Sanchez Production Partners' (SPP) CEO Gerry Willinger on Q3 2015 Results - Earnings Call Transcript

| About: Sanchez Midstream (SNMP)
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Sanchez Production Partners LLC. (SPP) Q3 2015 Earnings Conference Call March 31, 2016 11:00 AM ET

Executives

Chuck Ward - CFO

Gerry Willinger - Interim CEO

Pat Sanchez - COO

Tony Sanchez III - Executive Chairman of the Board of Directors of our General Partner

Analysts

Jay Abella - Investment Partners Group

Gregg Abella - Investment Partners

Operator

Good morning and welcome to Sanchez Production Partners Third Quarter 2015 Earnings Conference. My name is Rachel and I will be moderating today's call. At this time, all participants are in a listen-only mode. [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 on the call over to Mr. 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 III, Executive Chairman of the Board of Directors of our General Partner.

Just a few quick notes before we get started. We released our fourth quarter and full year 2015 earnings report and filed our 10-K yesterday evening. That material along with an updated Investor Presentation is available on our website www.sanchezbp.com.

We have made the slide deck available as part of today's webcast and while we do not plan to do a page turn on the presentation material; we may make references to specific slides during the course of this morning's presentation. 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.

And finally, we will also use non-GAAP financial measures in this morning's discussion to help our unit holders and the 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.

And with that, I would now like to turn the call over to Gerry Willinger.

Gerry Willinger

Thanks, Chuck. Despite a number of significant headwinds we executed plan to transform SPP in 2015and exited the year with a well positioned master limited partnership and arguably one of the most compelling investment opportunities in the energy space.

On the heels of completing a challenging e-version [ph] process we successfully closed and financed two significant transactions in 2015. The first involved the acquisition of escalating working interest and producing assets from Sanchez Energy for approximately $85 million.

The second involved the acquisition of West Catarina midstream assets from Sanchez Energy for approximately $345 million. The Western Catarina midstream transaction resulted in a step change in our business model, and an asset base that is expected to generate approximately 60% of its adjusted EBITDA from midstream activities this year.

As a result of these transactions, we successfully restructured our balance sheet, expanded our bank rate and hedging capabilities, developed a strategic relationship with Stonepeak and construction partners and in the midst of widespread distribution cuts in the industry, we initiated our first distribution on common units in November of 2015.

With the contribution of the Western Catarina midstream transaction, beginning to impact our operating results in the first quarter of 2015, we then increased our distribution by another 1.5% in February of this year.

As the close of the -- books [ph] in 2015 we are excited about the opportunities that lie ahead. Given our liquidity position, the strength of our balance sheet, the stress in the industries spending from lower commodity prices, and in light of first offering and line of sight to $800 million in assets owned by Sanchez Energy we see significant opportunities to grow the business overtime.

We believe our results in 2015 are a testament to the benefits of strong sponsorship and a committed team. Building on these results, we currently forecast adjusted EBITDA to range between $54 million and $50 million in 2016.

At the midpoint of this range, we currently project common unit distribution coverage of 2.3 times, which is quite good relative to what we see across our sector. We look forward to meeting new challenges this year and in the years ahead, always with an eye to upgrading value for our unit holders.

With that overview of our progress and 2016 forecast, I would like to now turn the call back to Chuck for a brief overview of our fourth quarter and full year 2015 results.

Chuck Ward

Thanks Gerry. For those joining us, I will refer you to page 24 of the slide deck we posted this morning for this portion of the discussion. Our revenue totaled $26.1 million during the fourth quarter of 2015. Included in this amount is revenue per midstream sales of $11.7 million, revenue from production activities totaling $11.3 million of which $5.8 million related to hedge settlements and gains on mark-to-market activities of $3.1 million which is a non-cash item.

For the full year 2015, our revenue totaled $68.4 million. On the production side of our business, we showed fourth quarter 2015 production of 336 MBOE for average net production of 3650 BOE per day during the quarter.

Net oil and liquids production for the fourth quarter of 2015 which accounted for approximately 31% of our total production during the quarter was 1,149 barrels per day which was down approximately 12% from the third quarter of 2015.

For the full year 2015 we produced 1,428 MBOE, a decrease of approximately 5% compared to full year 2014 production. Net oil and liquids production for the full year 2015 was 1,180 barrels per day an increase of approximately 21% compared to full year 2014 results.

Our operating expenses during the fourth quarter of 2015 totaled $12.7 million which included $2.2 million in operating expenses related to midstream activities, $5.1 million in operating expenses related to production activities and general and administrative expenses totaling $5.4 million.

