Item 1.
Financial Statements
PIONEER SOUTHWEST ENERGY PARTNERS L.P.
CONSOLIDATED BALANCE SHEETS
(in thousands, except unit amounts)
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2013
|
|
December 31, 2012
|
|
|
(Unaudited)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
Cash
|
|
$
|
4,813
|
|
|
$
|
1,601
|
|
Accounts receivable:
|
|
|
|
|
Trade
|
|
22,188
|
|
|
15,651
|
|
Due from affiliates
|
|
391
|
|
|
—
|
|
Inventories
|
|
1,307
|
|
|
1,388
|
|
Prepaid expenses
|
|
148
|
|
|
228
|
|
Deferred income taxes
|
|
96
|
|
|
89
|
|
Derivatives
|
|
5,238
|
|
|
4,553
|
|
Total current assets
|
|
34,181
|
|
|
23,510
|
|
Property, plant and equipment, at cost:
|
|
|
|
|
Oil and gas properties, using the successful efforts method of accounting:
|
|
|
|
|
Proved properties
|
|
664,765
|
|
|
556,915
|
|
Unproved properties
|
|
6,727
|
|
|
5,682
|
|
Accumulated depletion, depreciation and amortization
|
|
(187,253
|
)
|
|
(163,542
|
)
|
Total property, plant and equipment
|
|
484,239
|
|
|
399,055
|
|
Derivatives
|
|
3,055
|
|
|
7,227
|
|
Other assets, net
|
|
904
|
|
|
1,097
|
|
|
|
$
|
522,379
|
|
|
$
|
430,889
|
|
LIABILITIES AND PARTNERS' EQUITY
|
Current liabilities:
|
|
|
|
|
Accounts payable:
|
|
|
|
|
Trade
|
|
$
|
33,982
|
|
|
$
|
15,557
|
|
Due to affiliates
|
|
—
|
|
|
1,277
|
|
Interest payable
|
|
11
|
|
|
9
|
|
Income taxes payable to affiliate
|
|
162
|
|
|
70
|
|
Derivatives
|
|
4,795
|
|
|
13,390
|
|
Asset retirement obligations
|
|
600
|
|
|
900
|
|
Other current liabilities
|
|
109
|
|
|
146
|
|
Total current liabilities
|
|
39,659
|
|
|
31,349
|
|
Long-term debt
|
|
201,000
|
|
|
126,000
|
|
Derivatives
|
|
—
|
|
|
150
|
|
Deferred income taxes
|
|
879
|
|
|
156
|
|
Asset retirement obligations
|
|
11,087
|
|
|
11,201
|
|
Other liabilities
|
|
355
|
|
|
400
|
|
Partners' equity:
|
|
|
|
|
General partner's interest - 35,750 general partner units issued and outstanding
|
|
423
|
|
|
416
|
|
Limited partners' interest - 35,713,700 common units issued and outstanding
|
|
268,976
|
|
|
261,217
|
|
Total partners' equity
|
|
269,399
|
|
|
261,633
|
|
Commitments and contingencies
|
|
|
|
|
|
|
$
|
522,379
|
|
|
$
|
430,889
|
|
The financial information included as of
September 30, 2013
has been prepared by management
without audit by independent registered public accountants.
The accompanying notes are an integral part of these consolidated financial statements.
PIONEER SOUTHWEST ENERGY PARTNERS L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per unit data)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
Revenues:
|
|
|
|
|
|
|
|
|
Oil and gas
|
|
$
|
63,013
|
|
|
$
|
46,385
|
|
|
$
|
163,832
|
|
|
$
|
139,655
|
|
Derivative gains (losses), net
|
|
(11,380
|
)
|
|
(13,592
|
)
|
|
(7,230
|
)
|
|
18,176
|
|
|
|
51,633
|
|
|
32,793
|
|
|
156,602
|
|
|
157,831
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
Oil and gas production
|
|
16,704
|
|
|
14,468
|
|
|
44,718
|
|
|
36,487
|
|
Production and ad valorem taxes
|
|
4,793
|
|
|
3,974
|
|
|
13,273
|
|
|
11,801
|
|
Depletion, depreciation and amortization
|
|
8,886
|
|
|
5,771
|
|
|
23,711
|
|
|
15,589
|
|
General and administrative
|
|
1,950
|
|
|
1,888
|
|
|
5,691
|
|
|
5,548
|
|
Accretion of discount on asset retirement obligations
|
|
209
|
|
|
189
|
|
|
623
|
|
|
567
|
|
Interest
|
|
1,027
|
|
|
638
|
|
|
2,848
|
|
|
1,456
|
|
Other
|
|
2,058
|
|
|
221
|
|
|
2,058
|
|
|
969
|
|
|
|
35,627
|
|
|
27,149
|
|
|
92,922
|
|
|
72,417
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
16,006
|
|
|
5,644
|
|
|
63,680
|
|
|
85,414
|
|
Income tax provision
|
|
(249
|
)
|
|
(111
|
)
|
|
(835
|
)
|
|
(1,062
|
)
|
Net income
|
|
$
|
15,757
|
|
|
$
|
5,533
|
|
|
$
|
62,845
|
|
|
$
|
84,352
|
|
|
|
|
|
|
|
|
|
|
Allocation of net income:
|
|
|
|
|
|
|
|
|
General partner's interest
|
|
$
|
16
|
|
|
$
|
6
|
|
|
$
|
63
|
|
|
$
|
84
|
|
Limited partners' interest
|
|
15,689
|
|
|
5,474
|
|
|
62,631
|
|
|
84,058
|
|
Unvested participating securities' interest
|
|
52
|
|
|
53
|
|
|
151
|
|
|
210
|
|
Net income
|
|
$
|
15,757
|
|
|
$
|
5,533
|
|
|
$
|
62,845
|
|
|
$
|
84,352
|
|
|
|
|
|
|
|
|
|
|
Net income per common unit - basic and diluted
|
|
$
|
0.44
|
|
|
$
|
0.15
|
|
|
$
|
1.75
|
|
|
$
|
2.35
|
|
|
|
|
|
|
|
|
|
|
Weighted average common units outstanding—basic and diluted
|
|
35,714
|
|
|
35,714
|
|
|
35,714
|
|
|
35,714
|
|
|
|
|
|
|
|
|
|
|
Distributions declared per common unit
|
|
$
|
0.52
|
|
|
$
|
0.52
|
|
|
$
|
1.56
|
|
|
$
|
1.55
|
|
The financial information included herein has been prepared by management
without audit by independent registered public accountants.
The accompanying notes are an integral part of these consolidated financial statements.
PIONEER SOUTHWEST ENERGY PARTNERS L.P.
CONSOLIDATED STATEMENT OF PARTNERS' EQUITY
(in thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
Partner Units
Outstanding
|
|
Limited
Partner Units
Outstanding
|
|
General
Partner's
Equity
|
|
Limited
Partners'
Equity
|
|
Total
Partners'
Equity
|
Balance as of December 31, 2012
|
|
36
|
|
|
35,714
|
|
|
$
|
416
|
|
|
$
|
261,217
|
|
|
$
|
261,633
|
|
Cash distributions declared ($1.56 per unit)
|
|
—
|
|
|
—
|
|
|
(56
|
)
|
|
(55,713
|
)
|
|
(55,769
|
)
|
Net income
|
|
—
|
|
|
—
|
|
|
63
|
|
|
62,782
|
|
|
62,845
|
|
Contributions of unit-based services
|
|
—
|
|
|
—
|
|
|
—
|
|
|
690
|
|
|
690
|
|
Balance as of September 30, 2013
|
|
36
|
|
|
35,714
|
|
|
$
|
423
|
|
|
$
|
268,976
|
|
|
$
|
269,399
|
|
The financial information included herein has been prepared by management
without audit by independent registered public accountants.
The accompanying notes are an integral part of these consolidated financial statements.
PIONEER SOUTHWEST ENERGY PARTNERS L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
September 30,
|
|
|
2013
|
|
2012
|
Cash flows from operating activities:
|
|
|
|
|
Net income
|
|
$
|
62,845
|
|
|
$
|
84,352
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
Depletion, depreciation and amortization
|
|
23,711
|
|
|
15,589
|
|
Deferred income taxes
|
|
716
|
|
|
957
|
|
Accretion of discount on asset retirement obligations
|
|
623
|
|
|
567
|
|
Amortization of debt related costs
|
|
194
|
|
|
174
|
|
Amortization of unit-based compensation
|
|
690
|
|
|
639
|
|
Commodity derivative related activity
|
|
(5,258
|
)
|
|
(28,700
|
)
|
Other noncash expense
|
|
—
|
|
|
969
|
|
Change in operating assets and liabilities:
|
|
|
|
|
Accounts receivable
|
|
(6,928
|
)
|
|
1,531
|
|
Inventories
|
|
81
|
|
|
(353
|
)
|
Prepaid expenses
|
|
80
|
|
|
(91
|
)
|
Accounts payable
|
|
6,735
|
|
|
6,241
|
|
Interest payable
|
|
2
|
|
|
127
|
|
Income taxes payable to affiliate
|
|
92
|
|
|
(430
|
)
|
Asset retirement obligations
|
|
(1,325
|
)
|
|
(1,477
|
)
|
Other current liabilities
|
|
(82
|
)
|
|
(296
|
)
|
Net cash provided by operating activities
|
|
82,176
|
|
|
79,799
|
|
Cash flows from investing activities:
|
|
|
|
|
Additions to oil and gas properties
|
|
(98,195
|
)
|
|
(76,778
|
)
|
Net cash used in investing activities
|
|
(98,195
|
)
|
|
(76,778
|
)
|
Cash flows from financing activities:
|
|
|
|
|
Borrowings under credit facility
|
|
75,000
|
|
|
107,000
|
|
Principal payments on credit facility
|
|
—
|
|
|
(51,000
|
)
|
Payment of financing fees
|
|
—
|
|
|
(1,291
|
)
|
Distributions to unitholders
|
|
(55,769
|
)
|
|
(55,412
|
)
|
Net cash provided by (used in) financing activities
|
|
19,231
|
|
|
(703
|
)
|
Net increase in cash
|
|
3,212
|
|
|
2,318
|
|
Cash, beginning of period
|
|
1,601
|
|
|
1,176
|
|
Cash, end of period
|
|
$
|
4,813
|
|
|
$
|
3,494
|
|
The financial information included herein has been prepared by management
without audit by independent registered public accountants.
