Pioneer Southwest Energy's Management Presents at RBC Capital Markets MLP Conference - Conference Call Transcript

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Pioneer Southwest Energy Partners L.P. (PSE) RBC Capital Markets Conference Call November 17, 2011 9:30 AM ET


Steven H. Pruett – President and CFO - Legacy Reserves L.P

Kolja Rockov – Executive VP and CFO - LINN Energy

Rich Dealy – Executive VP and CFO – Pioneer Southwest Energy Partners L.P.


Good morning. We’ll get started here in just a minute. Hope everybody got something useful out of the day yesterday and we’ve got another good slate of panel presentations this morning and we will be kicking off this morning with an another panel focus on the upstream MLPs. These three partnerships really are focused in the Permian and Granite Wash. We’ve got Legacy Reserves L.P with Steve Pruett, President and Chief Financial Officer; LINN Energy, Kolja Rockov, Executive Vice President and Chief Financial Officer; and Pioneer Southwest Energy Partners with Rich Dealy, Executive Vice President and Chief Financial Officer.

So with that we’ll kick it off with Steven, Legacy.

Steven H. Pruett – President and CFO - Legacy Reserves L.P

Thank you, TJ. I’m a little under the weather today with the cold, but I’ll do my best. Well it’s great to be in Dallas and to report to our owners. We had a nice third quarter. It seems like it was eons ago, but we reported just a couple of weeks ago and our minds are of course focused on the fourth quarter and next year. I’ll be making forward-looking statements so we encourage you to look at our 10-K for risk factors and examine all of our recent filings.

Legacy is a publicly traded upstream Master Limited Partnership. While we are an MLP with a general partner, we do not have incentive distribution rights. The insiders, the founders own about 22% of the outstanding. That number is down subsequent to our 3.4 million unit offering which closed last – actually closed on Monday, $28.85 a unit. Thank you those in the room that participated in that offering and made it a success. We are very happy with the retention, though we have had some selling pressure from a few institutions this past week and we are hoping to get beyond that and start trading above the issue price.

The public, which is primarily retail and retail hands on 77%. The general partners benign with less than a 0.5% ownership have just received its pro-rata distributions and nothing else. And we – on Monday, we also issued a closed and acquisition of Permian Basin assets for about $21.5 million cash and 278,000 units. So we now have 2% of the outstanding is held in the hands of sellers of assets to Legacy. It’s a great way to defer gains on assets that often have low basis. Today we are trading – opening at an 8% yield so we are on sale. If you didn’t get enough units in the offering we encourage you to pick up some more while it’s cheap.

Our assets have grown over time. We are diversified, widely diversified over almost 6,000 producing wells, four former reserves with our acquisition that closed on Monday, 63.4 million barrels equivalent. The vast majority of that’s pre-developed producing. That means the wells are producing and generating cash flow to support year distribution. We are a little over two-third oil and natural gas liquids, along with a very rich stream of natural gas that has recently been selling at about 50% premium to Henry, Hub thanks to the natural gas liquids content.

The core areas of course are the Permian on the South edge. We are headquartered in Mid-land Texas. The Texas Panhandle is the center of our Mid-Con operations along with the miscible nitrogen project in Oklahoma, and we have a business unit in Cody, Wyoming. We’ve been growing through acquisitions in Wyoming thanks to that presence on the ground, 13,800 barrels of oil equivalent per day, 70% of that’s operated. That means we control our destiny on the timing and execution of our development capital program and improvement programs for existing well bores.

Development inventory is depicted on page five. We’ve been actively drilling the Wolfberry Trend. We’ve had tremendous results there exceeding our expectations. We are now moving into drilling our 40 acre in fill locations. They are still averaging – the slide says $1.85 million, that’s what we’ve averaged to date but we’ve put in a lot of infrastructure. As we infill drill we expect that cost to be $1.7 million, benefiting from the existing infrastructure.

The Spraberry Trend is our resource play in the Permian Basin spanning eight counties. Of course you will hear more about that from Rich Dealy. We have a lot of infill drilling to do there, it’s shooting fish in a barrel. The Farmer field happens to have some exposure to the horizontal Wolfcamp and Wolf Fork play that some of the larger independents like EOG are active in, and we are watching their development activities as they approach our acreage. They’ve all requested farm-outs for holding onto our acreage and as they de-risk it we’ll be drilling in that area. And then the opportunities on the lower left hand side are conventional water flood infill opportunities, again low risk and along with the upper left hand side the Empire Yeso area, that’s a Yeso play. It’s a very – essentially the Spraberry Wolfberry play of New Mexico and we’ll be drilling that this year in partnership.

