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Pioneer Southwest Energy Partners L.P. (PSE)

Q1 2010 Earnings Call Transcript

May 5, 2010 12:00 am ET

Executives

Frank Hopkins – VP, IR

Scott Sheffield – Chairman and CEO

Rich Dealy – EVP, CFO and Treasurer

Analysts

Kevin Smith – Raymond James

Richard Roy – Citi

Michael Blum – Wells Fargo

Presentation

Operator

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

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

The partnership 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 business prospects of Pioneer Southwest are subject to a number of risks and uncertainties that may cause actual results and future periods to differ materially from the forward-looking statements. These risks and uncertainties are described in Pioneer Southwest's news release on page 2 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 pay Pioneer Southwest 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 go over the agenda for today's call. Scott is going to be the first speaker. He will review the financial and operating highlights for the first quarter and then he'll give you a brief update on what's been happening with PSE's very successful drilling program so far this year Spraberry Field. Rich will cover first quarter financials in more detail, he will provide earnings guidance. And after that we'll open up the call for your questions.

Scott, I'll turn it over to you.

Scott Sheffield

Yes. Thanks, Frank, good morning. I appreciate everybody coming and listening to this call for PSE. Slide number 3 on our highlights; we had first quarter adjusted income of $23 million or $0.70 per unit. That excludes the non-cash market-to-market gain of $16 million for tax or $0.49 per unit.

First quarter production up significantly, over 6400 barrels of oil equivalent per day, almost all due to excellent drilling results, up 6% versus fourth quarter 2009. Cash flow from operations about 24 million. And with that we declared a distribution of $0.50 per outstanding unit for first quarter of 2010, payable on May 12th, record day May 4th.

We have a two-rig program, obviously it's on schedule. We put 12 wells on production during the first quarter of 2010. Flipping to our update on our drilling program, slide number 4, again as we have announced we expect to drill about 50 wells during 2010 with a two-rig drilling program.

Production rates for the new Wells have exceeded expectations. That's primarily due to the fact that we're opening up some new zones, both the shell zones in the Spraberry and the shells zones in the lower Wolfcamp, so obvious getting much higher rates, more production and more reserves than we expected.

Drill time and capital costs are on target. Our total inventory inside PSE, we have about 150 40-acre locations remaining and about 1200 20-acre locations. Obviously, strong rates of return at current NYMEX prices of 50% or greater, internal rate of return.

Let me turn it over to Rich to go over the financial highlights.

Rich Dealy

Thanks, Scott. Net income on slide 5 was 39 million at $1.19 per unit as Scott mentioned we did have the non-cash mark-to-market derivative gains during the quarter of $16 million primarily related to decline in forward commodity prices between December 31st and March 31 related to our derivative positions, so after mark-to-market $23 million or $0.70 per unit.

Looking at that the bottom of the page slide how we did relative to guidance you can see that production was, as Scott mentioned, well above our guidance due to the great performance of the wells that we put on production. All the other items there you can see was in the lower to midpoint of the guidance ranges and everything came out as expected.

Turning to slide 6, looking at second quarter guidance, production, we're expecting another good quarter of 6200 to 6600 BOE's per day of production. Production costs, DD&A, G&A, interest expense and our effective tax rate same guidance as we use for the first quarter and so no changes in those items as well.

Looking at slide 7, PSE remains a strong financial position. We did borrow $2 million during the quarter to fund the drilling programs. So we went from 67 million at the end of the year to 69 million. We still have $300 million credit facility out there of which we have access to 195 million incremental today and so we've get plenty of liquidity in the company.

If you look at our derivative positions in the appendix slide, you can see that we're 85% hedged for 2010, 75% for 2011 and 2012 and 60% for 2013 and then this is – provide a good stable base to sustain our distribution and potentially increase them in the future.

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