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QR Energy LP (NYSE:QRE)

Q3 2012 Results Earnings Call

November 8, 2012 11:00 AM ET

Executives

Taylor Miele - Investor Relations Manager

Alan Smith - Chief Executive Officer

John Campbell - President and COO

Cedric Burgher - Chief Financial Officer

Analysts

Ethan Bellamy - Robert W. Baird & Co.

Kevin Smith - Raymond James

Michael Peterson - MLV & Co.

John Ragozzino - RBC Capital Markets

Brett Reilly - Credit Suisse

Praneeth Satish - Wells Fargo Securities

Operator

Good morning and welcome to the QR Energy Third Quarter 2012 Results and Outlook Conference Call. My name is Rebecca and I will be your operator for today. On the line, we have Chief Executive Officer, Alan Smith; President and Chief Operating Officer, John Campbell; Chief Financial Officer, Cedric Burgher; and Investor Relations Manager, Taylor Miele.

All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions)

Thank you. I will now turn the call over to Mr. Taylor Miele. You may began your conference.

Taylor Miele

Thank you, Rebecca, and good morning, everyone. Welcome to QR third quarter 2012 earnings call. We issued a press release this morning containing the results and guidance that will be discussed on the call today. I would like to remind all listeners that we will use forward-looking statements as defined by securities laws. These statements reflect our current views with regard to future events and are subject to various risks, uncertainties and assumptions. Our results may differ materially from those conveyed in our forward-looking statements.

For a more complete list of these risk factors, please read QR Energy’s 10-Q which we filed with the Securities and Exchange Commission this morning. It is available on our website at qrenergylp.com on the Investor Relations tab or on the Securities and Exchange Commission website at sec.gov.

Additionally, during the course of today’s discussion, management will refer to adjusted EBITDA, distributable cash flow and the distribution coverage ratio as important metrics for evaluating QR Energy’s performance. Please note these are non-GAAP financial measures. They are reconciled to their most directly comparable GAAP measures on the last page of this morning’s press release.

Now, I will turn the call over to our Chief Executive Officer, Alan Smith.

Alan Smith

Well, thanks, Taylor, and good morning, everyone. We appreciate everyone taking the time to join us this morning for our third quarter earnings call. As we’ve told this since the beginning we’re a very engineering-centric leadership team, that remains focused on the execution and accountability of our business. Due to this focus over the past year, we have delivered operating results that have met or exceeded our guidance. This quarter is no different as we have had a very good operational quarter.

We also told you in the beginning that our growth will come through multiple paths by accessing accretive acquisitions most likely located in our core areas of operation. We have successfully demonstrated this growth by closing on a third party transaction and expect to close on a recently announced third party transaction by mid December. And we have grown by completing a significant drop down from our sponsor and we expect to complete an additional drop down in early 2013 or sooner. These highly accretive acquisitions have enabled us to nearly quadruple the production and triple the reserve of QR Energy since our IPO.

We are excited about the conventional acquisition market and believe that it will continue to be $15 billion to $20 billion annual market for years to come, which allows us to remain optimistic about our opportunities for growth and our ability to source acquisitions that are accretive to our distributable cash flow.

I would now like to switch gears and bring your attention to announcement on G&A in this morning press release. We have finalized our G&A allocation methodology were by Quantum Resources Management will allocate G&A to QR energy beginning in the first quarter of next year.

In our press release this morning, we provided quantitative cash G&A guidance for the fourth quarter and full year 2013. Cedric will give you more details in his section in a few moments and I know, many of you have anxiously awaited this information so that you can utilize it in your models accordingly.

Also one recent news we announced a $215 million East Texas field acquisition last week. This properties have low decline low life oil production with an abundance of low-risk development opportunities. We expect the cash flow of these assets alongside the commodity hedges put in place at the time of the signing of definitive agreement to extend our horizon of stable cash flow.

We also mentioned last week that a drop down from our sponsor of approximately 2,500 BOEs per day of oil production from the Jay field in Florida is still on process. We expect to be able to announce this transaction early next year or possibly sooner. The combination of these two accretive acquisitions discussed today and the additional clarity provided regarding our G&A cost significantly enhances the long-term outlook for our business. We believe we now have clear visibility to achieving our goal of a long-term distribution coverage ratio of 1.2 times.