We have additional drilling opportunities now in this page in the emerging horizontal Bone Spring. We announced completing a lateral out of the existing well bore. It’s still flowing, about 300 barrels a day, 70 days after its initial completion. We are still trying to get it equipped for rod pumping, but it’s just too strong a well. It can do more than that if it has additional lift support. So we’re encouraged by that. We spend $3.5 million on that lateral, our grass roots well and we have about 15 to 20 of those locations is around the $6 million to $7 million project and we’ll be doing some additional drilling in Lea County, New Mexico for the horizontal Bone Spring in the second half of 2012. We also have some merging exposure to what’s called the Wolfbone play in Pecos and Reeves County and expect to see that in 2013. So along with the horizontal Wolfcamp in the Reagan County area, we’ve got a lot of additional, what I would call probable and possible drilling opportunities. They’re very exciting that aren’t this map that give us good visibility on the sustainability of our distributions going forward.

Acquisitions though have really been the driver of our distribution growth over time, acquiring almost 900 million of acquisitions since 2006 through 91 transactions. So you can see we are averaging less than $10 million a transaction. We closed a $1.7 million Austin acquisition last week. We’ve got a number of $4 to $5 million deals where – and due diligence on that. You never read about those and so we get to the end of the quarter. But that’s our bread and butter, our daily – I should say weekly provision of growth opportunities that producers’ metrics like the ones you are seeing that are largely pre-developed producing, although our engineers are very good at creating more upside than that statistic indicates, predominantly oil and natural gas liquids, though we have been buying some larger gas packages of late, and importantly about 5.5 times cash flow which is very accretive to our investors.

So we’ve averaged around $200 million a year of acquisitions in 2007 and ’08, $280 million in 2010 with two larger booking transactions at the beginning and end of that year and about $126 million year-to-date, including pending acquisitions, excluding the pending deal in Central Wyoming.

This is our growth profile. Given the limited time I’ll just say that our production has grown 41% year-over-year to almost 13,800 Boes per day in Q3. Our EBITDA grew 46% year-over-year, and that stability in the annual growth over on the left hand side of the graph is a result of our hedging program. Without hedging that would be a much more volatile profile of EBITDA and by virtue of hedging, of collecting $52.5 million on our commodity swaps and collars in 2009 was what enabled us to sustain our distributions through the financial crisis in the commodity price meltdown.

If you’ve held our stocks since the IPO, it’s about a 15% compounded annual growth rate including distribution. That’s above our peer group slightly although the speculation around the Utica with EVEP has certainly energized our peer group performance. You can see that unfortunately in that same period the S&P 500 with dividend is still below one time. So getting – it’s not even at breakeven.

With that I think I’ll turn it to Rich Dealy – I’m sorry Kolja Rockov, from LINN. Thank you Kolja. And thanks for being here today, we look forward to questions.

Kolja Rockov – Executive VP and CFO - LINN Energy

Great. I’m Kolja Rockov. I’m the CFO at LINN. We’ve had a great run at LINN when I started the company it was about $200 million in size. We are just approaching $10 billion today. We’ve made about $7 billion of acquisitions, 50 of them over that time period. So we are pretty proud of that fact, kind of got this whole upstream MLP concept started. We think it’s a great growth sector. The US is the most mature producing region in the world. There’s more mature assets here than there are growth prospects I suppose, and that’s really our business premises, to consolidate those assets and turn into an income security which is what we’ve done.

Our Reserve base right now is about 3Ts of total reserve spread across the country in a lot of different areas. We’ve taken a bit of a hub and spoke approach where we enter a new area and then continue to consolidate around it. For example, the Permian. By two and a half years ago we had nothing there, made one small-ish acquisition and then 14 acquisitions later we’ve got – and $1.4 billion spent, we’ve got about 13,000 barrels a day of production. So we’ve aggressively entered into new areas and then continue to build around it.

Organic growth, that’s something that’s a little bit of a different wrinkle for us and we’ll talk about that in a second in terms of Granite Wash being the big driver for that. We’ve got about five years of organic growth inventory at the current pace that we are running. Before the Granite Wash horizontal program really kicked in, we were growing at maybe 2% to 3% a year. Last year to this year we’ve grown about 30%. So you can see it’s a pretty big sea change in terms of organic growth. In the past, acquisitions was really the driver, now it’s both.