The accompanying notes are an integral part of these consolidated financial statements.
PIONEER SOUTHWEST ENERGY PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2013
(Unaudited)
NOTE A. Partnership and Nature of Operations
Pioneer Southwest Energy Partners L.P. (the "Partnership") is a Delaware limited partnership that was formed in June 2007 by Pioneer Natural Resources Company (together with its subsidiaries, "Pioneer") to own, acquire, explore and develop oil and gas assets in the Partnership's area of operations. The Partnership's area of operations consists of onshore Texas and
eight
counties in the southeast region of New Mexico.
As of
September 30, 2013
, Pioneer owns a
52.4 percent
limited partner interest in the Partnership and Pioneer owns and controls Pioneer Natural Resources GP LLC (the "General Partner"), which manages the Partnership.
NOTE B. Basis of Presentation
Presentation.
In the opinion of management, the consolidated financial statements of the Partnership as of
September 30, 2013
, and for the
three and nine months ended
September 30, 2013
and
2012
, include all adjustments and accruals, consisting only of normal recurring accrual adjustments, which are necessary for a fair presentation of the results for the interim periods. These interim results are not necessarily indicative of results for a full year.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States ("GAAP") have been condensed in or omitted from this report pursuant to the rules and regulations of the United States Securities and Exchange Commission (the "SEC"). These consolidated financial statements should be read together with the consolidated financial statements and notes thereto included in the Partnership's Annual Report on Form 10-K for the year ended
December 31, 2012
.
Merger Agreement with Pioneer
. On August 9, 2013, the Partnership entered into an Agreement and Plan of Merger with Pioneer, Pioneer Natural Resources USA, Inc., a wholly-owned subsidiary of Pioneer ("Pioneer USA"), PNR Acquisition Company, LLC, a wholly-owned subsidiary of Pioneer ("MergerCo"), and the General Partner, which was amended on October 25, 2013 (as amended, the "Merger Agreement").
Pursuant to the Merger Agreement, MergerCo will merge with and into the Partnership, with the Partnership surviving the merger (the "Merger"), such that following the Merger, the General Partner will remain a wholly-owned subsidiary of Pioneer and the sole general partner of the Partnership, and Pioneer USA will be the sole limited partner of the Partnership. Except for the common units owned by Pioneer, all of the common units outstanding as of the closing of the Merger will be cancelled and, except for the dissenting units (as defined in the next paragraph), converted into the right to receive
0.2325
of a share of common stock of Pioneer per common unit.
Pursuant to the terms and conditions of the Merger Agreement, common units that are owned by a unitholder (a) other than the Partnership or its subsidiaries or Pioneer or its subsidiaries, (b) who does not vote at the special meeting of the Partnership in favor of the proposal to approve the Merger Agreement and the transactions contemplated thereby, including the Merger, and (c) who is entitled to demand and properly demands appraisal of such common units (the "dissenting units") pursuant to, and who complies in all respects with, the provisions of the Merger Agreement regarding appraisal rights (the "dissenting unitholders") will not be converted into the right to receive the merger consideration, but instead will be entitled to payment of the fair value of such dissenting units pursuant to and in accordance with the provisions of the Merger Agreement, unless and until such dissenting unitholder shall have failed to perfect or shall have effectively withdrawn or lost the appraisal rights. If a dissenting unitholder fails to perfect or effectively withdraws or loses the appraisal rights, then, as of the occurrence of such event or the closing of the Merger, whichever occurs later, each of such dissenting unitholder's dissenting units will be converted into the right to receive
0.2325
of a share of common stock of Pioneer per common unit.
The Merger Agreement provides that regular quarterly distributions on the Partnership's common units, not to exceed
$0.52
per common unit per quarter (which
$0.52
per common unit is equivalent to the most recent distribution declared for the quarter ended September 30, 2013), are to continue until the closing of the Merger. Regular distributions for a quarter are declared late in the first month following such quarter, and no distribution will be paid for a quarter if the Merger closes prior to the normal record date for such distribution. No fractional shares of Pioneer common stock will be issued in the Merger. In lieu of receiving any fractional share of Pioneer common stock to which any holder of the Partnership's common units would otherwise have been entitled, after aggregating all fractions of shares to which such holder would be entitled, any fractional share will be rounded up to a whole share of Pioneer common stock. The closing of the Merger is subject to certain closing conditions, including the
PIONEER SOUTHWEST ENERGY PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2013
(Unaudited)
approval of the Merger Agreement and the transactions contemplated thereby by the affirmative vote of holders of a majority of the outstanding common units entitled to vote at a special meeting of the unitholders of the Partnership. Pursuant to a voting agreement, Pioneer has agreed to cause the common units owned by it and its subsidiaries to be voted in favor of the Merger, which units represent
52.4 percent
of the Partnership's outstanding common units and therefore constitute a sufficient number of common units to approve the Merger at the special meeting of the unitholders of the Partnership. The parties anticipate that the Merger will close in the fourth quarter of 2013, pending satisfaction of certain conditions thereto. See Note J for a description of the litigation contingencies associated with the Merger.
Net income
per common unit.
Net income
per common unit is calculated by dividing the limited partners' interest in
net income
(which excludes net income allocable to unvested participating securities) by the weighted average number of common units outstanding.
The Partnership applies the provisions of Accounting Standards Codification ("ASC") Topic 260 "Earnings Per Share" when determining
net income
per common unit. Instruments granted in unit-based payment transactions that are determined to be participating securities prior to vesting are included in the
net income
allocation in computing basic and diluted
net income
per unit. Participating securities represent unvested unit-based compensation awards that have non-forfeitable distribution rights during their vesting periods, such as the phantom units and restricted units awarded under the Pioneer Southwest Energy Partners L.P. 2008 Long Term Incentive Plan (the "LTIP").
The Partnership's
net income
is allocated to partners' equity accounts in accordance with the provisions of the First Amended and Restated Agreement of Limited Partnership of Pioneer Southwest Energy Partners L.P. (the "Partnership Agreement").
NOTE C. Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or the price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements are based upon inputs that market participants use in pricing an asset or liability, which are characterized according to a hierarchy that prioritizes those inputs based on the degree to which they are observable. Observable inputs represent market data obtained from independent sources, whereas unobservable inputs reflect a company's own market assumptions, which are used if observable inputs are not reasonably available without undue cost and effort. The three input levels of the fair value hierarchy are as follows:
•
Level 1 – quoted prices for identical assets or liabilities in active markets.
|
|
•
|
Level 2 – quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability (e.g. interest rates) and inputs derived principally from or corroborated by observable market data by correlation or other means.
|
|
|
•
|
Level 3 – unobservable inputs for the asset or liability.
|
PIONEER SOUTHWEST ENERGY PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2013
(Unaudited)
Assets and liabilities measured at fair value on a recurring basis.
The fair value input hierarchy level to which an asset or liability measurement in its entirety falls is determined based on the lowest level input that is significant to the measurement in its entirety.
The following table presents the Partnership's assets and liabilities that are measured at fair value as of
September 30, 2013
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at the End of the Reporting Period Using
|
|
|
|
|
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Fair Value at September 30, 2013
|
|
|
(in thousands)
|
Recurring fair value measurements
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Commodity derivatives
|
|
$
|
—
|
|
|
$
|
8,293
|
|
|
$
|
—
|
|
|
$
|
8,293
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Commodity derivatives
|
|
—
|
|
|
4,795
|
|
|
—
|
|
|
4,795
|
|
Total recurring fair value measurements
|
|
$
|
—
|
|
|
$
|
3,498
|
|
|
$
|
—
|
|
|
$
|
3,498
|
|
Commodity derivatives.
The Partnership's commodity derivatives represent oil and gas swap contracts, collar contracts and collar contracts with short puts. The asset and liability measurements for the Partnership's oil and gas derivative contracts represent Level 2 inputs in the hierarchy priority. The Partnership utilizes discounted cash flow and option-pricing models for valuing its commodity derivatives.
The asset and liability values attributable to the Partnership's commodity derivatives were determined based on inputs that include (i) the contracted notional volumes, (ii) independent active market price quotes, (iii) the applicable estimated credit-adjusted risk-free rate yield curves and (iv) the implied rate of volatility inherent in the options underlying the Partnership's collar contracts and collar contracts with short puts, which is based on active and independent market-quoted volatility factors.
Financial instruments not carried at fair value.
The carrying values and fair values of financial instruments that are not recorded at fair value in the accompanying consolidated balance sheets as of
September 30, 2013
and
December 31, 2012
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2013
|
|
December 31, 2012
|
|
|
Carrying
Value
|
|
Fair
Value
|
|
Carrying
Value
|
|
Fair
Value
|
|
|
(in thousands)
|
Credit facility
|
|
$
|
201,000
|
|
|
$
|
193,355
|
|
|
$
|
126,000
|
|
|
$
|
123,635
|
|
Credit facility.
The fair value of debt is characterized as a Level 2 measurement in the fair value hierarchy and is calculated using a discounted cash flow model based on (i) forecasted contractual interest and fee payments, (ii) forward active market-quoted London Interbank Offered Rate ("LIBOR") yield curves and (iii) the applicable credit-adjusted risk-free rate yield curve.
The Partnership has other financial instruments consisting primarily of cash, receivables, prepaids, payables and other current assets and liabilities whose carrying values approximate their fair values due to the nature of the instruments and their relatively short maturities.
NOTE D. Derivative Financial Instruments
The Partnership generally utilizes commodity swap contracts, collar contracts and collar contracts with short puts to (i) reduce the effect of price volatility on the commodities the Partnership produces and sells, (ii) support the Partnership's annual capital budgeting and expenditure plans and (iii) help sustain unitholder distributions.
PIONEER SOUTHWEST ENERGY PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2013
(Unaudited)
Oil production derivative activities.