Now let’s turn to our results for the third quarter. our production of 14,620 BOEs per day was right in the middle of our guidance range and it continues to benefit from the successful implementation of our capital program and our focus on oil projects. We decreased LOE 7% on a per BOEs basis to $14.28 near the low end of guidance.

Our CapEx at $12.3 million was in the middle of the guidance range for the quarter. John will walk you through the highlights of the events who drove these results in just a few minutes. Adjusted EBITDA came in at $52.2 million and distributable cash flow was $23.3 for the quarter, which resulted in a distribution coverage ratio of 1.1 times.

Our hedging strategy remains in tact with 90% of our oil and gas production hedged for the quarter. We added five years of oil and natural gas hedges for last week’s acquisition which resulted in us having more than 85% of our oil and gas production hedged through 2014 and more than 55% hedged through 2017, if you combined today’s results and last week’s acquisition held flat for the period.

Cedric will give you additional details on our financial results and hedge portfolio in just a few moments. In conclusion, John and I just want to say how proud we are of our team and what they accomplished over the past two years and we just wanted to say thank you for your time this morning and thanks for your investment in QR Energy.

Now I’ll turn the call over to our president and Chief Operating Officer, John Campbell.

John Campbell

Thank you, Alan. Our average production in the third quarter 14,620 BOEs per day was within our guidance range and a slight increase from the first quarter. It was 58% liquids and continues to move that way given our liquids focused capital program. Oil made up the most significant portion on production at 43%. We increased oil production 6% from the second quarter as a result of capital projects in the Permian basin in priced acquisition.

Our average realized oil price including hedges was $96.31 per barrel up 1% from last quarter. Natural gas made up 42% of third quarter production. It was down 4% from the second quarter due to natural decline in the conversion in some of our dry gas production to NGLs. Our average natural gas price was $5 and $0.18 per Mcf including hedges which was a 3% increase from last quarter.

We increased NGL production by 10% in the third quarter by adding compression in the Ark-La-Tex area, which allowed us to convert some of our natural gas stream to NGLs approximately 160 BOEs per day. These volumes are weighted more towards ethane and propane the less expensive part of barrel but they delivered significantly higher margins in gas production.

We also saw [net value] prices come down another 12% to 15% quarter-over-quarter. The combination of these factors negatively impacted our average NGL price to $29.10 by 32% this quarter. NGL represents only 15% of our production and about 7% of our total revenue. We have had several items that have impacted production in the third quarter, Our Exxon JV properties had a (inaudible) beginning in the second quarter that cost us around 120 BOEs per day in the third quarter. But that was resolved at end of July.

We had some ethane rejection at a DCP plant in Ark-La-Tex area in July and August which impacted production approximately 95 BOEs per day in the quarter and we had to repair Gulf Coast well that had mechanical issues in the quarter, which had an impact of approximately 70 BOEs per day, so approximately 300 BOEs per day a production was offline in the third quarter. Each of these items have since been resolved.

LOE and workover expenses for the quarter were $19.2 million of 1428 per BOE at low end of our guidance range. The 7% decrease in LOE was due to reduced work-over expense.

Total capital spending for third quarter was $12.3 million and our maintenance capital was 13% or 25% of our EBITDA. The total is less than maintenance due to fact that we accelerated some capital into first half of the year. As of today we have drilled 35 wells planned for 2012 and we have one left to complete all of which were in Permian Basin.

In third quarter we increased compression capacity of Ark-La-Tex of upsize production equipment in Permian Basin and saw an uptick in non-operated drill wells. Overall our capital program has delivered approximately 1500 BOEs per day of uplift for the year.

Turning to our forward guidance we expect fourth quarter production to be in the range of [14.5 million to 14.9 million] BOEs per day as we continue to see uplift from our capital program. We will spend another $11 million of capital in the fourth quarter as we complete one final well in Permian it’s been Permian water fled facilities and perform work hours reactivations and pump upgrades on recently acquired properties and Ark-La-Tex.