Just to give you a sense of what we are doing on the acquisition side, we’ve really built a machine here. In the early days – obviously we were trying to consolidate as much as we could, but given our size this is the kind of deal volume that we are seeing. Last year we screened 189 acquisition opportunities, bid on 41. So you know you had to do a lot of work to actually get to that phase where you are literally bidding on 41 for a total value of $10.1 billion and they are closing 13 for $1.4 billion. 2011 screened 122 opportunities, bid on 31 for $7.5 billion and we closed 11 for $1.6 billion. So you can kind of get a sense of what deal activity really is. And I think this is really one of our competitive advantages, to be able to evaluate this many transactions and onboard them efficiently and keep moving and that’s how we deliver great distribution growth for you.

Latest acquisition. We bought Plains Explorations’ entire Granite Wash position, pretty exciting transaction, $600 million purchase price, highly accretive. We don’t have specific numbers to give you yet but we will very shortly. We had 200 drilling locations in the Granite Wash, this added another 200, so basically doubled our position there. Production went up about 75% and one of the exciting things about this is you can see how the assets fit really well in terms of geographic locations with what we have, and we’ve become more and more efficient as we’ve picked up steam here in the Granite Wash. Just to give you a couple of example, if you look at these yellow fields, we’ve interconnected all of those with pipes so that now – we were selling to one mid-stream partner. Now, we can sell to seven different ones. So we have a lot of flexibility.

We are also piping our Frac water from one location to the next which has really given us some nice efficiencies. We just started pad drilling where we are basically drilling one well while another well right next to it is producing. So there is a lot of efficiencies that we are picking up and the reason I say this on this slide is as you add the Plains asset, it just gets more and more efficient. It’s just nice to be able to link in everything that they were doing with some of the things that we were doing.

The entire position here you can see it, 400 locations. We’ve got 32 wells operating. We’ve had great results. The aggregate rate of return has been in excess of 100% per well. So it’s again been a great growth driver for us, mostly been active in the Frye Ranch and Stiles Ranch. We are completing our first well right now in the Dyco area so stay tuned for that fairly shortly.

In terms of hedging. Steve mentioned it. It’s one of the paramount to the upstream. It’s how we make this asset class work in an MLP. We are very aggressively hedge. If you look at natural gas, 100% hedged all the way out to 2015. Nobody can say that. Second point I, if you look at our hedging, it’s going up. The bars are actually stepping up over time and what’s important there is that organic growth wedge that we have in terms of growing through the Granite Wash and the Wolfberry, all of that has been hedged. So we can continue to develop those plays without a lot of risk in terms of commodities.

And then last but not least, we have a significant amount of push. About a third of our position is in put which is that green wedge you see there. So if prices were to commensurately increase, we have about a third participation in the upside. So 100% downside protection with about a third of the participation in the upside, pretty unique in this space.

In terms of our yield, 7.4% we think it is very attractive. We’ve growth the distribution 10% in the last 12 months. We’ve grown at about 70% since we came public in early 2006. I’ll pick out on what one asset class here which is the US Royalty Trust at 7.1%. Those are closed end vehicles that are not acquiring – not aggressively drilling and certainly growing organically at the same pace we are. So we think it’s relatively a great value at that kind of yield.

So last but not least here, three things that we really feel like we deliver, stable distribution. We’ve been able to pay distributions now for six years through all kinds of environment, good and bad, high quality assets base, great organic growth rate. You’ve seen the hedging significantly provides great protection for us. On the distribution growth drivers, organic is a big component and also acquisitions. We’ve had $7 billion of acquisitions in 50 separate transactions. So look for us to do more and we’ve got a great track record there. At almost all points in time and we are a little bit drawn right now, a couple of $100 million or so on the credit facility of $1.5 billion. But we’ve got great access to capital markets, a relatively undrawn revolver and we’ve got a lot of fire power to keep buying a lot of things.

So that’s our story. Thanks.

Rich Dealy – Executive VP and CFO – Pioneer Southwest Energy Partners L.P.

Good morning, and thanks TJ for having us back in this year. This is my favorite conference because it’s literally two miles from my office so it’s always convenient to come over here. Forward-looking statements are there for your review. Lawyers have asked me to do that. Just to give a quick preview of PSE for those that aren’t familiar with it. We formed the MLP back in 2008 in May, drilling for the State of Texas and eight South East Counties in South Eastern New Mexico. The plan was to have wells in it. Mainly we’re in the Spraberry field where 100% of our wells sit today. We have about 1,200 producing wells in this Spraberry field which for those who don’t know is one of the most active oil and gas fields in the US today and one of the largest.

It’s got over 200 rigs running in the field today and so it’s a great field that continues to get bigger and deeper. Those of you that have been following PXD which is a parent of PSE that’s got a great emerging Wolfcamp Shale play in the southern part of the field that is up and coming that should be in the Wolfcamp Shell. That should be a very prolific play. In addition, I’ll talk about it. In the Northern part of the field, you’ll see we’ve got additional depth horizons in the Strawn and the Atoka that are adding incremental recoveries as well.