All material physical sales contracts governing the Partnership's oil production are tied directly or indirectly to the New York Mercantile Exchange ("NYMEX") prices. The following table sets forth the volumes per day in barrels ("BBLs") outstanding as of
September 30, 2013
under the Partnership's oil derivative contracts and the weighted average NYMEX prices per BBL for those contracts as of
September 30, 2013
:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ending
December 31,
|
|
Year Ending
December 31,
|
|
|
2013
|
|
2014
|
Collar contracts with short puts:
|
|
|
|
|
Volume (BBLs per day)
|
|
—
|
|
|
5,000
|
|
Average price per BBL:
|
|
|
|
|
Ceiling
|
|
$
|
—
|
|
|
$
|
105.74
|
|
Floor
|
|
$
|
—
|
|
|
$
|
100.00
|
|
Short put
|
|
$
|
—
|
|
|
$
|
80.00
|
|
Swap contracts:
|
|
|
|
|
Volume (BBLs per day)
|
|
4,750
|
|
|
—
|
|
Average price per BBL
|
|
$
|
87.83
|
|
|
$
|
—
|
|
Gas production derivative activities.
All material physical sales contracts governing the Partnership's gas production are tied directly or indirectly to regional index prices where the gas is sold. The Partnership uses derivative contracts to manage gas price volatility and basis swap contracts to reduce basis risk between the Permian Basin index price and the NYMEX Henry Hub index price used in gas swap contracts. The following table sets forth the volumes in millions of British Thermal Units ("MMBTUs") under outstanding gas derivative contracts and the weighted average index prices per MMBTU for those contracts as of
September 30, 2013
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ending December 31,
|
|
Year Ending
December 31,
|
|
|
2013
|
|
2014
|
|
2015
|
Collar contracts with short puts:
|
|
|
|
|
|
|
Volume (MMBTUs per day)
|
|
—
|
|
|
—
|
|
|
5,000
|
|
Average price per MMBTU:
|
|
|
|
|
|
|
Ceiling
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5.00
|
|
Floor
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4.00
|
|
Short put
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3.00
|
|
Collar contracts:
|
|
|
|
|
|
|
Volume (MMBTUs per day)
|
|
2,500
|
|
|
—
|
|
|
—
|
|
Average price per MMBTU:
|
|
|
|
|
|
|
Ceiling
|
|
$
|
4.50
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Floor
|
|
$
|
4.00
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Swap contracts:
|
|
|
|
|
|
|
Volume (MMBTUs per day)
|
|
2,500
|
|
|
5,000
|
|
|
—
|
|
Average price per MMBTU
|
|
$
|
6.89
|
|
|
$
|
4.00
|
|
|
$
|
—
|
|
Basis swap contracts:
|
|
|
|
|
|
|
Permian Basin index swaps - (MMBTUs per day)
|
|
2,500
|
|
|
—
|
|
|
—
|
|
Price differential ($/MMBTU)
|
|
$
|
(0.31
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
Tabular disclosure of derivative financial instruments.
All of the Partnership's derivatives are accounted for as non-hedge derivatives as of
September 30, 2013
and
December 31, 2012
and therefore all changes in the fair values of its derivative contracts are recognized as gains or losses in the earnings of the periods in which they occur. The Partnership recognized derivative losses
PIONEER SOUTHWEST ENERGY PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2013
(Unaudited)
on commodity contracts of
$11.4 million
and
$7.2 million
during the
three and nine months ended
September 30, 2013
, respectively, as compared to derivative losses of
$13.6 million
and derivative gains of
$18.2 million
for the three and nine months ended September 30, 2012, respectively, which are reflected in net derivative gains (losses) in the accompanying consolidated statement of operations. The Partnership classifies the fair value amounts of derivative assets and liabilities as net current or noncurrent derivative assets or net current or noncurrent derivative liabilities, whichever the case may be, by commodity and counterparty. The Partnership enters into derivatives under master netting agreements, which, in an event of default, allows the Partnership to offset payables to and receivables from the defaulting counterparty.
The aggregate fair value of the Partnership's derivative instruments that are reported in the consolidated balance sheets consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value of Derivative Instruments as of September 30, 2013
|
Consolidated Balance Sheet Location
|
|
Fair
Value
|
|
Gross Amounts Offset in the Consolidated Balance Sheet
|
|
Net Fair Value Presented in the Consolidated Balance Sheet
|
|
|
(in thousands)
|
Derivatives not designated as hedging instruments
|
|
|
|
|
|
|
Asset Derivatives:
|
|
|
|
|
|
|
Derivatives - current
|
|
$
|
6,465
|
|
|
$
|
(1,227
|
)
|
|
$
|
5,238
|
|
Derivatives - noncurrent
|
|
$
|
3,071
|
|
|
$
|
(16
|
)
|
|
3,055
|
|
|
|
|
|
|
|
$
|
8,293
|
|
Liability Derivatives:
|
|
|
|
|
|
|
Derivatives - current
|
|
$
|
6,022
|
|
|
$
|
(1,227
|
)
|
|
$
|
4,795
|
|
Derivatives - noncurrent
|
|
$
|
16
|
|
|
$
|
(16
|
)
|
|
—
|
|
|
|
|
|
|
|
$
|
4,795
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value of Derivative Instruments as of December 31, 2012
|
Consolidated Balance Sheet Location
|
|
Fair
Value
|
|
Gross Amounts Offset in the Consolidated Balance Sheet
|
|
Net Fair Value Presented in the Consolidated Balance Sheet
|
|
|
(in thousands)
|
Derivatives not designated as hedging instruments
|
|
|
|
|
|
|
Asset Derivatives:
|
|
|
|
|
|
|
Derivatives - current
|
|
$
|
4,553
|
|
|
$
|
—
|
|
|
$
|
4,553
|
|
Derivatives - noncurrent
|
|
$
|
7,278
|
|
|
$
|
(51
|
)
|
|
7,227
|
|
|
|
|
|
|
|
|
$
|
11,780
|
|
Liability Derivatives:
|
|
|
|
|
|
|
Derivatives - current
|
|
$
|
13,390
|
|
|
$
|
—
|
|
|
$
|
13,390
|
|
Derivatives - noncurrent
|
|
$
|
201
|
|
|
$
|
(51
|
)
|
|
150
|
|
|
|
|
|
|
|
$
|
13,540
|
|
The Partnership uses credit and other financial criteria to evaluate the credit standing of, and to select, counterparties to its derivative instruments. Although the Partnership does not obtain collateral or otherwise secure the fair value of its derivative instruments, associated credit risk is mitigated by the Partnership's credit risk policies and procedures.
NOTE E. Exploratory Costs
The Partnership capitalizes exploratory well costs until a determination is made that the well has either found proved reserves, is impaired or is sold. The Partnership's capitalized exploratory well costs are presented in proved properties in the accompanying
PIONEER SOUTHWEST ENERGY PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2013
(Unaudited)
consolidated balance sheets. If the exploratory well is determined to be impaired, the impaired costs are charged to exploration and abandonments expense.
The following table reflects the Partnership's capitalized exploratory well activity during the
three and nine months ended
September 30, 2013
:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
September 30, 2013
|
|
September 30, 2013
|
|
(in thousands)
|
Beginning capitalized exploratory costs
|
$
|
10,572
|
|
|
$
|
—
|
|
Additions to exploratory costs pending the determination of proved reserves
|
5,552
|
|
|
35,225
|
|
Reclassification due to determination of proved reserves
|
(16,109
|
)
|
|
(35,210
|
)
|
Ending capitalized exploratory costs (a)
|
$
|
15
|
|
|
$
|
15
|
|
__________
|
|
(a)
|
All capitalized exploratory costs are aged less than one year based on the date drilling was completed.
|
NOTE F. Long-term Debt
The Partnership maintains a Credit Agreement (the "Credit Facility") with a syndicate of financial institutions that has aggregate loan commitments of
$300 million
that expires in March 2017. As of
September 30, 2013
, the Partnership had
$201.0 million
of borrowings outstanding under the Credit Facility. The Partnership's borrowing capacity under the Credit Facility is subject to a covenant requiring that the Partnership maintain a specified ratio of the net present value of the Partnership's projected future cash flows from its oil and gas assets to total debt, with the variables on which the calculation of net present value is based (including assumed commodity prices and discount rates) being subject to adjustment by the lenders. As a result, declines in commodity prices could reduce the Partnership's borrowing capacity under the Credit Facility and could require the Partnership to reduce its distributions to unitholders. Based on the financial covenant detailed above, the Partnership's available borrowing capacity under the Credit Facility was
$68.6 million
at
September 30, 2013
.
During March 2013, the Partnership amended the Credit Facility to clarify the timing of the requirement to maintain swap contracts on at least
50 percent
of forecasted production (the "minimum hedging requirement"). Prior to the amendment, the minimum hedging requirement was for all periods through December 31, 2014 and thereafter on a rolling basis of not less than
two years
or to March 2017 (the "Maturity Date"). The amended minimum hedging requirement includes all periods through December 31, 2014 and thereafter on a rolling basis of not less than
four
quarters, but in no case past the Maturity Date. The Partnership accounted for the amendment as a modification of the existing Credit Facility.
NOTE G. Incentive Plans
For the
three and nine months ended
September 30, 2013
, the Partnership recognized
$240 thousand
and
$791 thousand
, respectively, of unit-based compensation, as compared to
$287 thousand
and
$811 thousand
, respectively, for the
three and nine months ended
September 30, 2012
. As of
September 30, 2013
, there was
$1.3 million
of unrecognized compensation expense related to unvested unit-based compensation awards. This compensation will be recognized over the remaining vesting periods of the awards, which on a weighted average basis is a period of less than
three years
.
