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Despite Infrastructure Woes, Memorial's 3Q Production Rises

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Memorial Production Partners LP reported its operating and financial results for the three and nine months ended September 30, 2014.

Key Highlights:

• Average daily production increased 30% to 208.6 MMcfe for the third quarter 2014, compared to 160.9 MMcfe for the third quarter 2013.
• Adjusted EBITDA increased 54% to $90.0 million for the third quarter 2014, compared to $58.6 million for the third quarter 2013.
• Third quarter cash distribution of $0.55 per unit, or $2.20 per unit on an annualized basis, represents a 16% increase over the annualized minimum quarterly distribution of $1.90 per unit.
• On July 1, 2014, completed the partnership's largest acquisition since IPO with the purchase of certain oil producing properties in Wyoming for an adjusted purchase price of approximately $911.7 million, including estimated post-closing adjustments. On October 1, 2014, completed the acquisition of oil and gas properties in Colorado from Memorial Resource Development Corp. for $15 million.
• Closed a public offering of 9,890,000 common units in July at $22.25 per unit for net proceeds of approximately $220.0 million. Also, closed a public offering of 14,950,000 common units in September at $22.29 per unit for net proceeds of approximately $321.6 million.
• Raised net proceeds of approximately $484.9 million, after financing costs, through a senior unsecured notes offering in July; proceeds were used to repay borrowings outstanding under MEMP's revolving credit facility.
• Revolver availability of approximately $1.1 billion as of November 3, 2014.
• Strengthened commodity hedge portfolio, with 94% of current expected natural gas production hedged through year-end 2014 and approximately 92% hedged in 2015 and 2016 (82% hedged through 2019), and 87% of crude oil production hedged through year-end 2014 and approximately 93% hedged in 2015 and 2016 (83% hedged through 2019).
• 100% hedged to the appropriate basis differential for natural gas and crude oil through 2015; 93% hedged to the appropriate basis differential for natural gas and 100% hedged to the appropriate basis differential for crude oil in 2016.

John A. Weinzierl, Chairman and CEO, commented: "MEMP experienced a challenging third quarter as a result of infrastructure curtailments and lower than expected returns on our growth capital program. Looking ahead, we are excited about our position in the market given our long-lived asset base, a best in class hedge book and significant liquidity on our revolver. Additionally, we are excited to announce the closing of another drop down acquisition from our parent, Memorial Resource Development Corp. These producing properties are complementary to our existing operations in the Rockies and further demonstrate alignment with our sponsor."

William J. "Bill" Scarff, President, added: "MEMP has had significant growth since its IPO in December 2011 through thirteen acquisitions for approximately $2.4 billion. These acquisitions have expanded our asset base, reduced our exposure to any one basin, and diversified our commodity mix. Our balanced asset base of high margin, low decline properties, along with a significant hedge book, gives us confidence we will be able to grow coverage and maintain distributions going forward."

Review of Third Quarter 2014

• Average daily production increased 30% to 208.6 MMcfe for the third quarter 2014, compared to 160.9 MMcfe for the third quarter 2013.
• Crude oil, natural gas and NGLs sales, excluding commodity derivatives settlements, were $145.8 million in the third quarter of 2014, compared to $92.6 million in the third quarter of 2013. On a Mcfe basis, crude oil, natural gas and NGLs represented 31%, 52% and 17%, respectively, of sales volumes. On a revenue basis, crude oil, natural gas and NGLs sales represented 61%, 25% and 14%, respectively, of total oil and natural gas revenues.
• Average realized prices, excluding commodity derivatives settlements:

• Averaged realized prices, including commodity derivatives settlements, were $7.65 per Mcfe in the third quarter of 2014, compared to $6.50 per Mcfe in the third quarter of 2013.
• Adjusted EBITDA increased 54% to $90.0 million for the third quarter of 2014 from $58.6 million for the third quarter of 2013. The increase was primarily due to increased production and sales volumes from third party acquisitions.
• Distributable cash flow ⁽¹⁾ available to limited partners for the third quarter of 2014 was $38.8 million, or $0.53 per weighted average unit outstanding during the third quarter, providing a coverage ratio of 0.81x, which includes the impact of both third quarter equity offerings.
• Total lease operating expenses were $2.05 per Mcfe in the third quarter of 2014 compared to $1.58 per Mcfe in the third quarter of 2013. The increase was primarily due to a weighted increase in production from oil properties, which generally incur higher lease operating expenses on a per unit basis than natural gas properties, and increased workover and maintenance expenses on the Wyoming properties.
• Production and ad valorem taxes were $0.55 per Mcfe in the third quarter of 2014 compared to $0.41 per Mcfe in the third quarter of 2013. The increase was primarily due to higher taxes related to MEMP's oil producing properties in Wyoming.
• General and administrative expenses ("G&A") were $11.2 million for the third quarter of 2014 compared to $11.9 million for the third quarter of 2013. The $11.2 million included $2.4 million and $0.9 million, respectively, of unit-based compensation expense and acquisition related costs.
• Gains of $156.4 million on commodity derivatives were recorded during the third quarter of 2014, which included $155.5 million of non-cash gains from the change in fair value of hedge positions primarily due to decreases in the future prices of crude oil and natural gas. Cash settlements received on commodity derivatives were $0.9 million, or $0.05 per Mcfe. Total hedged production in the third quarter of 2014 was 17.8 Bcfe, or 93% of third quarter production of 19.2 Bcfe, at an average hedge price of $8.47 per Mcfe.
• Net interest expense was $26.5 million during the third quarter of 2014, including $1.8 million of non-cash amortization of deferred financing fees and accretion of senior notes discount.
• Total capital expenditures for the third quarter of 2014 were $85.8 million, including maintenance capital expenditures of $25.7 million.