As I mentioned, it predominantly being a Spraberry field, liquid rich play. 85% liquid, 60% is oil, 25% NGL and then 15% gas. These wells that we have are about 90% working interest in them. PXD, our parent operates all of them and they’ve got a really shallow decline rate about 4% to 5% which makes it good for a yield vehicle.

Looking at where our properties are located on the map here. You can see that it’s throughout the field, primarily in the northern part of the field, Martin Midland County. You can see that the blue and the red are – blue is the producing well, red are our future drilling locations on 40 acre spacing and then the orange is PXD’s position in the field. So you can see from a parent standpoint a dominant position in the Spraberry Trend area.

Our drilling program, we drilled – we started the program back in 2009 with a two rig program. We’ve continued to grow the partnership organically. We expect to drill about 40 wells this year, spend $65 million to $75 million doing that and grow production like I said in over 5% for the year, probably in that 6% or 7% range where we see it today.

We are drilling deeper with these wells. Initially most of the wells that are in the partnership are drilled in the Spraberry and Dean formations, but since then the Wolfcamp formation has been drilled and we’ve drilled all of our wells this year to the strong formation and then we are looking at drilling in the Atoka formation. So as we go deeper, we add additional Frac stages, but we are also getting excellent recoveries from these wells and I’ll show you some of the economics here in a minute.

We think about 60% of our acreage in Martin – in Midland County there is prospective for Strawn and that’s where we’ve completing our wells. In the Martin Country particularly, we’ve got the Atoka formation that there have been some recent success. We’ve got three wells that we are going to start before year end, they finally will be in production until after year end that we’ll test that formation.

And just from a standpoint of drilling locations left on the bottom here, we’ve got about 100, 40 acre locations and over 1,200, 20 acre locations. So the 20 acre locations become – when you have the Strawn, Atoka to quite good economically.

Just a little history here of the Spraberry field in terms of what’s happened completion wise. You can see back in the 50s where really it was just upper Spraberry that was getting Fracture stimulations done. A couple of those as go forward to the 2000s and particularly 2010, most there been, the fields going deeper. They’re hitting this – the Wolfcamp, the Strawn and it places the Atoka formations with additional Fracture stimulations stages, and increase in the EURs which I’ll say on this next slide here particularly from the Strawn and the Atoka, what we are seeing for a very small incremental cost in the Strawn. $60,000 to go an extra 300 to 500 feet depending – of the $60,000 you are adding 20,000 to 40,000 Boes of recoverable reserves. So you can see $1.5, $3 finding cost for that incremental. So good economic.

Very similar with the Atoka where is present for 300,000 to 350,000, pick up another 50,000 to 70,000 Boe of recoverable Reserves. The bigger cost here is mainly because you’ve got to go 5 ½ inch casing goes deeper, add a case another string of five and then you’ve got a couple Fracture stimulations that you are doing down there. But still there on an average of about a $6 finding cost. So great economics to be in the field and this is primarily what PSE is doing today.

Hedging. As Kolja talked about – Steve, we all have great hedging positions. We are hedged strong through 2012 and 90% of our – and 2013 at 85%, looking to add to ’14 and ’15 and we continue to watch that. Since we are predominantly oil, that’s the biggest component we hedge. NGLs we continue to march forward. We’d like to hit some of it given the back caudation in geo markets we haven’t done anything yet. So when you look at the hedging that we have done, as the others have talked about supports our distribution and so since we went public in 2008, we had a $0.50 distribution per quarter then or $2 annually. We’ve moved that last year, $0.51 quarterly or $2.04 and with the hedging, our drilling program, expect to see that go up in the future.

To kind of wrap up here, I think the key is we’ve got great assets in the MLP. We’ve got a strong balance sheet. We think it is important to run an MLP with low leverage given the amount of cash that’s going out in form of distributions. So we’ve got $97 million drawn on our credit facility out of a $300 million facility. So lots of excess capacity, high coverage ratios and low debt, then you couple that with a good hedging program. I think that at least distribution sustainability and the growth of our drilling rig program, we expect we can increase distributions in the future.

So I’ll stop there and we’ll open to question I guess.

Question-And-Answer Session


Thanks, Rich. If there’s any specific questions, just feel free to pitch in at anytime. I think we’ll kind of start, obviously a lot of activity in these two plays and we have seen some producers talk about infrastructures in the Permian and the Granite Wash. Just from each of you, if you can talk about any constraints that you see now within your operations and how that may be impacting you in the near term and how it may be alleviated? We can start with whoever would want to.