We expect maintenance capital to be steady at $13 million our LOE would likely being in the $14 to $16 BOE range in fourth quarter as well. Our fourth quarter guidance results in annual production guidance of approximately 14,200 to 14,600 BOEs per day full year, LOE I the $14 to $16 for BOE range, and CapEx of approximately $85 million for the year.

Our operating team has delivered excellent results this year. I am proud of their ability to integrate acquisitions, quickly perform detail technical reviews of our assets and effectively direct capital to highest return projects throughout our properties.

Now we turn it over to Cedric for review of our financial results.

Cedric Burgher

Thank you, John. Our revenue for third quarter was $65 million of 4% increase from the second quarter, 79% of the revenue came from oil sales, higher oil and NGL volumes more than off set the impact of lower NGL prices. Total production expenses which include LOE production another taxes and processing and transportation were $24.7 million, a 4% decrease from the second quarter which was due to lower LOE as we reduced work-over expense.

Production and other taxes were approximately 7.2% of revenue and DD&A was $15.83 per BOE. Our GAAP G&A for the third quarter was $9.2 million which includes non-cash allegations from Quantum Resources Management they needed houses all of the employees for QRE and our sponsored QRF. $7.8 million of the $9.2 million GAAP number represent cash expenses. Our cash G&A which is currently three and half percent of the previous quarters adjusted EBITDA was $1.8 million.

We have one more quarter of reduced cash G&A under the first two years of our services agreement. In 2013 we will assume the full cost of our portion of shared G&A from Quantum Resources Management. As Alan mentioned the indirect portion of cash G&A will be allocated based on multiple operating matrix which may include production, CapEx, well count, PV ten reserves, and employee time expended. We have given guidance for next year’s cash G&A in this morning’s press release. For the first quarter of 2013 we expect incur $8-$9 million of cash G&A, for the full year 2013 we expect incur $29-$32 million of cash G&A.

Please keep in mind that these figures do not include non-cash items like a long term incentive program which will be reflected in our GAAP G&A. Our full year guidance assumes that our sponsor will raise an additional fund in 2013 resulting in three ways split of the G&A pool. We expect us to cause a slight decrease in our G&A for second half of the year as is reflected in our annual guidance number.

Our net loss of $45 million or $1.24 per common unit in the third quarter was once again significantly impacted by the non-cash mark to market on our commodity derivative contracts. We had a net commodity derivative loss of $42 million comprised of a $13 million realized gain and a $56 million unrealized loss on commodity derivatives.

Our interest expense for the period was approximately $11.5 million a 23% increase from the second quarter due to the inclusion of 2 months of interest expense on our senior notes we had a net loss of $3.2 million on our interest rate derivatives. Our all in effective rate including the senior notes was 6.2% for the quarter.

Adjusted IBITDA was $52.2 million for the third quarter a 4% increase from the second quarter due to increase revenue and decreased LOE. After subtracting cash interest expense, of $8.7 million estimated maintenance capital expenditures of $13 million are distribution to convertible preferred units at 4% yield which was $3.5 million and the management incentive fee of $3.7 million our distributable cash flow was $23.3 million.

Tomorrow, we will pay a cash distribution attributable to the third quarter, of $48.75 per unit to all common and subordinated units. As a result our third quarter distribution coverage ratio was 1.1 times. Looking at our commodity derivative contracts for the fourth quarter we have hedged 58-72 barrels per day of oil and more than 30 million cubic feet per day of natural gas. If we achieve the mid-point of our guidance, our oil and natural gas production will be approximately 77% hedged in the fourth quarter.

Our press released has comprehensive commodity derivative tables as of today and you’ll see that we have a majority of our oil production hedged for the next 5 years.

So in summary, we’re very pleased with our results for this quarter and the expected growth from the two acquisitions that we are currently pursuing. We believe our accretive acquisition in the East Texas field and the upcoming drop down of Jay assets will significantly enhance our distribution coverage ratio for many years and move us towards our long term targeted coverage ratio of 1.2 times or greater.

