EROC

Eagle Rock Energy Partners, L.P. (EROC)

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Eagle Rock Energy Partners, L.P. (EROC)

Q2 2008 Earnings Call Transcript

August 6, 2008 10:00 am ET

Executives

Elizabeth Wilkinson – VP of IR and Treasurer

Joe Mills – Chairman and CEO

Darin Holderness – SVP and CFO

Analysts

Darren Horowitz – Raymond James

Helen Roe [ph]

Ron Londe – Wachovia Capital Markets

David Micheler [ph]

Presentation

Operator

Good day ladies and gentlemen and welcome to the second quarter Eagle Rock Energy Partners, L.P. earnings conference call. My name is Jasmine and I will be your operator for today. At this time all lines will be in a listen-only mode. We will conduct a question-and-answer session towards the end of the conference. If you wish to ask a question, please press star followed by one. If at any time during the call you require assistance, please press star followed by zero and the operator will be happy to assist you.

I would now like to turn the presentation over to your host for today’s call Ms. Elizabeth Wilkinson, Vice President of Investor Relations and Treasurer. You may proceed ma’am.

Elizabeth Wilkinson

Thank you, Jasmine. Good morning and thank you for joining us today for our conference call announcing Eagle Rock’s second quarter 2008 results. Joining me today are Joe Mills, our Chairman and Chief Executive Officer; Darin Holderness, Senior Vice President and Chief Financial Officer; Alfredo Garcia, Senior Vice President, Corporate Development; Chuck Boettcher, Senior Vice President, General Counsel and Secretary; Steve Hendrickson, Senior Vice President of Technical Evaluations; Joe Schimelpfening, Senior Vice President, E&P Operations and Development; and Bill Puckett, Senior Vice President, Midstream Commercial Operations.

Our remarks and answers to questions today may refer to or contain certain forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. In accordance to Safe Harbor provisions the Private Securities Reform Act of 1995, Eagle Rock Energy Partners has included in its SEC filings cautionary language identifying important factors but not necessarily all factors that could cause future outcomes to be materially different from those set forth in the forward-looking statements. A more complete discussion of these risks is included in our Securities filings which are publicly available on the EDGAR systems.

We issued our second quarter 2008 earnings release yesterday after market close. You may access that release through our Web site at www.eaglerockenergy.com. In addition, a replay of this call will be available today on our Web site shortly after the conclusion of this call. When we begin the Q&A, please limit your question to one follow-up and then rejoin the queue. And with that, I will turn the call over to Joe Mills for his remarks on the quarter.

Joe Mills

Thank you, Elizabeth. Good morning ladies and gentlemen, I appreciate you joining us this morning for a discussion of our second quarter 2008 results. We did publish our earnings release after the markets closed yesterday and we are continuing 2008 with another record quarter.

Adjusted EBITDA in the second quarter totaled $57.5 million which is 9% over our first quarter results and a 160% improvement as compared to our second quarter 2007 results. Distributable cash flow for the second quarter was $36.7 million after excluding some non-recurring items which represents 122% coverage of the second quarter 2008 distribution that we will pay on August 14, 2008 to all unit holders of record as of August 8. We announced last week that we will increase the distribution paid per unit to $0.41 which on an annualized basis is equivalent to a distribution rate of $1.64 per unit. This increase represents a 2.5% increase over our first quarter distribution. These results reflect the impact of the acquisitions we have made, the organic growth projects we have completed, and our commitment to improving our operational and financial effectiveness. We will now focus on some of the operational and financial highlights of our three lines of business for the quarter.

Our Midstream business contributed a solid $32.5 million to operating income for the quarter. This is up 42% as compared to the first quarter and was primarily driven by higher realized prices received for our condensate, NGLs, and equity gas as well as a 4.5% improvement in our daily gathering volumes. Our Midstream business averaged 414 MMcf of daily gathering volumes as compared to 396 MMcf/d in the first quarter. As we compare this to the second quarter of last year, we are up an impressive 229% in our operating income and daily gathering volumes are up 23%. These improvements are a reflection of the strides we have made in operational efficiencies executing on organic growth projects, the full impact of our laser acquisition that we completed in May of last year, improved commodity prices as well as improved drilling results by our key customers. Our daily gathering volumes are back in line with our first quarter 2007 averages and we are very optimistic we will see volumes grow for the second half of this year.

As we drill down to the three Midstream segment results, our East Texas/Louisiana segment enjoyed its best quarter ever. Daily gathering volumes averaged 180 MMcf/d up 10% as compared to our first quarter throughput and 37% higher as compared to last year. Operating income increased by 77% from first quarter to total $7.1 million in the second quarter. Specifically impacting these volumes and revenues are the continued drilling success of various operators in the expanding Austin Chalk play of Polk, Tyler, and Jasper counties Texas. The horizontal drilling of this expanding play is resulting in some very impressive initial production rates. We have seen wells average 20 MMcf/d to 25 MMcf/d in initial production rates and this is contributing to an average of seven to eight rigs running in this area and we are very well positioned to capture these volumes in our gathering systems and processing facility. Last year we completed the installation of our Tyler County pipeline project and we are very pleased with the results today. Last fall we did expand the capacity of this pipeline by de-bottlenecking the system to improve the throughput from 40 MMcf/d to 50 MMcf/d and we are now evaluating further expansion and de-bottlenecks to expand the capacity to approximately 65 MMcf/d. We are seeing drilling activity moving into Newton County, Texas and moving towards the Louisiana border and with the producers’ continued drilling success in this play; we will be evaluating further expansions to our capacity as well as to our Brookeland processing facility in last 2008 or early 2009. This will require organic growth capital expenditures for our East Texas/Louisiana segment.

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