Steven H. Pruett – President and CFO - Legacy Reserves L.P

Talk about the Granite Wash?


Yes. Kolja wants to start with the Granite Wash.

Kolja Rockov – Executive VP and CFO - LINN Energy

Yeah, I’ll make a global comment about all of it I suppose. It is a little bit tight. Industry activity has been at record pace. We’re having to do a lot of extraordinary things like truck the oil to market and spend some extra costs. So far we’ve had no issues in terms of getting it to market. It’s just cost that’s a little bit more and you saw that in the third quarter numbers I suppose if you followed our call. But I guess the point is that the midstream market is not asleep. They’re looking for distribution growth and more cash flow. We’ll wait to spend their money as well. So we see a lot of projects. Just in the Permian alone I think there’s five plants coming on stream in the next six to nine months.

In fact 25% of our oil at the end of the year is going to get connected to pipe as opposed to trucking it out. So think about the whole thing like the broadband issue we had where it was we didn’t have enough and then all of a sudden you had too much and when I look at the amount of projects that are coming online, both in the Permian and in the Granite wash in the next 12 to 18 months, I don’t think that problem is going to stay around for too long. Maybe I’m alone in that view, but there’s just a lot of capacity coming on stream and so far it hasn’t been that big of an issue to deal with for us.


Anything in the Permian?

Steven H. Pruett – President and CFO - Legacy Reserves L.P

I think the issue is just timing. Fortunately most of our drilling today is further east from where the backup is occurring which is out in Reese country and to some degree out in Eddy and Lea County, New Mexico. So the further you are out from the main hubs the bigger the issue is. We had an issue in the first quarter related to the whole industry did in the Permian independent or related to record coal weather and the emergency shutdown of four or five refineries that shut off about 500,000 barrels a day of refining capacity for four to six weeks. Hopefully that won’t be repeated. Either A, the record weather will be the PCs ill-fated lack of planning related to that shutdown process. But like Kolja said, we’ve had to hustle on trucking and move some of our barrels around from some of the larger gathers to smaller ones and thus pay a bit more to have it trucked and that affected differential somewhat.

But we’re encouraged by the response in the futures markets to the EnBridge announcement of acquiring Conocophillips, 50 percentages in the seaway pipeline and the resourceful. We’re encouraged by and we’ve had discussions with some major shippers on the longhorn pipeline that isn’t permitting to be reversed from the products pipeline flowing from Houston to West Texas and El Paso to Creed service, restoring its Creed service from midland Odessa area back to Gulf Coast. So hopefully that’s 18 months away, although these states were permitting and federal government’s intrusion in the oil business. Who knows? Like Kolja, I’m optimistic that we’re not going to have severe shut ins or curtailments and we’re staying ahead of the game on connecting our gas on the oil wells that we’re drilling. You can’t play – oil and gas is frowned upon. It’s going on, but we’re trying our best to avoid it.


So you guys have just talked about the number of drilling opportunities in front of you. I guess as you look at your positions in the Permian and Granite Wash, do you think there’s further room for expansion to increase that set of drilling opportunities? How do you view drilling for growth versus acquisitions and kind of balancing that over time? I don’t know if Rich wants to start.

Rich Dealy – Executive VP and CFO – Pioneer Southwest Energy Partners L.P.

Sure. Well I think for Pioneer Southwest, given that we’ve got so many locations in front of us, you’re going to have to weigh what makes sense from drilling these locations versus an acquisition and because we’ve got a big and deep inventory of wells that because of these deeper horizons have great economic, it makes sense that PSE will refocus on – we still look at acquisitions, but economics wise it’s been better for us to focus on our drilling opportunities than doing acquisition. So that’s where we’re going to continue focusing and really if you can have these drawn on Atoka formations it just makes them that much better. That’s really – today we’re focused on looking. We will look in those because of those horizons. Looked at deep rights and some of these leases we don’t have deep rights, so we’ll continue to acquire deep rights in those things. But that’s today our predominant focus.

Kolja Rockov – Executive VP and CFO - LINN Energy

I would say we pursue both, as you know both organic growth and acquisitions. To be honest with you we try to go as fast as we can in the acquisition game, just because we think there’s significant margins there. So we try to acquire as many accretive deals as we possibly can quarter in, quarter out. On the organic side, I think we’re trying to go at a logistically prudent pace I guess would be the way I would say it. We’re getting great rates of return and certainly a typical cyclical PNP company would probably drill four times as fast as what we’re doing. But we’re being careful. We’re getting great results and it’s the right pace. In terms of the inventory, we started the year at 200 wells of inventory in the Granite wash. I think if you kind of read in between the lines on the third quarter call, we hinted that that inventory could be significantly larger and then we added the 200 additional locations through the Plains acquisitions.