So thank you for your attention and we’ll now open the line for questions.

Question-and-Answer Session

Operator

(Operator Instructions). And your first question comes from the line of Ethan Bellamy.

Ethan Bellamy - Robert W. Baird & Co.

Good morning all.

Alan Smith

Good morning.

John Campbell

Good morning.

Ethan Bellamy - Robert W. Baird & Co.

Three questions for you, first on the guidance for the fourth quarter. Could you specify for us how much contribution from the acquisitions is in that number - those numbers?

John Campbell

Zero, for the.

Alan Smith

No, we included about 100 barrels a day is included that is without the acquisition our guidance would have been, it would have stayed the same 14.4 to 14.8. And we don’t know right now whether getting close, whether we get 3 weeks or 1 week in December so we just assume 1 week, so it’s around 100 barrels.

Ethan Bellamy - Robert W. Baird & Co.

Okay. With respect to the Jay dropdown are you just haggling on price at this point or is there some other competitive advantage, like [delaying].

John Campbell

No Ethan, there’s really a very deliberate process that we go through with our board so we have we’re in process on that and so we think that sometime in early ‘13, and that’s what we said may be sooner depending on how that process goes but there’s not a lot of price tag on its, on its so here’s the pricing than they have accomplished many has engages advisors, and the counselor and they work through it and they may come back to us and basically agree or not and we forget about it and I think that’s going to be that should all take place here we’ll get a good sense for forward going to adopt or about in the year.

Ethan Bellamy - Robert W. Baird & Co.

Is there any other tax consideration or just Quantum made a mark or anything like that for putting gun before your head?

Alan Smith

No.

Ethan Bellamy - Robert W. Baird & Co.

Okay. On NGLs potential hedging, are you going to let that exposure ride on you’re waiting for a better pricing routines in the forward curve to lock in there?

John Campbell

We have, we follow the hedging market actively. As you know Ethan, we hedge as much or more than any of our peers on oil and natural gas. But for NGLs we have done extensive studies over the years, including the Quantum Energy team upstairs. We don’t believe it makes economic sense at current levels. You can hedge 12 to 18 months in NGLs, but it is at a price that’s heavily discounted. And so we just don’t think it’s a good economic trade. We would hope that market would develop, the hedging market for NGLs, but today we just don’t think it’s a good move for our shareholders.

Cedric Burgher

It’s only about 7%.

John Campbell

It’s not a big percentage of our revenue it’s 7% of our revenue, that’s right.

Ethan Bellamy - Robert W. Baird & Co.

Okay, then on the G&A agreement. So that’s going to be diluted when Quantum raises another fund in ‘13. Does that continue to occur if they say ‘14 or ‘15 raise another fund as well or is that a one-time event?

John Campbell

Well the way that’s going to work Ethan is that, because of what Cedric gave you that really high level of view of is that based on the size of the investment in that fund it will change over time based on the acquisitions they make and the amount of assets that they are managing compared to what QRE has, compared to what the initial fund had. So once we see – so, first part of your question is, yes. We expect this to happen and then it will go on for the life of the fund, which is, goes out many years. So what will make it change will be the asset mix between the parties and then there is going to be direct expenses that are sort of no-brainer those go to the each area. Then there is going to be those compensation that will be more time-to-time sheets. Then there is going to be the balance of all that and includes things like the rent and everything else you got to take care of that is allocated based on what Cedric told you about today. So it’s a formula that will be calculated on an annualized basis.

Cedric Burgher

I’ll just add one thing on that Ethan, is that it’s obviously it’s not a one-time thing. This is a methodology we intended to apply what will change all the dynamics that Alan just described. But, we think we have been conservative in our guidance. If fund two is successful it will grow. As Alan mentioned as it grows then its share would grow. On the flip side as QRE grows, QRE share will grow. But anyway you do it it’s a win-win in terms of having approval that we get to split and we’ll not have to cover the full cost of the G&A pool, which we get to enjoy running QRE.

Ethan Bellamy - Robert W. Baird & Co.

Okay, thank you. Solid quarter appreciate it.

Operator

Your next question comes from the line of Kevin Smith.