The following table reflects the Partnership's outstanding unit-based awards as of
September 30, 2013
and the activity related thereto for the
nine months ended
September 30, 2013
:
|
|
|
|
|
|
|
|
|
|
Restricted
Units
|
|
Phantom
Units
|
Outstanding at beginning of year
|
|
7,496
|
|
|
102,644
|
|
Units granted
|
|
—
|
|
|
32,242
|
|
Lapse of restrictions
|
|
(7,496
|
)
|
|
(35,118
|
)
|
Outstanding at September 30, 2013
|
|
—
|
|
|
99,768
|
|
PIONEER SOUTHWEST ENERGY PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2013
(Unaudited)
NOTE H. Asset Retirement Obligations
The Partnership's asset retirement obligations primarily relate to the future plugging and abandonment of wells and facilities. The following table summarizes the Partnership's asset retirement obligation activity during the
three and nine months ended
September 30, 2013
and
2012
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
|
(in thousands)
|
Beginning asset retirement obligations
|
|
$
|
11,946
|
|
|
$
|
9,867
|
|
|
$
|
12,101
|
|
|
$
|
10,315
|
|
Liabilities settled
|
|
(636
|
)
|
|
(576
|
)
|
|
(1,325
|
)
|
|
(1,477
|
)
|
New wells placed on production
|
|
168
|
|
|
48
|
|
|
288
|
|
|
123
|
|
Accretion of discount
|
|
209
|
|
|
189
|
|
|
623
|
|
|
567
|
|
Ending asset retirement obligations
|
|
$
|
11,687
|
|
|
$
|
9,528
|
|
|
$
|
11,687
|
|
|
$
|
9,528
|
|
NOTE I. Related Party Transactions
In accordance with standard industry operating agreements and the various agreements entered into between the Partnership and Pioneer, the Partnership incurred the following charges from Pioneer during the
three and nine months ended
September 30, 2013
and
2012
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
|
(in thousands)
|
Producing well overhead (COPAS) fees
|
|
$
|
3,074
|
|
|
$
|
2,863
|
|
|
$
|
9,083
|
|
|
$
|
8,361
|
|
Payment of lease operating and supervision charges
|
|
3,558
|
|
|
2,498
|
|
|
9,548
|
|
|
7,384
|
|
Drilling and completion related charges
|
|
11,334
|
|
|
8,546
|
|
|
38,668
|
|
|
28,775
|
|
General and administrative expenses
|
|
1,298
|
|
|
1,181
|
|
|
3,648
|
|
|
3,422
|
|
Total
|
|
$
|
19,264
|
|
|
$
|
15,088
|
|
|
$
|
60,947
|
|
|
$
|
47,942
|
|
As of
September 30, 2013
, the Partnership has a net accounts receivable – due from affiliates in the accompanying consolidated balance sheet of
$391 thousand
, representing a
$1.7 million
receivable for reimbursable drilling and completion, and lease operating and supervision related charges that were provided by Pioneer, partially offset by a
$1.3 million
payable to Pioneer for general and administrative expenses and a
$40 thousand
payable to Pioneer for other miscellaneous items. As of
December 31, 2012
, the Partnership's net accounts payable – due to affiliates balance in the accompanying consolidated balance sheet of
$1.3 million
includes a
$1.4 million
payable to Pioneer for general and administrative expenses and a
$106 thousand
payable to Pioneer for other miscellaneous items, partially offset by a
$266 thousand
receivable for reimbursable drilling and completion related charges that were provided by Pioneer.
As of
September 30, 2013
and
December 31, 2012
, the Partnership had
$162 thousand
and
$70 thousand
, respectively, of income taxes payable to affiliate recorded in the accompanying consolidated balance sheets, representing amounts due to Pioneer under a tax sharing agreement between Pioneer and the Partnership.
During the third quarter of 2013, Pioneer entered into leases on
1,200
acres in Midland County in West Texas to explore, develop and produce oil and gas from the properties and assigned to the Partnership an undivided
94 percent
of Pioneer's interest in the leases in consideration for a payment to Pioneer of
$2.5 million
, representing a pro rata share of Pioneer's acquisition cost. There were no producing wells associated with the acquisition and the Partnership recorded the entire acquisition cost to unproved property.
PIONEER SOUTHWEST ENERGY PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2013
(Unaudited)
Prior to 2013, the General Partner annually awarded restricted common units to directors under the LTIP. Restricted common units were not awarded to directors under the LTIP during 2013. The Partnership paid the General Partner
nil
and
$74 thousand
during the
three and nine months ended
September 30, 2013
, respectively, and
$50 thousand
and
$147 thousand
during the
three and nine months ended
September 30, 2012
, respectively, which amounts represent the vested portion of the fair values of the annual director awards. In addition, the General Partner awarded
32,242
and
37,487
phantom units during the
nine months ended
September 30, 2013
and
2012
, respectively, to certain officers of Pioneer and the General Partner, who were most responsible for the performance of the Partnership. The phantom units represent the right to receive common units after the lapse of a three-year vesting period, subject to the recipient's continuous employment with Pioneer. Distributions on the phantom units are paid concurrently with distributions paid to holders of common units. Associated therewith, the Partnership recognized general and administrative expense during the
three and nine months ended
September 30, 2013
of
$240 thousand
and
$717 thousand
, respectively, of which
$231 thousand
and
$690 thousand
, respectively, was noncash, as compared to
$237 thousand
and
$664 thousand
, respectively, of which
$228 thousand
and
$639 thousand
, respectively, was noncash, for the
three and nine months ended
September 30, 2012
. The Merger Agreement provides that the phantom units outstanding as of the closing of the Merger will remain issued under the LTIP and will be converted into equivalent restricted stock units of common stock of Pioneer, with the number of shares subject to such restricted stock units adjusted to reflect the Merger exchange ratio, rounded down to the nearest whole share, but otherwise on the same terms and conditions as were applicable prior to the Merger.
NOTE J. Commitments and Contingencies
The Partnership is not currently a party to, or aware of, any material legal or governmental proceedings against it, aside from the legal proceedings described below. While many of these proceedings and claims involve inherent uncertainty, the Partnership believes that the amount of the liability, if any, ultimately incurred with respect to such proceedings and claims will not have a material adverse effect on the Partnership's consolidated financial position as a whole or on its liquidity, capital resources or future annual results of operations. The Partnership records reserves for contingencies when information available indicates that a loss is probable and the amount of the loss can be reasonably estimated.
Lawsuits filed in state and federal courts in Texas relating to the Merger.
On May 15, 2013, David Flecker, a purported unitholder of the Partnership, filed a class action petition on behalf of the Partnership's unitholders and a derivative suit on behalf of the Partnership against, Pioneer, Pioneer USA, the General Partner and the directors of the General Partner, in the 134th Judicial District of Dallas County, Texas (the "Flecker Lawsuit"). A similar class action petition and derivative suit was filed against the same defendants on May 20, 2013, in the 160th Judicial District of Dallas County, Texas, by purported unitholder Vipul Patel (the "Patel Lawsuit"). On August 27, 2013, the plaintiff in the Flecker Lawsuit filed an amended petition. On September 3, 2013, the court consolidated the Patel Lawsuit into the Flecker Lawsuit (as consolidated, the "Texas State Court Lawsuit"), and the plaintiffs filed a consolidated derivative and class action petition on September 5, 2013.
The Texas State Court Lawsuit alleges, among other things, that the consideration offered by Pioneer in the Merger is unfair and inadequate and that, by pursuing a transaction that is the result of an allegedly conflicted and unfair process, the defendants have breached their duties under the Partnership Agreement as well as the implied covenant of good faith and fair dealing, and are engaging in self-dealing. Specifically, the lawsuit alleges that the director defendants: (i) engaged in self-dealing, failed to act in good faith toward the Partnership, and breached their duties owed to the Partnership; (ii) failed to properly value the Partnership and its various assets and operations and ignored or failed to protect against the numerous conflicts of interest arising out of the proposed transaction; and (iii) breached the implied covenant of good faith and fair dealing by engaging in a flawed merger process. The Texas State Court Lawsuit also alleges that Pioneer, Pioneer USA and the General Partner aided and abetted the director defendants in their purported breach of fiduciary duties.
Based on these allegations, the plaintiffs in the Texas State Court Lawsuit seek to enjoin the defendants from proceeding with or consummating the proposed transaction. To the extent that the Merger is implemented before relief is granted, the plaintiffs seek to have the Merger rescinded. The plaintiffs also seek money damages and attorneys' fees. The defendants have filed a motion to dismiss the Texas State Court Lawsuit based on improper forum.
On August 21, 2013, Allan H. Beverly, a purported unitholder, filed a class action complaint against the Partnership, Pioneer, Pioneer USA, MergerCo and the directors of the General Partner in the United States District Court for the Northern District of Texas (the "Beverly Lawsuit"). The Beverly Lawsuit alleges that the defendants breached their fiduciary duties by agreeing to the Merger by means of an unfair process and for an unfair price. Specifically, the lawsuit alleges that the director defendants: (i) failed to maximize the value of the Partnership to its public unitholders and took steps to avoid competitive bidding; (ii) failed to properly
PIONEER SOUTHWEST ENERGY PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2013
(Unaudited)
value the Partnership; and (iii) ignored or failed to protect against the numerous conflicts of interest arising out of the proposed transaction. The Beverly Lawsuit also alleges that Pioneer, Pioneer USA and MergerCo aided and abetted the director defendants in their purported breach of fiduciary duties.
On September 13, 2013, Douglas Shelton, another purported unitholder, filed a class action complaint against the same defendants in the Beverly Lawsuit (as well as the General Partner) in the same court as the Beverly Lawsuit (the "Shelton Lawsuit"). The Shelton Lawsuit makes similar allegations to the Beverly Lawsuit, and also alleges that Section 7.9 of the Partnership Agreement fails to alter or eliminate the defendants' common law fiduciary duties owed to unitholders in the context of the Merger. Specifically, the lawsuit alleges: (i) that Pioneer, as controlling unitholder, failed to fulfill its fiduciary duties in connection with the Merger because it purportedly cannot establish that the proposed Merger is the result of a fair process that will return a fair price to the unaffiliated unitholders of the Partnership; (ii) that the director defendants breached their fiduciary duties by failing to exercise due care and diligence in connection with the proposed Merger because the proposed Merger is purportedly not the result of a fair process that will return a fair price to the unaffiliated unitholders; and (iii) that the non-director defendants aided and abetted the director defendants in their purported breach of fiduciary duties. The plaintiffs in the Beverly Lawsuit and the Shelton Lawsuit (together, the "Federal Lawsuits") seek the same remedies as the plaintiffs in the Texas State Court Lawsuit.