And what happens with us, when we bought Dominion we slowed down their drilling program. With Plains Exploration they were running five rigs. They probably are going to run two to three. So what happens is not only do you add inventory, but you actually link them out because you slow it down somewhat. So as long as we continue to be active on the acquiring side, our inventory keeps pushing out now. So it’s a very large depth, but again I think the pace is just to be prudent because there’s a few times in the company’s history where we tried to get a little bit faster with the drill bit and then the results come in a little bit sloppier. And so we’re trying to stay at the right pace to get the right kind of returns. And then again on the acquisition side it’s really as fast as we can go.


Maybe Steve, on the Permian, can you kind of discuss your exposure to the Bone Springs and maybe how some of those economics potentially deck up versus the Wolfberry?

Steven H. Pruett – President and CFO - Legacy Reserves L.P

It’s a higher rate of return but higher risk endeavor. One, it’s mechanically more challenging drilling a 5,000 or 6,000 foot lateral is mechanically riskier than an 11,000 foot vertical well and 1.7 billion for Wolfberry well compared to 6 million for horizontal Bone Spring well puts you in a different class. And most of our opportunities are 80% to 100% working interest. So as Kolja mentioned, it’s a matter of pacing and it’s also a matter of having offset operators de-risk it. Fortunately we’ve had that happen. So we’re really now in a mode of just permitting and waiting for and watching endangered species listings to ensure we don’t get a situation where we can’t drill when we’re ready to drill. We do have to deal with the Lesser Prairie Chicken mating season so that takes us out of commission till July 1.

I’m told they like to mate on – or at least the males like to show their stuff on our drilling pads in our well locations. So actually that’s been documented by some very bright animal husbandry experts from Texas A&I so it’s legitimate. Take more in so enjoy that comment. But to sail that, it’s an exciting play and the rigs return north of 40%. We’re seeing IPs in the 300 to 600 barrels a day range and someone made the comment that it’s kind of a 3x Wolfberry type opportunity, but with higher returns and we’re in the core area. In fact we have been producing first, second, third Bone spring sand and the Bone spring cabinet for years are properties we acquired from Marathon in ’99. So we’ve been producing these zones vertically. We know a lot about them. We’ve got control and so it is a low risk opportunity, but I think the cost and execution will be a bit more variable than for the Wolfberry.

We’re also excited about a leasehold position we quietly acquired and it’s kind of a first for us. We’re not a big leasehold acquirer in the Wolf Bone trend and all of these are lineared age rocks, the Spraberry, the Bone Spring are virtually equivalent from a geologic age standpoint and then the Wolfcamp is just below that Bone Spring. And so all of these are the same type of rocks, but the Bone Spring is a little bit more compartmentalized and thus lends itself to horizontal drilling, whereas the Wolfbone is more like the Wolfberry play where you’ve got to stack 1,000 to 3,000 foot interval of rocks that you open up 10 to 12 intervals and do a 10 to 12 stage Frac job on it. But these are $3 million to $4 million wells and again they need to be substantially better than the Wolfberry and we’re seeing that trend come to our acreage and we’ll be drilling it in ’13 and ’14.

So I’m very excited about the – like Kolja described, the visibility in the long and deep inventory that we have that sustains distributions and create organic growth and now (inaudible) is the model for how far you can push the MLP model and aggressiveness of developing it. It’s a more robust structure and we have this rich debate inside of Legacy around do we need to maintain one times coverage when you throw in all of our maintenance and growth capital and thus far we’ve stuck to that mantra. But for the petroleum general needs it’s very tempting to drill more aggressively and push that a little bit as Wen has done so successfully.


Rich, maybe you could expand a little bit on the Atoka. I know the three wells coming up and some of the economics there, expand on and possibly the opportunity side. You get past these three wells and maybe then in the next year what you’re seeing there as you go deeper.

Rich Dealy – Executive VP and CFO – Pioneer Southwest Energy Partners L.P.

Yeah, Seacor has drilled some already and so we’ve had I think three wells that we announced in our third quarter call for PXP where we’ve had initial IPs of about 150,000. 150,000 would be nice but 150 barrels a day equivalent of production and those on a single zone test. So it looks good. It’s all on the northern part of the field, Martin County predominant a little bit higher, a little bit west of there. And so it’s a place where for PXP 40% of our acreage is in that area. We’ve got quite a bit drilling locations on 20s and some 40s left and so we’ll see. It’s still new so I don’t want to get too far in front of it. I have heard anecdotally that somebody has a horizontal well, a fairly short one. It’s coming very nicely, up to about 1,000 barrels a day on a short horizontal. So it has potential but I don’t want to overhype it at this point till we get some more drilling results.


