Jul 29, 2010
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
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 Strawn interval, we're looking at taking some of our wells down deeper to the Strawn 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. Strawn 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 Strawn 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, Strawn 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 Strawn financial position as we move forward.
So why don't I stop there. And we'll open it up for questions.
Operator
(Operator Instructions) We'll take our first question from Mr. Michael Blum with Wells Fargo.
Please go ahead, sir.
Michael Blum – Wells Fargo
Hi, tThanks. Just one general question, there's obviously been a lot of acquisition activity in your backyard over there.
Just curious, if you can comment on, what you're seeing, how active you've been and in fact if you're, just generally what the acquisition market looks like in your view?
Scott Sheffield
Yes. The acquisition market in the Permian basin and primarily the Spraberry has gotten out of hand.
Its way overheated, people are paying $120,000 to $150,000 per flowing barrel metrics. People are paying tremendous deals on acreage.
There's one potential acreage deal we've heard that may have gone from 18,000 to 20,000 per acre recently. So people are desperate in their portfolios for crude oil inventories, there's very few crude oil plays.
The Spraberry, the Eagleford, the Bocken play, the Spraberry is running over 150 rigs, it's one of the hottest oil plays. So it's back to about a 50 year rig high.
And so people are desperate and paying huge prices. So we've neglected in the MLP with the over 1300 drilling locations we've neglected to participate.
MLP doesn't need it. So with drilling costs low and returns over 50%, there's no way anybody can get a 50% return on acquisition.
They're probably lucky to get above 10 the prices they're paying.
Michael Blum – Wells Fargo
Okay. So is it fair to say obviously your plan just to drill up your acreage at this point and within that context and based on the returns that you're getting right now, what are the prospects for a distribution increase?
Scott Sheffield
Yes. We have to – at time, I think it'll probably happen with two rigs.
We'll have to decide whether or not it's worthwhile adding as we test the 20's with 1200 drilling locations, do we increase activity on the rig count at some point in time. Two, those are the major decisions we'll have to make.
The Strawn results are important are we going to get better results like PXD is doing by going to the Strawn, so all of that will reflect obviously into potential distribution increase overtime.
Michael Blum – Wells Fargo
Okay. Great.
Thank you.
Operator
We'll move on to our next question from Leo Mariani with RBC. Please go ahead.
Scott Sheffield
Leo, are you on?
Leo Mariani – RBC
Yes. Sorry about that.
Scott Sheffield
That's all right.
Leo Mariani – RBC
Looks like your second quarter production ramp was not too robust versus first quarter, I am curious how many new wells do you get tied in during 2Q?
Scott Sheffield
It was around six, seven wells that we got tied in Q2. A couple of those came on late in the quarter so just more timing than anything else, Leo.
Leo Mariani – RBC
Okay. Got you.
All right and in terms of, adding deeper Strawn potential, when do you plan to sort of, test it out at the PNC levels, is that ongoing now or is that something that we should see next year?
Scott Sheffield
Yes. We're looking – the teams are, we're looking at their maps and their areas and where the entity PSE holds the Strawn rights and so it’s something that probably most likely be next year.
Leo Mariani – RBC
Okay. Thanks, guys.
Scott Sheffield
Thanks.
Operator
(Operator Instructions) Our next question comes from Steve Tabb with Tocqueville. Please go ahead.
Steve Tabb – Tocqueville
Yes. Hi.
Each quarter you put out your charts and you say planned distribution growth. And so, I think somebody asked about it again today and you sort of answered, with a lot of variables.
When can we really expect an increase? Can we expect it within this year or will it be in the first half of next year?
I know you have – but you plan for a lot of things. What about planning for the distribution increase?
Rich Dealy
Steve, it's Rich. I think we clearly want to increase the distribution.
I think it's a function we talked about in prior quarters of when our coverage ratio gets to the point that we think is the right level, which is probably in that 1.25 to 1.3 level. Right now, when you look at 2011, that's the likely first likely possibility but it's still predicated on what the future commodity prices look like in that point in time.
And so it's still something we'll continue to evaluate, but it's always something that first has a possibility in 2011.
Steve Tabb – Tocqueville
Looking at your number 10 page where you listed the derivative positions. I mean, you list the different categories of swaps and collars and three-way collars and swaps and so forth, but what would you say is the average, hedged price of the total overall of all these items on the page?
Rich Dealy
Well, if you look at the page. For all of the periods included?
Steve Tabb – Tocqueville
Just I'm concerned more about going forward 2011 and 2012 and 2013.
Rich Dealy
I'd say that on average for hedged oil, around $80.
Steve Tabb – Tocqueville
In 2011?