On September 26, 2013, representatives of the plaintiffs in the Texas State Court Lawsuit and the Federal Lawsuits and representatives of the defendants in such lawsuits entered into a memorandum of understanding (the "memorandum of understanding") to settle the claims and allegations made in such lawsuits. The memorandum of understanding provides the plaintiffs with a period of confirmatory discovery during which the plaintiffs can confirm the fairness and reasonableness of the settlement contemplated by the memorandum of understanding. The parties agreed to use their reasonable best efforts to agree upon, execute and present to the Dallas County, Texas District Court a stipulation of settlement, which will provide for, among other things, a certification, for settlement purposes only, of the applicable class of unitholders to which the settlement will apply. Furthermore, the stipulation of settlement will provide for a full and complete discharge, dismissal with prejudice, settlement and release of all claims, suits and causes of action by the plaintiffs (other than appraisal rights under the Merger Agreement) against the defendants and their representatives arising out of or relating to the allegations made in the Texas State Court Lawsuit and the Federal Lawsuits, the Merger or any deliberations, negotiations, disclosures, omissions, press releases, statements or misstatements in connection therewith, any fiduciary or other obligations in respect of the Merger or any alternative transaction or under the Partnership Agreement, or any costs and expenses associated with settlement other than as provided in the stipulation. All proceedings relating to the allegations made in the Texas State Court Lawsuit other than with respect to the settlement have been stayed. As part of the consideration for the settlement, the Merger Agreement was amended to provide for contractual appraisal rights for the unitholders of the Partnership. The parties to the memorandum of understanding have agreed to use their reasonable best efforts to obtain the agreement of any plaintiffs filing similar lawsuits to the Texas State Court Lawsuit or the Federal Lawsuits (whether filed in any state or federal court) to become party to the memorandum of understanding and the related settlement, and it is a condition to the consummation of the final settlement that any such plaintiffs join the settlement or such similar lawsuits otherwise be dismissed with prejudice prior to the final approval of the settlement. On October 15, 2013, the plaintiffs in the Beverly Lawsuit voluntarily dismissed all claims in the lawsuit in accordance with the memorandum of understanding. On October 16, 2013, the plaintiffs in the Shelton Lawsuit likewise voluntarily dismissed all claims in the lawsuit in accordance with the memorandum of understanding. There can be no assurance that a final settlement will be consummated.
Lawsuit filed in the Delaware Court of Chancery relating to the Merger.
On September 23, 2013, Patrick Wilson, another purported unitholder, filed a class action petition on behalf of the unitholders against Pioneer USA, MergerCo, the Partnership, the General Partner and the directors of the General Partner in the Court of Chancery of the State of Delaware (the "Wilson Lawsuit"). The Wilson Lawsuit alleges that the director defendants breached their purported fiduciary obligations to the unitholders by engaging in a process that undervalued the Partnership and which allegedly constitutes gross negligence, recklessness, willful misconduct, bad faith or knowing violations of law. Additionally, the Wilson Lawsuit alleges that the non-director defendants aided and abetted the purported breaches of fiduciary duties of the director defendants. The Wilson Lawsuit seeks the same remedies as the plaintiffs in the Texas State Court Lawsuit and the Federal Lawsuits. As of the date of this Report, the plaintiffs in the Wilson Lawsuit have not joined the memorandum of understanding.
The Partnership cannot predict the outcome of these or any other lawsuits that might be filed subsequent to the date of the filing of this Report, nor can the Partnership predict the amount of time and expense that will be required to resolve these lawsuits. See Note B for a description of the Merger Agreement.
PIONEER SOUTHWEST ENERGY PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2013
(Unaudited)
NOTE K. Income Taxes
The Partnership's income tax provisions and benefits, which were entirely attributable to the Texas Margin tax (which rate currently approximates
one percent
of the Partnership's taxable income apportioned to Texas), consisted of the following for the
three and nine months ended
September 30, 2013
and
2012
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
|
(in thousands)
|
Current provisions:
|
|
|
|
|
|
|
|
|
U.S. state
|
|
$
|
13
|
|
|
$
|
21
|
|
|
$
|
119
|
|
|
$
|
105
|
|
Deferred provisions:
|
|
|
|
|
|
|
|
|
U.S. state
|
|
236
|
|
|
90
|
|
|
716
|
|
|
957
|
|
|
|
$
|
249
|
|
|
$
|
111
|
|
|
$
|
835
|
|
|
$
|
1,062
|
|
The Partnership's net deferred tax attributes represented current assets of
$96 thousand
and
$89 thousand
as of
September 30, 2013
and
December 31, 2012
, respectively, and noncurrent liabilities of
$879 thousand
and
$156 thousand
as of
September 30, 2013
and
December 31, 2012
, respectively. In connection with the Partnership's initial public offering in 2008, the Partnership entered into a tax sharing agreement with Pioneer. Under this agreement, the Partnership pays Pioneer for its share of state and local income and other taxes (currently only the Texas Margin tax) for which the Partnership's results are included in a combined or consolidated tax return filed by Pioneer. The Partnership's share of Texas Margin tax is determined based on a pro forma tax return that includes only the income, deductions, gains, losses and credits of the Partnership as if the Partnership filed a separate return. As of
September 30, 2013
and
December 31, 2012
, the Partnership had
$162 thousand
and
$70 thousand
, respectively, of income taxes payable to affiliate in the accompanying consolidated balance sheets, representing amounts due to Pioneer under the tax sharing agreement.
NOTE L. Subsequent Events
Distribution declaration.
In October 2013, the Partnership declared a cash distribution of
$0.52
per common unit for the period from July 1, 2013 to
September 30, 2013
. The distribution is payable on
November 12, 2013
to unitholders of record at the close of business on
November 4, 2013
. Associated therewith, the Partnership expects to pay
$18.6 million
of aggregate distributions.
Merger Agreement.
On October 25, 2013, the Partnership entered into an amendment to the Agreement and Plan of Merger with Pioneer, Pioneer USA, MergerCo and the General Partner dated August 9, 2013. Pursuant to the Merger Agreement, MergerCo will merge with and into the Partnership, with the Partnership surviving the Merger, such that following the Merger, the General Partner will remain a wholly-owned subsidiary of Pioneer and the sole general partner of the Partnership, and Pioneer USA will be the sole limited partner of the Partnership. Except for the common units owned by Pioneer, all of the common units outstanding as of the closing of the Merger will be cancelled and, except for the dissenting units, converted into the right to receive
0.2325
of a share of common stock of Pioneer per common unit. The closing of the Merger is subject to the satisfaction of certain closing conditions. See Note B for a description of the Merger Agreement.
PIONEER SOUTHWEST ENERGY PARTNERS L.P.
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Financial and Operating Performance
Highlights of the Partnership's financial and operating performance for the
third
quarter of
2013
include:
|
|
•
|
Net income
increased
to
$15.8 million
(
$0.44
per common unit) for the
third
quarter of
2013
, as compared to
net income
of
$5.5 million
(
$0.15
per common unit) for the
third
quarter of
2012
. The
increase
in net income during the
third
quarter of
2013
, as compared to the
third
quarter of
2012
, is primarily attributable to:
|
|
|
◦
|
a $16.6 million increase in oil and gas sales as a result of 18 percent, five percent and 17 percent increases in average oil, NGL and gas prices, respectively, and a 16 percent increase in daily sales volumes on a BOE basis; and
|
|
|
◦
|
a $2.2 million decrease in net derivative losses; partially offset by
|
|
|
◦
|
a $3.1 million increase in depreciation, depletion and amortization ("DD&A") expense primarily due to higher sales volumes and proved property carrying values;
|
|
|
◦
|
a $2.2 million increase in oil and gas production costs, primarily due to increases in repair and maintenance charges, labor costs, salt water disposal costs and workover costs;
|
|
|
◦
|
a $1.8 million increase in other expense for legal and consulting services related to the Merger Agreement with Pioneer; and
|
|
|
◦
|
an $819 thousand increase in production and ad valorem taxes associated with the aforementioned increase in oil, NGL and gas prices.
|
|
|
•
|
The Partnership's three-rig drilling program added
14
new producing wells during the
third
quarter of
2013
. See "Capital Commitments, Capital Resources and Liquidity - Capital commitments," for additional information about the Partnership's drilling activities.
|
|
|
•
|
Daily sales volumes for the
third
quarter of
2013
increased
by
16 percent
to
8,872
BOEPD, as compared to
7,664
BOEPD in the
third
quarter of
2012
, primarily due to incremental production volumes from wells drilled as part of the Partnership's three-rig drilling program.
|
|
|
•
|
Average oil, NGL and gas sales prices increased to
$103.77
per BBL,
$33.11
per BBL and
$3.07
per MCF, respectively, during the
third
quarter of
2013
, as compared to
$88.12
per BBL,
$31.60
per BBL and
$2.62
per MCF, respectively, during the
third
quarter of
2012
.
|
|
|
•
|
Average oil and gas production costs per BOE
decreased
to
$20.48
for the
third
quarter of
2013
, as compared to
$20.52
for the
third
quarter of
2012
.
|
|
|
•
|
Net cash provided by operating activities
increased
by
16
percent to
$28.6 million
in the
third
quarter of
2013
, as compared to
$24.6 million
in the
third
quarter of
2012
, primarily due to the increases in sales volumes and commodity prices. See "Capital Commitments, Capital Resources and Liquidity - Capital resources," for additional information about the change in the Partnership's net cash provided by operating activities.
|
Recent Developments
On August 9, 2013, the Partnership entered into an Agreement and Plan of Merger with Pioneer, Pioneer USA, MergerCo and the General Partner, which was amended on October 25, 2013.
Pursuant to the Merger Agreement, MergerCo will merge with and into the Partnership, with the Partnership surviving the Merger, such that following the Merger, the General Partner will remain a wholly-owned subsidiary of Pioneer and the sole general partner of the Partnership, and Pioneer USA will be the sole limited partner of the Partnership. Except for the common units owned by Pioneer, all of the common units outstanding as of the closing of the Merger will be cancelled and, except for the dissenting units, converted into the right to receive 0.2325 of a share of common stock of Pioneer per common unit.