Kolja, you mentioned the Granite wash. Certainly the Granite wash has different intervals and you guys are starting to drill and maybe you can describe what you’re seeing within some of those different intervals that you are drilling and how you balance targeting those intervals versus targeting what you know what is already worth from what you have been drilling.

Kolja Rockov – Executive VP and CFO - LINN Energy

Well, there’s probably right around seven to eight intervals that you could target in the Granite wash. We’ve drilled five of them at this point in time. So just about two or three months ago we really were in one or two. So we’ve made a significant step out into some other zones and had some great results. Just as a rule of thumb the upper zones are much more liquids rich and that’s really what we’ve been targeting. The returns are great there. We did have an Atoka well just recently that came on at 30 million a day and produce 30 million a day for 30 days. So it’s pretty eye popping. Of course Gaps is what, three, 40 or something today. So we don’t make a lot of money with it, but it’s there. We still have a lot more on the liquids rich side and we’ll continue to test zones and try to understand our play, but rates of return across the whole spectrum have been great and that’s really the driver is we’re trying to target that 100% rate of return and trying to stick with that and not necessarily just drill the dry gas stuff. We’re going to leave that alone for a while.


What about pad drilling? How early are you in the process of beginning pad drilling and maybe as you progress, how do you see that ramping and improving some of the efficiencies that you can realize in the granite wash?

Kolja Rockov – Executive VP and CFO - LINN Energy

I mean there’s really two things that it does. One is it’s marginally cheaper but that isn’t the big one. The big one is that you don’t have to take a producer offline to drill another one and right now we’ve got five rigs running forward on pads. So we’ve adopted it wholeheartedly and that’s really I think the way to go. You bring a well on, it comes on at 15 million to 30 million a day and then you’re trying to drill the second well within 60 days or so and you have to take off the line. I mean that’s pretty heartbreaking. So that’s what we ran into in the early days and we had some variability and then you’ve got the first well you take it offline. When you put it back online it has to clean up again. So the pad drilling has been great for us and hopefully will continue to produce the results that we’ve seen so far. That certainly streamlined the operation and gives us that production – more predictable production for the whole company as we go forward.


Steve, maybe you can comment on particularly in the Permian, maybe some of the M&A activity and what you see the market like, what kind of packages may be out there and given this mighty depressed environment? Certainly have just closed the deal, but if there are kind of more bolt-on type opportunities or if there are larger potential packages out there as well.

Steven H. Pruett – President and CFO - Legacy Reserves L.P

I heard Scott Richardson speak. Of course he’s with RBC and he’s kind of the guru and has had market share on Permian packages and he said it’s been a slow year today. This was about 30 days ago when he made this comment. It’s been a light M&A year just because of the ball play prices, but we’ve seen a renewed interest in the private entrepreneur sellers, ranging from my age up to 70 or 80 years old that are motivated to clip the coupon and the deal we closed on Monday is what the gentleman that approached me this summer, he was turning 60 which now that I’m 50 I view as quite young and he was ready to get out of the rat race and life had gotten too complicated, and he was a self made immigrant oil man and he clipped a $30 million chip on and we had his tag along investors throw in and it was a long arduous discussion.

The initial discussion lasted about three hours telling his life story, which was very interesting and very admirable. But it’s just a grind out of dealing with – and it was about the fourth time. My partners had tried to buy him out four times and this the fifth time was the charm and they all said I would never get it done and we did get it done thankfully just through relationship. So we have a lot of deals like that and a lot of small deals with local brokers or sort of here on the Street that are in the $1 million to $5 million range and we’re set up to be able to digest all of those. On the large entities, a little bit slower and we’re not a player for the classic Wolfberry package. Kolja has bought quite a few of those where they may be 20% to 30% developed or maybe there’s eight wells and 200 advertised pads and probables. We’ve not really pursued those because we’ve got a deep drilling inventory and it’s hard for us to pay for the right to drill someone else’s location and it stacks into our inventory and it passes a company that’s larger that can more aggressively pursue it.

We’re not seeing a lot on the large in. We’re expecting to see a continued combination of the disaggregation or non-core sales by the EOGs and EnCanas and larger public companies, along with the smaller deals that are the local entrepreneurs that are willing to sell out or seller A, to go to the farm for ranch or B, fund their drilling programs and clipping their mature PDP. Those have been the themes that have worked for us and they continue to work well and I think it’s unabated. We’re also buying gas because owners of gas reserves, they finally acknowledge the forward curve and acknowledged that what they have on the books as pads are not viable, not economically viable. They’ve taken them off the books and taking their write downs and selling them and we’re buying them for PDP and some day when gas is $5 again or $5.50 we’ll be able to drill those five, 10 years down the road since they’re HPP. So those are the things that we’re focusing on.