Operating expenses related to production activities during the fourth quarter of 2015 which includes lease operating expense, production taxes and cost of sales averaged $15.10 per BOE in the fourth quarter of 2015, which compares to operating expense of $15.74 per BOE in the third quarter of 2015 and $16.95 per BOE in the fourth quarter of 2014.

For the full year 2015, operating expenses averaged $15.67 per BOE which compares to operating expenses of $17.03 per BOE for the full year 2014. General and administrative expenses during the fourth quarter of 2015 excluding non-cash items related to unit compensation and asset management fees totaled $4.5 million.

For the full year 2015, general and administrative expenses again excluding non-cash items r elated to unit base compensation and asset management fees totaled $22.7 million. After adjustments for about $8.7 million in non-recurring items related to employee severance, litigation, the conversion to a limited partnership and transaction cost general administrative expenses for the full year 2015 totaled $14 million.

This compares to $42.2 [ph] million from the full year 2014 which included an adjustment of $1 million for non-recurring item related to the conversion during 2014. Our adjusted EBTIDA for the fourth quarter of 2015 was approximately $12 million which compares to $3.7 million in the third quarter of 2015. After adjustments again for non-recurring items in the third quarter of 2015 related to litigation in the Western Catarina midstream transaction which as a reminder closed in October of 2015.

For the full year 2015, adjusted EBTIDA was $17 million before adjustments for non-recurring items and $25.8 million after the $8.7 million in adjustments for the non-recurring items I mentioned earlier.

This compares to adjusted EBITDA for the full year 2014 of $25.4 million after a $1 million adjustment for the non-recurring item in 2014. Our capital spending during the fourth quarter of 2015 totaled approximately $2.7 million, for the full year 2015 our capital spending totaled approximately $4 million.

We currently have $109 million in debt outstanding under our current facility which is a borrowing base of $200 million. Our borrowing base which you will recall includes the midstream component is scheduled for redetermination by the lenders in the next quarter.

For 2016 we've had approximately 4.1 Bcf of our natural gas production at an effective NYMEX fixed price for about $4.14 per Mcf and approximately 441,000 barrels of our crude oil production at an effective NYMEX fixed price of about $74 per barrel.

These positions are included in our 2016 forecast, which Gerry mentioned earlier. Additional information on our 2016 forecast can be found on Page 5 of our Investor slide deck.

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

Thank you. We will not begin the question and answer session. [Operator Instructions]. Our first question comes from line of Mr. Jay Abella. Jay, go ahead.

Jay Abella

Yes. Hi, guys. Congratulations on a good year and the transformation.

Gerry Willinger

Thank you.

Charles Ward

Thanks, Jay.

Jay Abella

Just wanted to ask a question real quick, if you can provide a line of sight to what potential drop downs we might look for this year and what kind of milestone we can expect or at least have the possibility of attaining? Thanks.

Gerry Willinger

Well, I'll answer it generally is that we're always looking to do any type of what I'll call transformational acquisition or incremental acquisition. And so, as we look to the year, particular in this environment we'll be looking to work with both of our partners in Sanchez Energy and with Stonepeak Infrastructure Partners to do acquisitions from across the platform.

We'll also be looking to do acquisitions on a third-party nature. So, while I can't give specifics now, what I'll say is we are looking to be acquisitive and use our balance sheet in a manner that that makes sense on a go forward basis this year.

Jay Abella

Okay. Let me throw in a slightly different question. You said this morning that 40% of your EBITDA is coming from your upstream property still. Is that the understanding?

Gerry Willinger

That's correct.

Jay Abella

Is that also excluding the Kansas, Oklahoma stuff you have available for sell?

Charles Ward

Yes. When we build our forecast we think about forward looking. We're actually excluding those ops from having any contribution.

Jay Abella

Okay. So, the guidance here on whatever it was, page five, is about these, let's call them continuing operations if in fact those are the ones were sold?

Gerry Willinger

That's correct.

Jay Abella

Okay. Thanks guys.

Charles Ward

You bet.

Operator

Thank you, Jay. And our next question comes from Mr. Gregg Abella of Investment Partners. Gregg, go ahead.

Gregg Abella

Hey, good morning, guys. I'd like to reiterate what Jay said. Great quarter, great year, looking forward to 2016. Just a couple of maybe observations and questions, but I guess if you had to prioritize, what types of drop downs you're looking at, would the banks seem to be more favorably inclined to lend against midstream assets in this environment than upstreams. So, does that factor in at all to what prioritizes you might have? And you maybe can comment on that before I go to my next question.