Pursuant to the terms and conditions of the Merger Agreement, dissenting units that are owned by dissenting unitholders will not be converted into the right to receive the merger consideration, but instead will be entitled to payment of the fair value of such dissenting units ("appraisal rights") pursuant to and in accordance with the provisions of the Merger Agreement, unless and until such dissenting unitholder shall have failed to perfect or shall have effectively withdrawn or lost the appraisal rights. If a dissenting unitholder fails to perfect or effectively withdraws or loses the appraisal rights, then, as of the occurrence of such event
PIONEER SOUTHWEST ENERGY PARTNERS L.P.
or the closing of the Merger, whichever occurs later, each of such dissenting unitholder's dissenting units will be converted into the right to receive 0.2325 of a share of common stock of Pioneer per common unit.
The Merger Agreement provides that regular quarterly distributions on the Partnership's common units, not to exceed $0.52 per common unit per quarter (which $0.52 per common unit is equivalent to the most recent distribution declared for the quarter ended September 30, 2013), are to continue until the closing of the Merger. Regular distributions for a quarter are declared late in the first month following such quarter, and no distribution will be paid for a quarter if the Merger closes prior to the normal record date for such distribution. No fractional shares of Pioneer common stock will be issued in the Merger. In lieu of receiving any fractional share of Pioneer common stock to which any holder of the Partnership's common units would otherwise have been entitled, after aggregating all fractions of shares to which such holder would be entitled, any fractional share will be rounded up to a whole share of Pioneer common stock. The closing of the Merger is subject to certain closing conditions, including the approval of the Merger Agreement and the transactions contemplated thereby by the affirmative vote of holders of a majority of the outstanding common units entitled to vote at a special meeting of the unitholders of the Partnership. Pursuant to a voting agreement, Pioneer has agreed to cause the common units owned by it and its subsidiaries to be voted in favor of the Merger, which units represent 52.4 percent of the Partnership's outstanding common units and therefore constitute a sufficient number of common units to approve the Merger at the special meeting of the unitholders of the Partnership. The parties anticipate that the Merger will close in the fourth quarter of 2013, pending satisfaction of certain conditions thereto.
See Note J of Notes to Consolidated Financial Statements included in "Item 1. Financial Statements" for a description of the litigation contingencies associated with the Merger and "Part II, Item 1A. Risk Factors" for additional information about potential risks associated with the Merger.
Fourth Quarter
2013
Outlook
Based on current estimates, the Partnership expects production to average
8,700
to
9,200
BOEPD.
Production costs (including production and ad valorem taxes) are expected to average
$24.00
to
$27.00
per BOE based on current NYMEX strip prices for oil and gas. DD&A expense is expected to average
$10.50
to
$11.50
per BOE.
General and administrative expense is expected to be
$1.5 million
to
$2.5 million
. Interest expense is expected to be
$1.0
million to
$1.2
million, and accretion of discount on asset retirement obligations is expected to be nominal.
The Partnership's income tax rate is expected to be approximately one percent of earnings before income taxes as a result of the Partnership's operations being subject to the Texas Margin tax.
Acquisitions
During the third quarter of 2013, Pioneer entered into leases on 1,200 acres in Midland County in West Texas to explore, develop and produce oil and gas from the properties and assigned to the Partnership an undivided 94 percent of Pioneer's interest in the leases in consideration for a payment to Pioneer of $2.5 million, representing a pro rata share of Pioneer's acquisition cost. There were no producing wells associated with the acquisition and the Partnership recorded the entire acquisition cost to unproved property. See Note I of Notes to Consolidated Financial Statements included in "Item 1. Financial Statements" for additional information about the Partnership's acquisition.
Results of Operations
Oil and gas revenues.
Oil and gas revenues totaled
$63.0 million
and
$163.8 million
for the
three and nine months ended
September 30, 2013
, respectively, as compared to
$46.4 million
and
$139.7 million
for the same periods in
2012
.
The
increase
in oil and gas revenues during the
three and nine months ended
September 30, 2013
, as compared to the same periods in
2012
, was primarily due to
17 percent
and
five percent
increase
s in the average per BOE sales prices, respectively, and
16 percent
and
13 percent
increase
s in the average daily BOE sales volumes, respectively.
The
increase
in the average per BOE sales price during the
three months ended
September 30, 2013
, as compared to the same period in
2012
, resulted from the effects of
18 percent
,
five percent
and
17 percent
increases in average oil, NGL and gas prices, respectively. The
increase
in the average per BOE sales price during the
nine months ended
September 30, 2013
, as compared to the same period in
2012
, resulted from the effects of
three percent
and
42 percent
increases in average oil and gas prices, respectively, partially offset by a
two percent
decrease in average NGL prices.
PIONEER SOUTHWEST ENERGY PARTNERS L.P.
The following table provides average daily sales volumes for the
three and nine months ended
September 30, 2013
and
2012
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
Oil (BBLs)
|
|
5,792
|
|
|
4,934
|
|
|
5,617
|
|
|
4,900
|
|
NGLs (BBLs)
|
|
1,848
|
|
|
1,665
|
|
|
1,573
|
|
|
1,449
|
|
Gas (MCF)
|
|
7,393
|
|
|
6,388
|
|
|
7,237
|
|
|
6,665
|
|
Total (BOE)
|
|
8,872
|
|
|
7,664
|
|
|
8,396
|
|
|
7,459
|
|
The oil, NGL and gas prices that the Partnership reports are based on the market prices received for the commodities. The following table provides the Partnership's average prices for the
three and nine months ended
September 30, 2013
and
2012
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
Oil (BBLs)
|
|
$
|
103.77
|
|
|
$
|
88.12
|
|
|
$
|
93.63
|
|
|
$
|
91.13
|
|
NGLs (BBLs)
|
|
$
|
33.11
|
|
|
$
|
31.60
|
|
|
$
|
32.59
|
|
|
$
|
33.29
|
|
Gas (MCF)
|
|
$
|
3.07
|
|
|
$
|
2.62
|
|
|
$
|
3.17
|
|
|
$
|
2.24
|
|
Total (BOE)
|
|
$
|
77.20
|
|
|
$
|
65.79
|
|
|
$
|
71.48
|
|
|
$
|
68.33
|
|
Derivative gains (losses), net.
Fluctuations in commodity prices resulted in net mark-to-market derivative losses of
$11.4 million
and
$7.2 million
for the
three and nine months ended
September 30, 2013
, respectively. For the
three and nine months ended
September 30, 2012
, the Partnership recognized net mark-to-market derivative losses of
$13.6 million
and net mark-to-market derivative gains of
$18.2 million
, respectively. See Notes C and D of Notes to Consolidated Financial Statements included in "Item 1. Financial Statements" and "Item 3. Quantitative and Qualitative Disclosures About Market Risk" for additional information about the Partnership's commodity related derivative financial instruments.
Oil and gas production costs.
The Partnership's oil and gas production costs totaled
$16.7 million
and
$44.7 million
during the
three and nine months ended
September 30, 2013
, respectively, as compared to
$14.5 million
and
$36.5 million
for the same respective periods in
2012
. During the
three and nine months ended
September 30, 2013
, total oil and gas production costs per BOE were consistent and
increased
by
nine percent
, respectively, as compared to the
three and nine months ended
September 30, 2012
. The
increase
in production costs per BOE during the
nine months ended
September 30, 2013
, as compared to the same period in
2012
, is primarily due to the following:
|
|
•
|
a $1.05 per BOE increase in repair and maintenance costs;
|
|
|
•
|
a $0.30 per BOE increase in labor charges; and
|
|
|
•
|
a $0.10 per BOE increase in third party transportation charges.
|
The following table provides the components of the Partnership's oil and gas production costs per BOE for the
three and nine months ended
September 30, 2013
and
2012
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
Lease operating expenses
|
|
$
|
18.34
|
|
|
$
|
19.15
|
|
|
$
|
17.82
|
|
|
$
|
16.21
|
|
Workover costs
|
|
2.14
|
|
|
1.37
|
|
|
1.70
|
|
|
1.64
|
|
Total production costs
|
|
$
|
20.48
|
|
|
$
|
20.52
|
|
|
$
|
19.52
|
|
|
$
|
17.85
|
|
Production and ad valorem taxes.
The Partnership's production and ad valorem taxes were
$4.8 million
and
$13.3 million
for the
three and nine months ended
September 30, 2013
, respectively, as compared to
$4.0 million
and
$11.8 million
for the same respective periods in
2012
. In general, fluctuations in production and ad valorem taxes are directly related to commodity price
PIONEER SOUTHWEST ENERGY PARTNERS L.P.
changes; however, Texas ad valorem taxes are based upon prior year commodity prices, whereas production taxes are based upon current year commodity prices. During the
three and nine months ended
September 30, 2013
, the Partnership's production taxes per BOE
increase
d
14 percent
and
three percent
, respectively, and ad valorem taxes per BOE
decrease
d
eight percent
and
three percent
, respectively, resulting in a combined
increase
of
four percent
and
one percent
, respectively, as compared to the
three and nine months ended
September 30, 2012
.
The following table provides components of the Partnership's total production and ad valorem taxes per BOE for the
three and nine months ended
September 30, 2013
and
2012
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
Production taxes
|
|
$
|
3.70
|
|
|
$
|
3.25
|
|
|
$
|
3.47
|
|
|
$
|
3.36
|
|
Ad valorem taxes
|
|
2.18
|
|
|
2.38
|
|
|
2.33
|
|
|
2.41
|
|
Total production and ad valorem taxes
|
|
$
|
5.88
|
|
|
$
|
5.63
|
|
|
$
|
5.80
|
|
|
$
|
5.77
|
|
DD&A expense.
The Partnership's DD&A expense was
$8.9 million
(
$10.89
per BOE) and
$23.7 million
(
$10.34
per BOE) for the
three and nine months ended
September 30, 2013
, respectively, as compared to
$5.8 million
(
$8.18
per BOE) and
$15.6 million
(
$7.63
per BOE) for the same respective periods in
2012
. The
increase
in per BOE depletion expense was primarily due to a 34 percent increase in the Partnership's proved oil and gas property basis as a result of its three-rig drilling program.