Rich Dealy
Well, ‘11's a little bit higher. But when you combine 2011, 2012 and 2013…
Steve Tabb – Tocqueville
I'd like to go individually.
Rich Dealy
Dollars.
Steve Tabb – Tocqueville
Could you go over it individually?
Rich Dealy
Yes. If you look at 2011, oil probably averages roughly $95, $90 to $95.
2012, oil's going to be around $80 and 2013 around $80.
Steve Tabb – Tocqueville
What about gas and liquid oil and natural – whatever?
Rich Dealy
There you can see NGL's, the hedged volumes there for ‘11 are at roughly $35 for ‘11 and ‘12. And that's 50% of our production, none for 2013.
And then on the gas side, you can see there, for 2011 we're basically $6.65, 2012, $6.45 and 2013, $6.90.
Steve Tabb – Tocqueville
What would you say the barrels of oil equivalent of these three are for each of the years?
Rich Dealy
Well, the percentages are at the bottom, so, 70% to 75% to 60%, for ‘11, ‘12, ‘13 respectively on a dollar basis. I'd have to calculate it and come up with what it is.
I hesitate to speculate off the top of my head. But it's probably, I'll do it anyway.
It's probably around $70 or so.
Steve Tabb – Tocqueville
But for 2011?
Rich Dealy
Yes and probably $60 for ‘12 and ‘13.
Steve Tabb – Tocqueville
I see. Okay.
Thank you.
Rich Dealy
You're welcome.
Operator
(Operator Instructions). Our next question comes from Kevin Smith with Raymond James.
Please go ahead.
Kevin Smith – Raymond James
Hey, gentlemen. Good morning.
I wanted to chat about your Strawn formation and what type of incremental returns could you get and incremental CapEx that could be associated with taking the well down further?
Scott Sheffield
Yes. If you go to our PXD presentation which was done a couple of hours ago, it's costing us only about $100,000 to go about 200 feet from the lower Wolfcamp, since we're already going down the lower Wolfcamp in most of our wells and the initial results we're seeing 60, 70 barrels a day plus increase in production just from those zones.
And right now, we stated that it's on about 30% to 40% of PXD's acreage. And we're just now evaluating what percent of PSE's acreage it's on.
So we'll have a better update in the next three months. As I said we'll probably be testing something late this year, early next year and inside PSE.
Kevin Smith – Raymond James
Fair enough. I don't want to beat a dead horse but it sounds like you get about three years of drilling inventory on 40 acres spacing at this point before you moved to 20 acres spacing.
Are you comfortable with transitioning from 40 to 20 without doing any sort of acquisitions? Or do you plan on trying to get more 40 acres?
Scott Sheffield
Our goal is just – We're going to sprinkle in some 20 acre drilling over that three-year time frame. Also, PXD is drilling what 50 wells this year.
Rich Dealy
20, I think, 20 additional.
Scott Sheffield
Yes. PXD did 25 in ‘08 and we're doing another 20, 25 this year.
So the goal is not to just jump from 40's to 20's. We'll have sprinkled in some 20's and open up all zones to get a favorite type curve.
And if for some reason we feel like we need an acquisition, I mentioned the acquisition market ultra expensive right now. Whether or not that comes down is hard to tell.
What we need to do is look at – We're evaluating some acquisition that are strictly prove develop producing. If we can find some of those that don't have upsides then you might be able to buy it at a much lower price.
Obviously, those are the kinds we'll look at or continue to look at, something that's on a 4% to 6% to 8% decline but no upside. Those are the type of deals that we should be able to make in this environment if we need to be.
But right now, we don't see it. 'We have confidence in the 20s and the 40's and really probably not see additional acquisitions or the need for additional acquisitions.
Kevin Smith – Raymond James
Fair enough. When do you expect to drill at PSE levels at 20 acres?
Scott Sheffield
At PSE? I would expect to see some next year.
Kevin Smith – Raymond James
All right. And what type of working any growth rate?
I know you guys hit on this before? But now with the new stuff you're seeing and especially with the rate of returns, what type of organic growth do you think is a good target rate using two rigs?
Scott Sheffield
It's probably in the 5% range, year-over-year from last year. This year it's bigger because of the acquisition that was in there.
But going forward is probably in that 5% range.
Kevin Smith – Raymond James
Thank you very much, gentlemen.
Operator
(Operator Instructions). And with no questions in queue, I would like to turn the call back over to Mr.
Scott Sheffield for any closing remarks.
Scott Sheffield
Again, thanks for participating and please give us a call if you've got any further questions and look forward to talking to everyone during the next quarter. Thank you.
Operator
Ladies and gentlemen, that concludes today's presentation. Thank you for your participation.