Charles Ward

Sure. Your observation obviously is correct. There is no shortage of distress among certain parties in the upstream market. What I'll say though, that we're seeing certainly has accelerated in the last few weeks, what I would call a further differentiation between midstream companies and that, perhaps all midstreams are not created alike.

And to that point, what we think about is that being tied into good production, economic profile in today's market is equally important to whatever some minimum volume commitments or takeaway capacities or other things maybe. It's one of the things that we initially liked about the Catarina and we continue to like about it. It's relative where it sits in kind of economic [Indiscernible] production in United States and relative to picking up at the wellhead – at the pads relative present being kind of a short haul or medium long haul economic equation.

Gregg Abella

Again, I guess as a unit holder, if I were – I just had a better feeling about companies that are prioritizing midstream assets at this point, and I think you'll get a premium in the market as suppose to even having something that's working interest at this point. But we leave that up to you guys, but just now how I am looking at it as an owner?

Let me switch now at the buyback program and ask about that. With the cash flow projected even at the low end of your range it looks like you probably have some gas in tank to keep going with it even after it expires. Has there been some thought about that?

Charles Ward

And I'd say what we do is we kind of analyze the program on a monthly basis. We've set it up so that we give guidance and then kind of stand back and let the program make its run. That way if we're working on transactions and other things, we don't have to be constantly conscious of whether we're in or out of the window. We do that kind of analysis at the beginning of every month and we'll be looking at that again and figuring out how we'll treat the next quarter or so.

Gregg Abella

Okay. Because as I look at now every dollar you're using is basically getting a 14% yield or so in this price or in this price range, seems like a good use of capital, and if I were in your shoes, I would keep going with it. But I guess, we'll hear more about that if you were to – I don't know what sort of timing there is, but at what point will there maybe some discussions as to whether you keep going?

Gerry Willinger

I think being given the nature of buyback programs, typically the nature would be that if we were to cease the program we'd have to make an announcement. If we were to turn on, say the ATM, which is the other -- the opposite side tool that we have in our toolbox, so I would expect that there would be some disclosure requirements around that.

Gregg Abella

Okay. That will be something maybe later around the middle of the year, later in the year?

Gerry Willinger

I think it's hard to commit in timing. We have obviously, a need for capital markets to develop for some of the growth activity we'd like to see and do. And so, relative to having buyback in action, at the same time can certainly cloud some of those opportunities, so it's pretty dynamic obviously, as you can tell.

Gregg Abella

Okay. That's fair. My last question really has to do with – in previous sort of calls we talked about distribution growth over the next couple of years. You still targeting the same rate of distribution growth going forward and I think it’s something around 15% a year within couple of years?

Gerry Willinger

I think it's hard to say, what the distribution growth target long term would be, I think when you think about the 15% we think about it in terms of two things. Number one is fundamentally growth and distributions, second would be a yield compression and we think we should continue to enjoy as whether it seems to be if you look at kind of the midstream screen of stocks as we get some compression and move kind of further down the yield stock to become more like really what we think our peers as we go forward, but that that should provide unit value growth, so when we think about that 15% it’s kind of a combination of those two factors. Obviously when we have a more developed portfolio, some organic opportunities will emerge which will help give a kick on that growth, but right now obviously we are sticking with producing the existing assets while and looking at turning to acquiring gross some more.

Gregg Abella

Okay, makes sense. Do you need to get the redetermination behind you before you can proceed with the dropdown or is that we need …..

Gerry Willinger

No, that’s not a casing item for us.

Gregg Abella

Okay, good to know also. I’ll get to the last issue, and I promise this will be last question, but…

Gerry Willinger

No worries.

Gregg Abella

But the legacy assets which were the midcon assets were still in those markets that try to sell these things even at these low prices or are we just holding back, how are you viewing that?

Gerry Willinger

You’re right. Low prices are not helping from a marketing process. What we are doing is kind of looking at some other options, of ways to keep let’s say the option value for return of value in those assets are live and to the benefit with SPPU holders that it might be a little bit more that construction rather than now right sale at this time, but while we work on that kind of internally I think its final, it’s not final.

Gregg Abella

Okay. Thanks guys, again great year and great quarter and looking forward to this year.

Gerry Willinger

Thanks, thanks for your support.

Operator

Thank you, Greg. And as of right now, there are no more questions in queue. And that concludes today's conference. Thank you all for joining. You may now disconnect.

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