General and administrative expense.
The Partnership's general and administrative expense was
$2.0 million
and
$5.7 million
for the
three and nine months ended
September 30, 2013
, respectively, as compared to
$1.9 million
and
$5.5 million
for the same respective periods in
2012
. The Partnership and Pioneer entered into an administrative services agreement in May 2008, pursuant to which Pioneer performs administrative services for the Partnership. In accordance with this agreement, a portion of Pioneer's general and administrative expense is allocated to the Partnership based on a methodology of determining the Partnership's share, on a per-BOE basis, of certain of the general and administrative costs incurred by Pioneer. The Partnership is also responsible for paying for its direct third-party services.
Interest expense.
Interest expense was
$1.0 million
and
$2.8 million
for the
three and nine months ended
September 30, 2013
, respectively, as compared to
$638 thousand
and
$1.5 million
for the same respective periods in
2012
. The increase in interest expense for the
three and nine months ended
September 30, 2013
, as compared to the same respective periods in
2012
, was primarily due to an increase in outstanding borrowings under the Credit Facility.
Other expense.
The Partnership recorded other expense of
$2.1 million
for both the
three and nine months ended
September 30, 2013
, as compared to
$221 thousand
and
$969 thousand
for the same respective periods in
2012
. Other expense for the three and nine months ended September 30, 2013 is comprised of fees for legal and consulting services provided by third-parties associated with the proposed Merger transaction with Pioneer. See Note B of Notes to Consolidated Financial Statements included in "Item 1. Financial Statements" for additional information regarding the Merger Agreement. For the three months ended September 30, 2012, other expense was comprised of $221 thousand of charges for the remediation of two salt water disposal pipeline leaks. For the nine months ended September 30, 2012, other expense was comprised of a $772 thousand charge for the aforementioned pipeline leak remediation and a $197 thousand miscellaneous charge.
Income tax provision
.
The Partnership recognized income tax
provision
s of
$249 thousand
and
$835 thousand
for the
three and nine months ended
September 30, 2013
, respectively, as compared to income tax
provision
s of
$111 thousand
and
$1.1 million
for the same respective periods in
2012
. The Partnership's income tax
provision
increased for the three months ended
September 30, 2013
, as compared to the same respective period in
2012
, primarily due to increased oil and gas revenues. The Partnership's income tax provision decreased for the nine months ended September 30, 2013, as compared to the same respective period in 2012, primarily due to increased oil and gas revenues being more than offset by higher costs and derivative losses in 2013. See Note K of Notes to Consolidated Financial Statements included in "Item 1. Financial Statements" for additional information regarding the Partnership's income taxes.
PIONEER SOUTHWEST ENERGY PARTNERS L.P.
Capital Commitments, Capital Resources and Liquidity
Capital commitments.
Pending consummation of the Merger, which is expected to occur in the fourth quarter of 2013, the Partnership expects that it will continue to operate its business as it has in the past, including the continuation of its three-rig drilling program through the remainder of 2013. The Partnership's primary cash funding needs will be for drilling expenditures and unitholder distributions. Funding for these cash needs may be provided by any combination of internally-generated cash flow, cash and cash equivalents on hand, or external financing sources as discussed in "Capital resources" below. Although the Partnership expects that these sources of funding will be adequate to fund capital expenditures and dividend/distribution payments and provide adequate liquidity to fund other needs during 2013, no assurances can be given that such funding sources will be adequate to meet the Partnership's future needs. See "Part II, Item 1A. Risk Factors" for additional information about potential risks associated with the Merger.
During the
nine months ended
September 30, 2013
, the Partnership placed
39
new wells on production, of which
13
were exploration wells, recompleted
one
well and exited the
third
quarter with
nine
wells in progress, of which
one
was an exploration well. The Partnership plans to continue with a three-rig drilling program over the balance of 2013. Capital expenditures over the remainder of 2013 are expected to be approximately $35 million, including facility connections. The Partnership's
2013
capital expenditures include the savings from Pioneer's use of internally provided drilling and completion services in connection with drilling the Partnership's undeveloped locations. However, Pioneer has no obligation to provide its internal services in connection with future drilling of the Partnership's undeveloped properties. Although the Partnership expects that internal cash flows and available borrowing capacity under the Credit Facility will be adequate to fund capital expenditures and planned unitholder distributions for the remainder of 2013, no assurances can be given that such funding sources will be adequate to meet the Partnership's future needs.
The Partnership Agreement requires that the Partnership distribute all of its available cash to its partners. In general, available cash is defined in the Partnership Agreement to mean cash on hand at the end of a quarter after the payment of expenses and the establishment of cash reserves for future capital expenditures (including acquisitions), operational needs and distributions for any one or more of the next four quarters. Because the Partnership's proved reserves and production decline continually over time, the Partnership will need to mitigate these declines through drilling initiatives, production enhancement, and/or acquisitions of income producing assets that provide cash margins if the Partnership is to sustain its level of distributions to unitholders over time. Accordingly, the Partnership is currently reserving a portion of its cash flow to drill its proved undeveloped and certain unproved locations in order to maintain and grow its production and make distributions, and may in the future reserve cash flow for acquisitions of producing properties, proved undeveloped properties or unproved properties that can be developed or explored to maintain and grow the Partnership's production and cash flow.
A distribution for the
third
quarter of
2013
of
$0.52
per unit was declared by the Board of Directors of the General Partner on October 22, 2013 and is to be paid on
November 12, 2013
to unitholders of record on
November 4, 2013
. The Merger Agreement provides that regular quarterly distributions on the Partnership's common units, not to exceed $0.52 per common unit per quarter, are to continue until the closing of the Merger. Regular distributions for a quarter are declared late in the first month following such quarter, and no distribution will be paid for a quarter if the Merger closes prior to the normal record date for such distribution.
Oil and gas properties.
The Partnership's cash expenditures for additions to oil and gas properties during the
nine months ended
September 30, 2013
increased
by
28
percent to
$98.2 million
, as compared to
$76.8 million
for the same period in
2012
. Additions to oil and gas properties primarily reflect expenditures associated with the Partnership's three-rig drilling program during the
nine months ended
September 30, 2013
. The Partnership's expenditures for additions to oil and gas properties for the
nine months ended
September 30, 2013
and
2012
were funded by net cash provided by operating activities and borrowings under the Credit Facility.
Contractual obligations, including off-balance sheet obligations.
As of
September 30, 2013
, the Partnership's contractual obligations included Credit Facility indebtedness, asset retirement obligations and derivative instruments. Borrowings outstanding under the Credit Facility were
$201.0 million
at
September 30, 2013
. As of
September 30, 2013
, the Partnership's derivative instruments represented assets of
$8.3 million
and liabilities of
$4.8 million
; however, these derivative instruments continue to have market risk and represent contractual obligations of the Partnership. The ultimate liquidation value of the Partnership's commodity derivatives will be dependent upon actual future commodity prices at the time of settlement, which may differ materially from the inputs used to determine the derivatives' fair values at any point in time. The Partnership entered into these derivatives for the primary purpose of reducing commodity price risk on forecasted commodity sales. See Notes C, D and F of Notes to Consolidated Financial Statements included in "Item 1. Financial Statements" and "Item 3. Quantitative and Qualitative Disclosures
PIONEER SOUTHWEST ENERGY PARTNERS L.P.
About Market Risk" for additional information regarding the Partnership's derivative positions and the Credit Facility. As of
September 30, 2013
, the Partnership's asset retirement obligations were
$11.7 million
, a
decrease
of
$414 thousand
from the amount as of
December 31, 2012
. As of
September 30, 2013
, the Partnership was not a party to any material off-balance sheet arrangements.
Capital resources.
The Partnership's primary capital resources for the remainder of 2013 are expected to be net cash provided by operating activities and amounts available under the Credit Facility. During
2013
, at current commodity prices and cost levels, the Partnership expects that net cash flows from operations will not be sufficient to fund its three-rig drilling program and planned unitholder distributions, but that available borrowing capacity under the Credit Facility will be sufficient to fund the Partnership's capital requirements.
Recently, there has been a trend in the Partnership's operating area toward horizontal drilling. In particular, the horizontal activity has been focused on drilling various zones within the Wolfcamp Shale horizon. Additionally, there is the potential that horizontal drilling in the Partnership's operating area could be economical in the Jo Mill and Spraberry Shale horizons. The Partnership believes that its leasehold acreage is prospective for horizontal development; however, the potential for horizontal development of all of its acreage is (i) limited by the noncontiguous nature of some of the Partnership's acreage, (ii) limited as to the Partnership's depth rights across some of its acreage and (iii) subject to higher risk since there has been limited horizontal drilling in the area to substantiate that such horizontal drilling will generate adequate rates of returns across the various prospective horizons. In addition, the potential for horizontal drilling locations can be adversely affected by the location of existing or future vertical wells, which may limit or eliminate the Partnership's ability to drill a horizontal well. The Partnership expects horizontal drilling to generate higher rates of return than vertical drilling, if successful in its operating areas.
Operating activities.
Net cash provided by operating activities
during the
nine months ended
September 30, 2013
was
$82.2 million
, as compared to
$79.8 million
for the
nine months ended
September 30, 2012
. The
increase
in
net cash provided by operating activities
was primarily due to a $24.2 million increase in oil and gas revenues resulting principally from an increase in production, partially offset by an $8.2 million increase in oil and gas production costs, a $2.0 million increase in derivative payments, a $2.1 million increase in other expense payments, a $1.5 million increase in ad valorem and production taxes, a $1.4 million increase in interest payments and a $6.6 million decrease in cash provided by changes in working capital.
Investing activities.
Net cash used in investing activities
during the
nine months ended
September 30, 2013
was
$98.2 million
, as compared to
$76.8 million
for the
nine months ended
September 30, 2012
. The
increase
in
net cash used in investing activities
was due primarily to increased drilling and completion costs associated with the Partnership's drilling program.
Financing activities.
Net cash provided by financing activities during the
nine months ended
September 30, 2013
was
$19.2 million
, as compared to net cash used in financing activities of
$703 thousand
for the
nine months ended
September 30, 2012
. The increase in net cash provided by financing activities was primarily due to an increase in borrowings under the Credit Facility to fund a portion of the Partnership's 2013 three-rig drilling program.