Kevin Smith - Raymond James

Good morning.

Alan Smith

Good morning Kevin.

Kevin Smith - Raymond James

Nice color and thanks for the nice quarter and thanks for the color on the G&A, I think that’s very helpful. How are you thinking about CapEx as we enter into 2013. Clearly you have kind of ramped down in the second half. You got a lot of moving parts of the East Texas acquisition and potentially Jay, what’s your flexibility I guess to ramp back up and as we enter in January?

Alan Smith

Yes, we are putting our 2013 budget together right now and so I think, you’ll see it start ramping backup, getting prepared to ramp backup in the first quarter. I think you’ll see us continue to spend money out in the Permian basin in a couple of fields out there with some further infill drilling. You’ll see us ramp up CapEx spent on the Prize acquisition in ‘13 over there and then with the new acquisition we have got a plan laid out there for 2013 as well. So we are planning to ramp backup first of the year.

Kevin Smith - Raymond James

Got you. When do you think you’ll start putting capital to work in East Texas, rather than on the newly acquired property?

Alan Smith

As soon as we close we’ll be out there returning wells to production and doing all the things that we identified when we did the evaluation. Its right on top of the stuff we already have and we are going to keep filling people and everything in place out there that was a big part of the deal and so we’ll be ready to go since we close.

Kevin Smith - Raymond James

Great. Cedric, is there any update on the borrowing based re-determination?

Cedric Burgher

Sure, good question. We did get the borrowing base re-determined back to the $730 million number that was before the high-yield, which caused an automatic reduction. So we got that back up to 730 and that does not include the Dartmouth, or the Jay drop which should, you know both are coming, but would come with the closing of those assets.

Kevin Smith - Raymond James

Got it, so when the East Texas closes you would expect it to bump up a little bit more as well?

Cedric Burgher

Yes.

Kevin Smith - Raymond James

Okay, and then could you remind me where you stand on hedging in the East Texas properties, is that already started or you wait until close?

Cedric Burgher

No we put those hedges in place, with the PSA signing. So within two days we had all those hedges on and we hedged a high percentage of those through 2017.

Kevin Smith - Raymond James

Okay, great so those hedges are now reflected in your press release?

Cedric Burgher

They are in our press release that’s right.

Kevin Smith - Raymond James

Perhaps next…

Cedric Burgher

It’s also in the Q on Page 24, if it’s the version you got from us that we sent out, but they are both in the same tables in the press release as well as the Q. But it does include the new transaction hedges.

Kevin Smith - Raymond James

Thank you.

Operator

Your next question comes from the line of Michael Peterson.

Michael Peterson - MLV & Co.

Good morning everyone. Alan, my question regards your outlook for 2013. Now I recognize that you would have included more detail in this morning’s release if you wanted to approach the subject. However, I would ask for a bit of indulgence on your part as many investors I think have already turned the corner and are looking at 2013. Specifically any perspective you might be able to share in terms of operating strategic or financial goals for the year ahead would be helpful?

Alan Smith

Look Mike we – I think we have set our strategy out pretty clearly. This is the [buckling] and tackling we like to do every day being an engineering centric organization is we are going to continue to do a good job of managing our base. We have done, I think these two acquisitions which have helped with the overall decline profile of our assets. So, originally we were going into this year around 11%, 12% decline. These last two deals have, one was in the 3% to 5% decline. This most recent deal is in the 6% to 7% range. So that’s going to bring that down which is our intent so that we can manage our base assets and our maintenance capital for those base assets. So that’s an important part of what we wake up and think about every day. And also managing our costs as you are seeing here, we did have some – as John pointed out some workovers needed to take care of earlier in the year and that’s just going to fluctuate, but we are very focused on the cost.

On the acquisition front, I think that we are very bullish on the acquisition market. I know you have heard us say it many times, there is multiple things driving that. I think you know the, we saw a big push into the year probably because of the capital gains potential change. We also continue to see the shale players bringing more opportunities out to the market. These conventional opportunities to fund their programs, still may see some farm based pressure, liquidity pressure that may cause some more people to sell, because where gas price is today.

