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Pioneer Southwest Energy Partners L.P. (PSE)

Q2 2010 Earnings Call Transcript

July 29, 2010 12:30 pm ET

Executives

Frank Hopkins – VP, IR

Scott Sheffield – Chairman and CEO

Rich Dealy – EVP, CFO and Treasurer

Analysts

Michael Blum – Wells Fargo

Leo Mariani – RBC

Steve Tabb – Tocqueville

Kevin Smith – Raymond James

Presentation

Operator

Welcome to the Pioneer Southwest Energy's second quarter conference call. Joining us today will be Scott Sheffield, the 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 materials 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 the actual results and the 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.

As a reminder, today's call is being recorded. 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, Mr. 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 second quarter and he'll update you on PSE's successful drilling program in the Spraberry field. Rich will then cover the second quarter financials in more detail and provide earnings guidance for the third quarter. After that, we'll open up the call for your questions.

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

Scott Sheffield

Thank you, Frank and good morning. Slide number three on the highlights. The second quarter, we had another great quarter for PSE, adjusted income about 23 million, $0.69 per unit. That excludes non cash mark-to-market derivative gains, about 32 million after tax. Second quarter production averaged close to 6500 barrels of oil equivalent per day with cash flow from operations about 27 million.

We declared another distribution of $0.50 per outstanding unit for the second quarter, payable on August 12 with a record date of August 4. Reflects continued annual distribution rate of $2.00 per common unit. We continue to have two rig drilling program in the field with 20 wells put on production, four wells waiting on completion.

Turning to slide number four, update on our drilling program. What's exciting is that we're still continuing to see above better production results from by going into the lower Wolfcamp and also opening up the organic rich shale zones and the Spraberry and the Wolfcamp interval.

In addition, with the recent results that PXD is saying from the strong interval, we're looking at taking some of our wells down deeper to the strong formation. Well costs are averaging about 1.1 million gross that's about eight frac stages per well. Again, as I mention, we're seeing production rates exceeding expectations.

Strong rates of returns, 50% plus at current NYMEX strip commodity prices, obviously with most of the commodities hedged over the next several years. We have about 145 remaining 40 acre drilling locations. We're drilling roughly at a rate of about 40 to 50 wells per year with the two rigs. And then we have 1220 acre locations, which will start drilling on 20s at some point in time.

Obviously, with the opening up additional zones, we're starting to see 20 acre drilling with a very, very strong possibility by opening up more Wolfcamp zones, we'll get back to hopefully our original 40 acre projection.

Let me turn it over to Rich to go over the quarter.

Rich Dealy

Thanks, Scott. On slide five, net income for the quarter was 55 million or $1.66 per unit. As Scott mentioned, that did include mark-to-market derivative gains 32 million or $0.97 per unit. Those derivative gains were primarily related to declines in the Ford oil prices relative to our hedge position and so that's what was driving that.

So, excluding mark-to-market derivative gains, we’re $23 million or $0.69 per unit. Looking at the bottom of page five, you can see where our results came in relative to second quarter guidance. We're in the middle of where we would have projected to be and so everything was on target.

Turning to slide six and looking at third quarter guidance, you'll see that production we are raising our guidance there as we continue with the two rig drilling program and expect to see continued production growth. The rest of the items on guidance are all similar to what we had in the first and second quarter with no change.

Turn to slide seven. We're going to talk about PSE's financial position – maintains still a great balance sheet, strong financial position, we have $72 million borrowed at quarter end, $200 million availability under our credit facility and an excellent hedge position through 2013. So, we think that's all of the things that have bode well for the MLP and something we'll continue to maintain as a strong financial position as we move forward.

Read the rest of this transcript for free on seekingalpha.com