Okay. Rich, maybe you can touch on kind of hedging and looking at some of the out years on your (inaudible) hedges given some of the recent strength. Maybe talk about where you’re comfortable looking at into that hedge profile and some of the out years and where you’d like to be for your typical hedge book.

Rich Dealy – Executive VP and CFO – Pioneer Southwest Energy Partners L.P.

Yeah, I think we’d like to be in that 80% range or so out through 2014, 2015 kind of rolling basis. For instance where LINN and Legacy. I think where we’re looking at, this is for predominantly oil, really focused on oil and it’s been so volatile as we’ve seen over the last 60 days that the huge fluctuations that we’ve seen. So it’s hard to take, I think generally we’re looking at a $90 type floor. We’ve historically done and probably will continue to do because I think it’s a good way to hedge against – because we’re drilling two to hedge against drilling cost is do three ways or a collar structure with a short put on it. So we’re looking at that $65 to $70 short put and $90 floor and then upside in the $120 range. So what that allows us to do between – for those who are not familiar, we participate with oil prices between $90 and $120 in that example and then below $90 to down to $70 or $65 short put, we get $90 below that $70 or $65.

We get the spread between $90 and the $70 of whatever that price is. So if the price went to using that example $60 and there was a $20 spread there, we’d get $80 for that crude and the benefit we see in that is since we’re drilling, it allows us – we know we’re going to have cost inflation, even though PST does benefit significantly from Pioneer, the Seacor parent that has 15 of its own drilling rigs has five practically. It’s working in the Permian base until we get significant cost saving as a result of having our own internal services. We know we’re still going to have inflation in those things that we don’t own internally and it allows us to protect our margins and get bigger margins as quantifies the move up versus locking in a swap and then having our margins get squeezed as drilling costs move up. So that’s really our focus.


Kolja, I know you guys have been fairly opportunistic in rolling off some of the longer term hedges to increase your prices near term. Can you just kind of go through the rationale there?

Kolja Rockov – Executive VP and CFO - LINN Energy

Yeah, absolutely. I think with ours it’s a pretty simple program and we try to be five years 100% hedged with about a third of it input and that gives you the upside participation. And with respect to your comment, we were building our 2016 position because oil was at $110 a couple of months ago and gas in 2016 was $6.01. So I guess point number one, think about that. When you’re hedging 2016 and most of the oil and gas companies are worried about ’12 and ’13, I think it’s pretty nice prices at $6 gas and $100 crude is flat, but still a good price. So we’re building those positions and put them on and then the market is so volatile. Two months later you’ve got 2016 oil trading at almost $80. That’s so far out there and I don’t believe that oil is going to be $80 in 2016, or at least I don’t believe we’ll have another shot at hitting – pinning it at $100 three or four more times between now and then.

So basically what we did is we took that profit and put it into ’12. So 2016 is now un-hedged which is still like I said a long ways out there and now it’s running towards the 100 again. So you get it to 100, we’ll pin it again and we’ve done that successfully in the past. You just don’t want that outer year trade up and down $20 and not take that profit. I think it’s silly not to take it as you have it. So that’s basically what we did and then the other thing we did was and it’s the second time we’ve done this. Oil prices ran up like I said a couple of months ago and we had $75 floors for next year and the year after and when that floor starts to look like it’s too far below where the current price is, we’ll pay a little bit of money to bring that floor up so that we have adequate insurance as to where we are and it’s cheaper to do that when the price is significantly higher. So we move those floors from $75 to $90 and the next thing new crude is $75.

Well now it’s back to $100 but either way we feel better about that being the floor, but the one that was the most famous for us was when oil was at $150 or $140. We had floors that were about $72, so that was a pretty dizzying height and we paid about, I think it was $6 a barrel to move it to $120 and everybody thought we were crazy. It’s like why are you doing that because we’re going to $200 and we moved it to $120, which is still significantly below the $150 price. Well, guess what? In that year oil went to $35. So we like insurance. We buy it, we have a nice orb in terms of what we’re buying and the accretion that we generate and we just don’t want to take any commodity risk and that’s the way we’ve done it. It’s a discipline. We stick to it and your question; we trade a little bit around the margin when it’s easy money. But otherwise we stick to the nitty.


Well, good. I think with that we’re out of time. I appreciate your participation on the panel. Thank you.

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