So I think there is a number of catalysts that will continue to keep the conventional asset market propped up. We’ll be very actively looking for the lot of opportunities within our core areas as we have done in past. We do clearly have an acquisition strategy. We’ll continue to beat that team up and we literally just added a project manager, an additional engineer, and an additional technician. So we are dedicating more resources to that and so we’ll continue to be active acquirer I think going forward.

So that’s really the focus for 2013 as you guys know and we have said it before, we are not a [sexy] drilling story. We are an MLP. We want to own long life legacy assets that have relatively low decline and they will take a lot of capital to keep the production flat and then continue to buy more assets like that and build some scale and size going forward, which will help us on a number of fronts operationally as well as financially. So that’s how I would give you the answer on that.

Michael Peterson - MLV & Co.

That’s very helpful Alan I appreciate that. If I could do a follow-up, you mentioned the asset markets particularly in light of the results on Tuesday reelecting the president. Do you have any expectation that there will be a revisitation by those on the sales side of the table to come back and maybe check again to see if bids are still there? Do you think that the offers are going to drop down to bid prices? Do have a sense as to if there is going to be an acceleration in terms of deals that are done between now and year-end for the tax of reasons that you iterated?

Alan Smith

Well, the way our acquisition market works is that if you want to get a deal closed you need a – really need a bare minimum of 60 days to (inaudible) that needs to be done and if you are prudent buyer you are going to deal with all that work. So, I think that what’s coming to market has pretty much come to the market and people are evaluating it. I would guess that all bids will be due in the latest by December 1st and I am sure you’ll see some people sneak some deals in the last week of the year that you might not normally see when people are trying to take vacation. But I think that there is not going to be a big push I think beyond what we already have seen out there and in the market.

Michael Peterson - MLV & Co.

That makes sense. Thank you and congratulations on a nice quarter.

Alan Smith

Thank you

Operator

Your next question comes from the line of John Ragozzino.

John Ragozzino - RBC Capital Markets

Hey, good morning guys.

Alan Smith

Good morning John.

Cedric Burgher

Hey, John.

John Ragozzino - RBC Capital Markets

This is a follow-up to Kevin’s line of questioning on what CapEx for the back half of this year. You guys have kind of scaled back a little. Is there anything in the -- cross airs in terms of non-op projects that you potentially see come in the fourth-quarter that could kind of be a bit of an unexpected up lift to the upside?

Cedric Burgher

You know non-op is a very small piece of our business. We own some interest in some large legacy fields out there. Small interest, there are ongoing drilling programs that will go on out there over years. One of the programs picked up, last quarter we saw some CapEx there. So I don’t see any big changes or anything on non-op CapEx between now and the rest of the year. If I…

John Ragozzino - RBC Capital Markets

Yes, that’s perfect. The other, we on a per unit basis for the quarter, obviously it’s a nice sequential down tick on reduced workover expense, lot more in line with the, I am sorry first quarter, would you say that there is a continuation of that trend to be expected into fourth quarter and more specifically into 2013 as you track into the volumes from the acquired assets recently. Should that trend continue?

Cedric Burgher

I will tell you that, workovers in our business, they are going to kind of ebb and flow, can’t plan on them and I would guide you closer to the 15 number than the 14 number I think that’s a, that range we give is pretty good. One workover can get away from you and so I would keep you around $15.

John Ragozzino - RBC Capital Markets

Let me just revert that, so absent any workovers and unexpected items just the organic trend given the [May] earning and new volumes, would you expect the core per unit LOE metrics to come down into the next year?

Cedric Burgher

I mean the acquisition, you know that we just did, you know we are moving a lot of water there, it actually has a higher lifting cost than our current assets. So again I would not expect the LOE to come down from that range that we are talking about the $15 range.

John Ragozzino - RBC Capital Markets

Okay, that’s very helpful thanks. Then just one more, well you know, I think you guys covered the last question just a little more color on the G&A which I think I am pretty comfortable with. So, I appreciate it and congrats on the quarter.

Cedric Burgher

Thanks John.

Operator

Your next question comes from the line of Brett Reilly.

