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Pioneer Southwest Energy Partners L.P. (PSE)

Q3 2010 Earnings Call

October 27, 2010 12:00 pm ET

Executives

Frank Hopkins - VP, IR

Scott Sheffield - Chairman and CEO

Rich Dealy - EVP and CFO

Analysts

Richard Roy - Citi

Rhett Bruno - Bank of America

Kevin Smith - Raymond James

Chad Potter - RBC Capital Markets

Steve Tabb - Tocqueville Asset Management

Presentation

Operator

Welcome to the Pioneer Southwest Energy's third quarter conference call. Joining us today will be Scott Sheffield, Chairman and Chief Executive Officer; Rich Dealy, Executive Vice President and Chief Financial Officer and Frank Hopkins, Vice President of Investor Relations.

Pioneer Southwest has prepared PowerPoint slides to supplement their comments today. These slides can be accessed over the internet at www.pioneersouthwest.com. Again, the Internet site to access the slides related to today's call is www.pioneersouthwest.com. At the website, select Investor then select Investor Presentations.

The partnership's comments today will include forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements and the business prospects of Pioneer Southwest are subject to a number of risks and uncertainties that may cause actual results in future periods to differ materially from the forward-looking statements. These risks and uncertainties are described in Pioneer Southwest's news release on page two of the slide presentation and in Pioneer Southwest's public filings made with the Securities and Exchange Commission.

At this time, for opening remarks and introductions, I would like to turn the call over to Pioneer Southwest's Vice President of Investor Relations, Frank Hopkins. Please go ahead, sir.

Frank Hopkins

Good day, everyone. And thank you for joining us. Let me briefly review the agenda for today's call. Scott will be the first speaker. He will review the financial and operating highlights for the third quarter and update you on PSE's successful drilling program in the Spraberry field. Rich will then cover the third quarter financials in more detail and provide earnings guidance for the fourth quarter. And after that, we'll open up the call for any questions that you might have.

With that, I'll turn the call over to Scott.

Scott Sheffield

Thank you, Frank and good morning. Slide number three on the highlights. We reported third quarter adjusted income of $23 million or $0.71 per unit. This does exclude our mark-to-market derivative loss of $17 million after tax; that's primarily due to the recent run up in crude which our $100 hedges obviously are worth less because of that mark-to-market accounting standpoint.

Our third quarter 2010 production averaged 6,600 barrels a day; that's up 3% from second quarter 2010. And it reflects our continued two well drilling program and the positive results we're seeing from the lower Wolfcamp, and opening up the organic rich shale zones and the Spraberry zones itself also.

We'll eventually take a few wells to the strong as we have reported recent success at the PHD level. So we will do that late this year, and going into 2011.

Cash flow from operations of $25 million declared another distribution of $0.50 per outstanding unit for third quarter 2010, that's payable on November 12 to unit holders as of November 4. That reflects an annual distribution rate of $2.00 per common unit.

On Slide number 4, again in regard to our two well drilling program, we have put on 21 wells to date on production through September 30. We're seeing our well cost still stay fairly consistent about $1.1 million to $1.2 million per well. Locked in almost all the calls obviously for 2010, and production rates are exceeding expectations. If you want to get more color, you can refer to our successful results from our PHD drilling presentation by going to that website in regard to successful, Wolfcamp and some strong drilling.

We have 140 remaining 40 acre locations and over 1,200 20 acre locations. We'll be starting to drill some 20s going into 2011 and 2012 mixing with our 40s.

Let me turn it over to Rich Dealy to talk to our earnings for the course.

Rich Dealy

Thanks, Scott. On Slide 5, Scott talked about net income reported $6 million or $0.20 per common unit. That did include the unrealized mark-to-market derivative loss that Scott discussed as $17 million or $0.51. So adjusting for that, we're at $23 million or $0.71 per unit. Looking at the bottom part of the slide where we talk about our guidance relative to our results coming into the third quarter. if you look at production, Scott talked about drilling results continued to look good. And we're at the upper end of production guidance for the quarter.

Each of the other items are basically at the lower end or the midpoint of guidance and where we would have expected very consistent with prior quarters. So all in all, a great quarter for PSE.

Turning to Slide 6, and a little bit about the fourth quarter. very similar with the drilling program continuing to go on. We are upping our production guidance to 6,400 to 6,800 BOE's per day. And all the other guidance items are consistent with what they've been all year long that we've been riding a middle out of the lower part of those guidance ranges.

On Slide 7, financial position; PSE still has a great financial position. $180 million availability under it's credit facility, strong hedge position in place at over 70% for 2011, 80% for 2012 and 60% for 2013. And so another good quarter for PSE.

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