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Pioneer Southwest Energy Partners L.P. (PSE)

Q4 2011 Earnings Call

February 7, 2012 12:00 PM ET

Executives

Frank Hopkins – SVP, IR

Scott Sheffield – Chairman and CEO

Rich Dealy – EVP, CFO and Treasurer

Analysts

Kevin Smith – Raymond James

Michael Blum – Wells Fargo

T. J. Schultz – RBC Capital Markets

Stephen Tabb – Tocqueville Asset Management

Presentation

Operator

Ladies and gentlemen, please stand by. We are about to begin. Good day, everyone, and welcome to Pioneer Southwest Energy’s Fourth 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, Senior 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 Investors, then select Investor Presentations. This call is being recorded.

A replay of the call will be archived on the internet site through February 28. 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 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, I would like to turn the call over to Pioneer Southwest’s Senior Vice President of Investor Relations, Mr. Frank Hopkins. Please go ahead, sir.

Frank Hopkins

Thanks, Rufus. 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 fourth quarter and update you on PSE’s expanding drilling program in the Spraberry field. Rich will then cover the fourth-quarter financials in more detail and provide earnings guidance for the first quarter. And after that, we’ll open up the call for your questions.

So with that, I’ll turn the call over to Scott.

Scott Sheffield

Thanks, Frank. Good morning. Starting on a highlight, on slide number 3, we had fourth quarter adjusted income of $26 million or $0.77 per unit. But it does exclude some unrealized mark-to-market derivative losses of $33 million or $0.98 per unit. Fourth-quarter production averaged about 7,000 barrels of oil equivalent per day, down about 6% versus the third quarter, primarily due to the fact that most of our wells were placed on production towards the latter part of the fourth quarter. We also had some weather-related downtime, including a lighting strike at a large tank battery. If it weren’t for these items, production would have been similar to the third quarter without these items. Rich will talk about the guidance coming up in his presentation.

11 wells placed on production in the fourth quarter, most of that towards the end, as I mentioned. From the 2-rig program, 8 additional wells were awaiting completion at year-end. We continued to see excellent results from deepening to the Lower Wolfcamp and Strawn intervals.

We had cash flow from operations of $28 million. Again, we announced a distribution of $0.51 per outstanding unit for fourth quarter, payable on February 10 to unitholders as of record date February 3 – equates to $2.04 per common unit on an annualized basis.

Reported year-end proved reserves are 51 million barrels of oil equivalent.

On slide number 4, going into the 2012 drilling program, we expect to drill 55 to 60 wells with a 3-rig program. Capital expenditure is expected to be about $110 million to $120 million, including facilities. Essentially, almost all the wells in 2012 are expected to be drilled at the Strawn formation, with about a 30,000-barrel pickup in the reserve potential in the EUR. But then 35% of the 2012 are expected going down to the Atoka – deeper Atoka interval. We expect it to add somewhere around 50,000 to 70,000 per barrels on top of our typical Wolfcamp or Strawn well.

Forecasting production growth of 10% in 2012 compared to 2011. Again reminding you, on the inventory, we have 100 remaining 40-acre locations. We have close to about 2 years' inventory. And if you read the PXD transcript over the last several quarters, including this recent one, this morning we’re still continuing to see excellent performance on 20-acre drilling, essentially achieving the same results as a 40-acre type well. The current average well costs about $1.8 million, average before-tax IR is somewhere between 45% and 50%, assuming flat commodity prices of $100 oil and $4 gas.

Turning over to Rich for financial highlights.

Rich Dealy

Thanks, Scott. I will start on slide 5. As Scott mentioned, we had a net loss of $7 million or $0.21 per common unit; that did include derivative losses associated with the increase in futures oil prices. And so adjusted for that item, income was $26 million or $0.77 per common unit.

At the bottom of the page there, you can see our Q4 guidance we put out in November and our results as Scott talked about production. If you look at the other items, all within guidance range. DD&A is towards the upper end of guidance, mainly because we continue to drill proved and developed locations. So adding that basis, everything else is consistent with what we forecast.

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