Brett Reilly - Credit Suisse

Good morning guys. Just a quick follow-up on the SG&A assumptions for 2013. Did that include the impact of the contemplated drop down either latter this year or in early part of 2013.

Alan Smith

No, it does not.

Brett Reilly - Credit Suisse

So, we should expect a little bit of incremental expense when that happens?

Alan Smith

Yes. Our intent was if and when we announce that we would at that time give you the updated G&A as well guidance.

Brett Reilly - Credit Suisse

Got it, and then pro forma for the recent deal. Could we get an update on debt to EBITDA post the acquisition?

Alan Smith

Yeah, it’s going to be around plus or minus 3.5 times. As I mentioned on our call when we announced that acquisition, I guess that was a week, week and a half ago that we have ample liquidity to do that acquisition and the drop down from the [J] and still have access. So we’ll have a good amount of access that number will depend on how much borrowing base we get, but I think in any scenario there is plenty and we would also have enough pro forma EBITDA coming over that we would be well under our four times debt to EBITDA financial covenant in our credit facilities. So there is room under both metrics

Brett Reilly - Credit Suisse

Okay. And then now, that it looks like you guys have a pretty nice cushion on coverage for next year, how should we think about when we should expect resumption in distribution growth?

Alan Smith

Well, we’ve said our long-term goal is 1.2 times, or higher distribution coverage and we’ve talked about the G&A increase, over time, the preferred units will have a step up in cost, so we are very excited about what we are doing to meet our goal of 1.2 times or higher, long-term coverage ratio and that’s really what we’re focused on. When we feel like, we have got that well in hand and exceeded that, that’s when we’ll look at significant distribution increases.

Brett Reilly - Credit Suisse

Okay. That’s all from me, thanks guys.

Alan Smith

Thank you.

Operator

And your next question comes from the line of Praneeth Satish.

Praneeth Satish - Wells Fargo Securities

Hey, good morning, just two quick ones from me, first the 1.2 times coverage just to clarify, does that include, this is a long-term ration, does that include the impact of the preferred units converting?

Alan Smith

Yes, in our goal that’s right, that’s our goal.

Cedric Burgher

Fully diluted.

Alan Smith

It’s fully diluted, right, so that’s the way we look at it here. And we’re not, giving guidance specifically on a given quarter. But what we’re saying is that these two acquisitions, really go a long way to helping us achieve that long-term fully diluted coverage ratio of 1.2 times or higher, that’s what we’ve tried to communicated.

Praneeth Satish - Wells Fargo Securities

Okay, can you just remind us gain of the decline rate of the [Jay] Properties, and maybe how that compares to your current PDP decline rate.

Cedric Burgher

The decline on the Jay, as we have modeled I’ll tell you is in the 9% - 10% range, so it’s depend on, it is a little bit accretive from a decline, the actually production on the field today is actually been pretty flat, but the way we’ve to the model is around 9%.

Praneeth Satish - Wells Fargo Securities

Okay, great, thank you.

Operator

And your next question comes from the line of [Elliot Miller].

Unidentified Analyst

Are you giving any thought at this time, to a refinancing of the high-yield debt as soon as the prepayment penalties are gone?

Alan Smith

No, we’re not. We’re happy with that part of our capital structure. We do know and watch the bonds they are trading at a nice premium above par, so that’s a good thing for future issuances, it means our cost would go down significantly for the next deal. But we are not looking to refinance those at this time.

Unidentified Analyst

Are you – like you’re not ruling out I assume, any future reconsideration of that.

Alan Smith

No, of course, not.

Unidentified Analyst

Okay, thanks.

Operator

And there are no further questions and I would now like to turn the call back over to Mr. Alan Smith.

Alan Smith

Well, we appreciate everyone taking the time this morning, obviously, always feel free to follow-up with Taylor, Cedric or myself, or John as you need additional information and soon when we can get this Jay drop through, I know, if anything question you asked we will give you a lot more detail and color on that at that time. So with that unless there’s anymore questions, we should appreciate your time this morning.

Operator

This concludes today’s conference call you may now disconnect.

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