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Pioneer Southwest Energy Partners L.P. (PSE)

Q3 2012 Earnings Call

November 1, 2012 12:00 pm ET

Executives

Scott Sheffield - Chairman & CEO

Rich Dealy - EVP & CFO

Frank Hopkins - SVP, IR

Analysts

Kevin Smith - Raymond James

Ipsit Mohanty - Bank of America Merrill Lynch

John Razzano - RBC Capital Markets

Bernard Dolman - Private Investor

Presentation

Operator

Welcome to 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, 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 Investors Presentations. This call is being reported. A replay of the call will be archived on the Internet site through November 26th.

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, Frank Hopkins. Please go ahead sir.

Frank Hopkins

Good day everyone, and thank you for joining us. I want to first give a shout out to all of our friends on the East Coast and especially those in the New York City area, please continue to be safe and we hope you're all able to recover quickly from the devastating storm that impacted your area earlier this week.

Now 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 of 2012. He will then update you on PSE's drilling program in the Spraberry field and our recent acquisition made by the partnership. Rich will then cover the third quarter financials in more detail and provide earnings guidance for the fourth quarter. 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. Highlights on slide number 3. PSE had third quarter adjusted income of $17 million or $0.47 per unit. This does exclude unrealized mark-to-market derivative losses of $11 million after tax or $0.32 per common unit.

We reported third production averaged about almost 7700 barrels oil equivalent per day, up 8% versus second quarter. We benefited from 215 barrels a day from partial NGL, natural gas liquid inventory drawdown at Mont Belvieu, offset by a production loss of 450 barrels a day equivalent due to our continuing third-party fractionations capacity constraints at Mont Belvieu. We do have remaining NGL inventory about 8400 barrels expected to be drawdown in the fourth quarter, but that could be offset by line fill requirements for a new Loan Star natural gas line, liquids line in fourth quarter.

We do have Ethane rejection going on at Midkiff/Benedum related to third-party NGL fractionation capacity constraints at Mont Belvieu resolved in early fourth quarter, and also Spraberry gas processing facilities are nearing capacity in the fourth quarter due to greater than anticipated industry production growth both from us and other third-party.

To solve that they just have a major expansion that will be on late March/early April of a $100 million a day, a second $100 million a day will come on about the summer time, and then we are in the process of building another $200 million a day to come on in 2014.

Going to Slide number 4. We did complete, we have six new wells, four wells recompleted were placed on production in the third quarter, total of 29 wells and four recompletions year-to-date. Six additional wells are waiting completion at the end of third quarter. We continue to see tremendous results in benefit from going deeper to Wolfcamp, Strawn and Atoka intervals.

We expect to generate full year production growth about 8% compared to '11. Cash flow from operations at $25 million, and distribution of $0.52 per unit for the third quarter payable on November 9th to unitholders of record on November 2nd, equates to $2.08 per common unit on annualized basis.

We did have a important acquisition and we purchased 94% working interest in 3,000 gross acres in Midland County for $6.3 million, includes all deep rights, Spraberry, Dean, Wolfcamp, Strawn, and Atoka. The sector is up for 75 40-acre vertical locations, 75 20-acre vertical locations. We do have horizontal Wolfcamp Shale potential, where PHD is drawing fairly close to this existing acreage and a couple of wells that will announce sometime in the month of February in 2013 for our results. That could setup obviously several horizontal Wolfcamp Shale locations inside PSE. We expect to move two PSE rigs to this acreage during the fourth quarter.

In Slide number 5, on 2012 drilling program. We expect to drill, recomplete 50 wells with 3-rig programs. We spent about a $110 million to $120 million at capital including facilities, 85% of the acreage position has Strawn potential, and since, the older wells drilling in 2012, will be drilled to the Strawn, and we're adding 30,000 barrels of oil equivalent to the EUR estimated ultimate recovery. 35% of the 2012 wells are expected to be drilled to the deeper Atoka interval, where we're adding 50,000 to 70,000 barrels of oil equivalent, and 70% of the acreage has Atoka potential in PSE. We have four 20-acre down spaced wells on production. Results to-date are very similar to our type curve for a Lower Wolfcamp well, EUR of 140,000 barrels of oil equivalent. We have current inventory of 155 on remaining 40 acres and almost 1300, 20-acre locations.

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