Operations Update

MEMP's third quarter production volumes were negatively impacted by infrastructure curtailments and lower than expected returns on some of its growth capital projects.

In East Texas / North Louisiana, MEMP had a 100% success rate on new drills, but underwent an extended cased hole fishing operation on a new completion located on a dual horizontal Cotton Valley well pad in East Texas that delayed first production from both wells until early October. In addition, several of the new completions this quarter were infield horizontals that were backfilled within existing wells on tighter spacing than what MEMP has executed in the past. Going forward, MEMP has revised its fourth quarter and forward new drill projects, as well as its frac procedures to mitigate these issues.

At the Bairoil CO2 flood project in the Rockies, production volumes were significantly impacted by four compressor units going down throughout the quarter for unscheduled maintenance and repairs. The maintenance work has been completed, with the exception of one backup unit that is currently under repair. As a result of these maintenance efforts and several flood expansion projects, current monthly CO2 and water injection rates are averaging at their highest levels for 2014. Other Bairoil facility improvements and well operations executed during the third quarter have positively impacted production results with October daily oil rates running approximately five percent higher than the third quarter average.

MEMP's Permian properties experienced less than anticipated third quarter production results due to underperformance on a number of new drill capex projects, primarily as a result of higher than anticipated water cuts. In addition, MEMP experienced extended production shut ins in some field areas due to unusually heavy rains and the associated flooding. To a lesser extent, production was further impacted by contractor scheduling and electrical utility delays. Going forward, MEMP projects a less active Permian drilling program and capital will be primarily focused on recompletions, workover and facilities projects, and general operational improvements in the area. PDP production decline for this area projects to be approximately 10% over the next ten years.

At the Beta Field, MEMP has now successfully executed six consecutive gravel pack operations with two new drill completions turned to production during the quarter. The latest two wells were successfully drilled and completed below budgeted capex and are producing approximately seventy-five percent above budgeted rates, but were turned to sales behind schedule. These latest completions have also resulted in two of the top three producing wells in the field. MEMP is currently drilling an additional well and expects to turn this well to production in November. MEMP remains enthusiastic about its ongoing development of this asset, as it continues to take the field to ever increasing monthly production rates since its acquisition.

MEMP's other operating areas, which are comprised of low-decline mature assets, continue to deliver expected production volumes, and the operations of those assets are going as planned. MEMP anticipates improvement in production rates for its properties across all basins throughout the fourth quarter 2014 and into 2015, as it continues to evaluate and improve operations across all operating areas.

Updated Full-Year 2014 Guidance

In connection with the current operations forecast, MEMP is revising its 2014 full-year guidance. It reflects the impact of forecasted growth capital spending as well as the impact of all announced acquisitions. A summary of the guidance, assuming no additional acquisitions, is presented below:

Acquisitions Update

On July 1, 2014, MEMP completed the acquisition of oil producing properties in Wyoming for approximately $911.7 million. The acquired properties consist of established CO2 floods located in two fields in the Bairoil Complex in Sweetwater and Carbon Counties in Wyoming. The Bairoil Complex properties are 100% operated with an average working and net revenue interest of 100% and 88%, respectively. The properties cover approximately 6,800 gross (6,800 net) acres and include 140 producing wells and 166 injection wells.

On October 1, 2014, MEMP closed an acquisition from MRD in the Rockies for a purchase price of $15 million. The acquired properties are located in Weld County, Colorado, in the Wattenberg Field, include interest in 74 gross wells and are 100% non-operated. Estimated third quarter 2014 net production from the properties was approximately 2.9 MMcfe/d, and estimated net proved reserves were 4.7 Bcfe (100% proved developed producing and 63% liquids / 37% gas). Terms of the transaction were approved by the Board of Directors of the general partner of MEMP and by the Board's conflicts committee, which is comprised entirely of independent directors.

Hedging Summary

Consistent with its hedging policy, MEMP strengthened its overall hedge portfolio and executed additional hedges on a portion of its expected oil and natural gas volumes through 2019. MEMP has entered into natural gas, crude oil and NGL derivatives contracts covering the period from 2014 through December 2019. MEMP's hedging policy is designed to reduce the impact to cash flows from commodity price and interest rate volatility.

The following table reflects the volumes of MEMP's production covered by commodity derivative contracts and the average fixed or floor prices at which production is hedged. Targeted average net production estimate represents the production required to reach the lower boundary of the annual production range in MEMP's 2014 full year guidance. All of MEMP's hedges are costless, fixed-price swaps and collars.

Financial Update

MEMP amended its revolving credit facility in October 2014 to, among other things, increase the borrowing base from $1.315 billion to $1.44 billion. Total debt outstanding as of November 3, 2014, was $1.55 billion, including $348 million of debt outstanding under MEMP's revolving credit facility and $1.2 billion of senior notes. Pro forma for the increase, the revolving credit facility had $1.1 billion of availability, which management believes will provide ample financial flexibility to continue pursuing MEMP's acquisition growth strategy.

MEMP has also filed a registration statement on Form S-3 with the U.S. Securities and Exchange Commission under which it may from time to time offer and sell up to $250 million of common units through an at the market ("ATM") equity program in the future, subject to market conditions and other factors.

In September 2014, Standard and Poor's upgraded its corporate credit rating of MEMP to B+ / B-.