, your DCF coverage isn't going to be different than your guidance. It doesn't matter?

Chuck Ward

No, the thing is it's a lot of wells. We get an uplift from the commodity pricing, but it's hedged. Our goal will remain to talk about it as if it's sold, and we'll try to make sure that we give enough breakout information that someone can derive that without having to go through too many hoops. Our goal is still to stick to those things that we think do best and are – and look the most MLP like for going forward.

Matt Niblack

Great. Then last question, on the acquisition front, are you predominately looking at dropdowns at this stage given the availability of some assets still at the sponsor? Or are you out there looking at third party? And if so, what sort of third party?

Gerry Willinger

We are doing both pretty hard, I'd say. At this point we see it as an opportunity rich – some deals that we've been looking at – of course by a couple of filings in the last couple of weeks have gotten a little more complicated, especially derivative midstream assets often associated with those transactions or with those assets. But we see as having the – with the balance sheet where we've got it that we have a good opportunity set and the market presents some good valuation opportunities. We've just got to clear up the ability to have some A&D transactions out there.

Matt Niblack

Great. Thank you very much.

Gerry Willinger

Thanks, Matt.

Operator

This will conclude our question-and-answer session. I would like to turn the conference back over to Chuck Ward for any closing remarks.

Chuck Ward

Well, thanks for joining us today and we look forward to chatting again next quarter. Thanks.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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