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Sanchez Production Partners Touts Eagle Ford Deal; 1Q Results

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   |    Friday,May 15,2015

Sanchez Production Partners LP reported first quarter 2015 results.

Highlights from the report include:

• SPP successfully converted from a limited liability company to a limited partnership in the first quarter 2015 with the overwhelming support of its unitholders and executed its first transaction involving producing assets in the Eagle Ford Shale. The Eagle Ford Acquisition, which closed March 31, 2015, is expected to add an average of 1,000 BOE/D to SPP’s production over the period 2015 through 2019 and initiates the Partnership’s business development relationship with Sanchez Energy Corporation, a company that has a substantial inventory of assets with characteristics favorable to the MLP model.
• Net daily production of 3,596 BOE/D during the first quarter, of which approximately 19% was from oil and liquids and 81% was from natural gas.
• Revenue of $11.9 million, which includes $5.9 million of sales revenue, 46% of which was from oil and liquids sales and 54% of which was from natural gas sales, and $5.6 million from hedge settlements.
• Operating costs, after adjustments for non-recurring items, of $23.20 per BOE, which is a decrease of 8% compared to first quarter 2014 and a decrease of 9% compared to the prior quarter.
• Adjusted EBITDA, after removing non-recurring items, of $4.9 million, which is a decrease of 31% compared to first quarter 2014 production and an increase of 3% compared to the prior quarter.

Gerald F. Willinger, Interim Chief Executive Officer of SPP’s general partner, said: "We anticipate that the work we completed in the first quarter 2015 will bear fruit later this year and for many years to come. During the quarter, SPP completed its conversion from a limited liability company to a limited partnership with the overwhelming support of its unitholders, capping off a process undertaken in the summer of 2014 that has been the cornerstone of our strategic plan for SPP since August 2013. On the heels of completing the conversion, SPP executed its first transaction with Sanchez Energy by acquiring escalating working interests in 59 wellbores in the Eagle Ford Shale that are expected to add approximately 1,000 BOE/D to the Partnership’s average daily production over the period 2015 through 2019. As we noted at the time of the transaction, we believe the Eagle Ford Acquisition sets the stage for other similar and potentially larger transactions in 2015 and beyond, which might also involve the acquisition of integrated midstream assets. We believe a large-scale transaction will be key to recapitalizing SPP and resuming distributions to unitholders. In conjunction with the acquisition, we successfully refinanced SPP’s credit facility, thereby expanding the Partnership’s borrowing base, bank syndicate, and hedge capabilities, and tapped the capital markets to raise equity for SPP for the first time since 2008.

"These initiatives are directly related to and result from our ongoing efforts to further align the Partnership with Sanchez Oil & Gas Corporation. We believe SPP’s relationship with SOG provides the Partnership with a robust operational platform and deal flow, as evidenced by the transaction with Sanchez Energy, a company that has a substantial inventory of assets with characteristics favorable to the MLP model. While SPP’s quarterly results were impacted by some non-recurring costs related to our conversion to a limited partnership and the Eagle Ford Acquisition, we believe the structural benefits of the work completed during the first quarter will better position the Partnership for the next phase of its development. We remain committed to returning value to unitholders, and look forward to the opportunities that lie ahead."

Operating and Financial Results

The Partnership produced 324 MBOE during the first quarter 2015 for average net production of 3,596 BOE/D for the quarter, which is a decrease of 13% compared to first quarter 2014 production and a decrease of 11% compared to the prior quarter. Net oil and liquids production for the first quarter 2015, which accounted for approximately 19% of the Partnership’s total production during the quarter, was 687 barrels per day, which is a decrease of 24% compared to first quarter 2014 production and a decrease of 11% compared to the prior quarter.

Revenue of $11.9 million for the first quarter 2015 includes revenue from sales of $5.9 million, of which approximately 46% was from oil and liquids sales and 54% was from natural gas sales. The balance of the Partnership’s first quarter 2015 revenue came from hedge settlements ($5.6 million), services provided to third parties ($1.2 million), and losses on mark-to-market activities ($0.7 million), which is a non-cash item.

Operating costs, which include lease operating expenses, production taxes and general and administrative expenses, net of certain non-cash items, as reported by the Partnership, averaged $39.63 per BOE in the first quarter 2015. Included in the Partnership’s reported operating costs are general and administrative charges relating to SPP’s conversion from a limited liability company to limited partnership, employee severance, litigation, and the previously announced Eagle Ford Acquisition, which are non-recurring items. Taken together, these non-recurring items totaled approximately $5.3 million, or $16.43 per BOE. Adjusted for this amount, operating costs were $23.20 per BOE in the first quarter 2015, which is a decrease of 8% compared to first quarter 2014 and a decrease of 9% compared to the prior quarter.

The Partnership reported a first quarter 2015 Adjusted EBITDA loss of approximately $0.4 million. After excluding the non-recurring items noted above, Adjusted EBITDA during the first quarter 2015 was $4.9 million, which is a decrease of 31% compared to first quarter 2015 and an increase of 3% compared to the prior quarter. On a GAAP basis, the Partnership recorded a net loss of $90.0 million for the quarter, which includes an impairment charge of $82.9 million related to the Partnership’s legacy assets located in Kansas and Oklahoma.

The Partnership completed no new wells or recompletions in the first quarter 2015.

Credit Facility and Hedging Update

As of May 15, 2015, the Partnership has $106.0 million in debt outstanding under its credit facility, which has a borrowing base of $110.0 million. The Partnership reported cash and cash equivalents totaling $2.2 million as of March 31, 2015.

For the period April 1, 2015 through December 31, 2015, the Partnership has hedged approximately 3.5 Bcf of its natural gas production at an effective NYMEX fixed price of $4.16 per Mcf and 356 MBbl of its crude oil production at an effective NYMEX fixed price of $75.02 per barrel.

Management Update

At the regularly scheduled board meeting in May, the board of directors of the general partner of SPP elected Antonio R. Sanchez, III as Chairman of the Board. Additionally the board elected Patricio Sanchez as Chief Operating Officer and Kirsten Hink as Chief Accounting Officer of the general partner. The sole member of the general partner elected to expand the board to seven members and appointed both Patricio Sanchez and Eduardo Sanchez to join the board effective June 30, 2015.

Patricio Sanchez has served as co-president of SOG since June 2014 and prior to that from April 2010 to June 2014 as Executive Vice President. Mr. Sanchez has also been the managing member of Santerra Holdings, LLC, an oil and gas exploration and production company, since February 2012.

Eduardo Sanchez has served as President and Chief Executive Officer of Sanchez Resources, LLC (“SR”), a privately held oil and gas exploration and production company since 2010. SR holds and operates properties throughout Louisiana and Mississippi, including a substantial position in the core of the Tuscaloosa Marine Shale.

Mrs. Hink has served as Senior Vice President and Chief Accountant Officer of Sanchez Energy Corporation, an independent exploration and production company, since January 2015, and she previously served as SN’s Vice President and Principal Accounting Officer from March 2012. Prior to joining SN, Mrs. Hink served as the Controller of Vanguard Natural Resources, LLC from January 2011 to February 2012. From January 2010 to December 2010, she served as Assistant Controller of Mariner Energy, Inc. She served as the Chief Accounting Officer for Edge Petroleum Corporation from July 2008 through December 2009 and the Vice President and Controller for Edge from October 2003 through July 2008. Prior to that time, she served as Controller of Edge from December 31, 2000 to October 2003 and Assistant Controller of Edge from June 2000 to December 2000.