Liquidity.
The Partnership expects that its principal sources of liquidity for the remainder of 2013 will be cash generated from operations and amounts available under the Credit Facility. As of
September 30, 2013
, the Partnership had
$201.0 million
of borrowings outstanding under the Credit Facility. The Partnership's borrowing capacity under the Credit Facility is subject to a covenant requiring that the Partnership maintain a specified ratio of the net present value of the Partnership's projected future cash flows from its oil and gas assets to total debt, with the variables upon which the calculation of net present value is based (including assumed commodity prices and an assumed discount rate) being subject to adjustment by the lenders. As a result, declines in commodity prices could reduce the Partnership's borrowing capacity under the Credit Facility and could require the Partnership to reduce its distributions to unitholders. Based on the financial covenant detailed above, the Partnership's available borrowing capacity under the Credit Facility was
$68.6 million
at
September 30, 2013
. As of
September 30, 2013
, the Partnership was in compliance with all of its debt covenants. See Note F of Notes to Consolidated Financial Statements included in "Item 1. Financial Statements" for additional information regarding the Partnership's Credit Facility.
The Partnership generally utilizes derivative swap contracts, collar contracts and collar contracts with short puts to (i) reduce the impact on the Partnership's net cash provided by operating activities from the price volatility of the commodities the Partnership produces and sells, (ii) support the Partnership's annual capital budgeting and expenditure plans and (iii) help sustain unitholder distributions. In furtherance of the Partnership's effort to meet these objectives, approximately 70 percent, 70 percent and 10 percent of the Partnership's estimated total production for the remainder of
2013
, 2014 and 2015, respectively, have been matched with commodity swap contracts, collar contracts or collar contracts with short puts.
PIONEER SOUTHWEST ENERGY PARTNERS L.P.
As discussed above under "— Capital commitments," the Partnership Agreement requires that the Partnership distribute all of its available cash to its unitholders and the General Partner. In addition, because the Partnership's proved reserves and production decline continually over time, the Partnership will need to replace production to sustain its level of distributions to unitholders over time. Accordingly, the Partnership's primary needs for cash will be for production growth through drilling initiatives (such as the ongoing three-rig drilling program), acquisitions, production enhancements and for distributions to partners. In making cash distributions, the General Partner will attempt to avoid large variations in the amount the Partnership distributes from quarter to quarter. The Partnership Agreement permits the General Partner to establish cash reserves to be used to pay distributions for any one or more of the next four quarters, and for the conduct of the Partnership's business, which includes possible acquisitions. A sustained decline in commodity prices could result in a shortfall in expected cash flows. If cash flow from operations does not meet the Partnership's expectations, the Partnership may reduce its level of capital expenditures, reduce distributions to unitholders, and/or fund a portion of its capital expenditures using borrowings under the Credit Facility, or from other sources, such as asset sales. The Partnership cannot provide any assurance that needed capital will be available on acceptable terms or at all.
The Partnership Agreement allows the Partnership to borrow funds to make distributions. The Partnership may borrow to make distributions to unitholders, for example, in circumstances where the Partnership believes that the distribution level is sustainable over the long-term, but short-term factors have caused available cash from operations to be insufficient to sustain its level of distributions. In addition, the Partnership plans to continue to use derivative contracts to protect the cash flow associated with a significant portion of its production. The Partnership is generally required to settle its commodity derivatives within five days of the end of a month. As is typical in the oil and gas industry, the Partnership does not generally receive the proceeds from the sale of its production until 30 days to 60 days following the end of the production month. As a result, when commodity prices increase above the fixed price in the derivative contracts, the Partnership will be required to pay the derivative counterparty the difference between the fixed price in the derivative contract and the market price before the Partnership receives the proceeds from the sale of its production. If this occurs, the Partnership may make working capital borrowings to fund its distributions.
New accounting pronouncements.
There are no new accounting pronouncements that are likely of having a material effect on the Partnership's consolidated financial statements.
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
The following quantitative and qualitative information about market risk are supplementary to the quantitative and qualitative disclosures provided in the Partnership's Annual Report on Form 10-K for the year ended
December 31, 2012
. As such, the information contained herein should be read in conjunction with the related disclosures in the Partnership's Annual Report on Form 10-K for the year ended
December 31, 2012
.
The following table reconciles the changes that occurred in the fair values of the Partnership's open derivative contracts during the
nine months ended
September 30, 2013
:
|
|
|
|
|
|
Derivative
Contract Net
Assets (Liabilities) (a)
|
|
(in thousands)
|
Fair value of contracts outstanding as of December 31, 2012
|
$
|
(1,760
|
)
|
Changes in contract fair value
|
(7,230
|
)
|
Contract maturities
|
12,488
|
|
Fair value of contracts outstanding as of September 30, 2013
|
$
|
3,498
|
|
____________
|
|
(a)
|
Represents the fair values of open derivative contracts subject to market risk.
|
PIONEER SOUTHWEST ENERGY PARTNERS L.P.
Interest rate sensitivity.
The following table provides information about the Credit Facility's sensitivity to changes in interest rates. The table presents the expected maturity date of the Credit Facility, the weighted average interest rates expected to be paid on the Credit Facility given current contractual terms and market conditions and the estimated fair value of outstanding borrowings under the Credit Facility. The average interest rate represents the average rates being paid on the debt projected forward relative to the forward yield curve for LIBOR on November 4, 2013.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ending December 31, 2013
|
|
Year Ending December 31,
|
|
Liability Fair Value at September 30,
2013
|
|
|
|
2014
|
|
2015
|
|
2016
|
|
2017
|
|
|
|
(dollars in thousands)
|
Total Debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable rate principal maturities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
201,000
|
|
|
$
|
193,355
|
|
Average interest rate
|
|
1.88
|
%
|
|
1.97
|
%
|
|
2.38
|
%
|
|
3.28
|
%
|
|
4.29
|
%
|
|
|
PIONEER SOUTHWEST ENERGY PARTNERS L.P.
The following table provides information about the Partnership's commodity derivative financial instruments that were sensitive to changes in oil or gas prices as of
September 30, 2013
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ending December 31,
|
|
Year Ending
December 31,
|
|
Asset
(Liability)
Fair Value at
September 30,
2013 (a)
|
|
|
|
|
|
|
2013
|
|
2014
|
|
2015
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Oil Derivatives:
|
|
|
|
|
|
|
|
|
Collar contracts with short puts:
|
|
|
|
|
|
|
|
$
|
8,102
|
|
Volume (BBLs per day)
|
|
—
|
|
|
5,000
|
|
|
—
|
|
|
|
Price per BBL:
|
|
|
|
|
|
|
|
|
Ceiling
|
|
$
|
—
|
|
|
$
|
105.74
|
|
|
$
|
—
|
|
|
|
Floor
|
|
$
|
—
|
|
|
$
|
100.00
|
|
|
$
|
—
|
|
|
|
Short put
|
|
$
|
—
|
|
|
$
|
80.00
|
|
|
$
|
—
|
|
|
|
Swap contracts:
|
|
|
|
|
|
|
|
$
|
(5,984
|
)
|
Volume (BBLs per day)
|
|
4,750
|
|
|
—
|
|
|
—
|
|
|
|
Price per BBL
|
|
$
|
87.83
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
Average forward NYMEX oil prices (b)
|
|
$
|
94.62
|
|
|
$
|
93.38
|
|
|
$
|
—
|
|
|
|
Gas Derivatives:
|
|
|
|
|
|
|
|
|
Collar contracts with short puts:
|
|
|
|
|
|
|
|
$
|
307
|
|
Volume (MMBTUs per day)
|
|
—
|
|
|
—
|
|
|
5,000
|
|
|
|
Price per MMBTU:
|
|
|
|
|
|
|
|
|
Ceiling
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5.00
|
|
|
|
Floor
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4.00
|
|
|
|
Short put
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3.00
|
|
|
|
Collar contracts:
|
|
|
|
|
|
|
|
$
|
99
|
|
Volume (MMBTUs per day)
|
|
2,500
|
|
|
—
|
|
|
—
|
|
|
|
Price per MMBTU:
|
|
|
|
|
|
|
|
|
Ceiling
|
|
$
|
4.50
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
Floor
|
|
$
|
4.00
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
Swap contracts:
|
|
|
|
|
|
|
|
$
|
1,012
|
|
Volume (MMBTUs per day)
|
|
2,500
|
|
|
5,000
|
|
|
—
|
|
|
|
Price per MMBTU
|
|
$
|
6.89
|
|
|
$
|
4.00
|
|
|
$
|
—
|
|
|
|
Average forward index gas prices (c)
|
|
$
|
3.45
|
|
|
$
|
3.61
|
|
|
$
|
3.84
|
|
|
|
Basis swap contracts (d):
|
|
|
|
|
|
|
|
$
|
(38
|
)
|
Permian Basin index swaps - (MMBTUs per day)
|
|
2,500
|
|
|
—
|
|
|
—
|
|
|
|
Price differential ($/MMBTU)
|
|
$
|
(0.31
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
Average forward basis differential prices (c)
|
|
$
|
(0.06
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
____________
|
|
(a)
|
In accordance with ASC 210-20 and ASC 815-10, the Partnership classifies the fair value amounts of derivative assets and liabilities executed under master netting arrangements as net derivative assets or net derivative liabilities, as the case may be. The net asset and liability amounts shown above have been provided on a commodity contract-type basis, which may differ from their master netting arrangements classifications.
|
|
|
(b)
|
The average forward NYMEX oil prices are based on
November 4, 2013
market quotes.
|
|
|
(c)
|
The average forward index gas prices and forward basis differential prices are based on NYMEX market quotes and estimated El Paso Natural Gas (Permian Basin) differentials to NYMEX prices, respectively, on
November 4, 2013
.
|
|
|
(d)
|
To minimize basis risk, the Partnership enters into basis swaps to convert the index prices of its swap contracts from a NYMEX index to an El Paso Natural Gas (Permian Basin) posting index.
|
PIONEER SOUTHWEST ENERGY PARTNERS L.P.