Stephen Brunner - President and CEO Charles Ward - CFO

Jay Abella – Investment Partners Asset Management

Good morning and welcome to Sanchez Production Partners Third Quarter 2014 Earnings call. My name is Elan and I'll be moderating today’s call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, today’s call is being recorded, and if you object to such recordings, you may disconnect at this time. I would now like to turn the call over to Stephen R. Brunner, President and Chief Executive Officer of Sanchez Production Partners. Mr. Brunner, you may begin.

Thank you, good morning everyone. This is Steve Brunner, along with Chuck Ward. We’d like to thank everyone that took the time to join us this morning as we review our third quarter 2014 results in what is our earnings call since we changed our name from Constellation Energy Partners to Sanchez Production Partners. Before we look at the quarter, on Slide 2, I’d like to remind everyone that this morning’s presentation is being webcast and our slide deck is available on our website, which is now www.sanchezpp.com. I’d also like to note that our slides and discussion this morning include forward-looking statements which are subject to certain risks and uncertainties. These are described more fully in our documents on file with the SEC, which are also available on our website. And finally, we’ll use non-GAAP financial measures in this morning’s presentation to help our unit holders and the investment community better understand our operating performance. The presentation available on our website includes an appendix that reconciles these non-GAAP financial measures to GAAP measures. If you’ll turn with me to Slide 3, our average daily net production during the third quarter was 4,129 BOE, down about 2% compared to the prior quarter, but up about 13% when compared to the same quarter last year. Our oil and liquids production during the quarter came in at 1,102 barrels per day, down about 4% compared to the prior quarter, but up about 60% over the same quarter last year. This is the second consecutive quarter we've seen oil and liquids production above the 1,000 barrel per day mark. So we're obviously very pleased about that. For the year-to-date ended September 30, 2014, our average daily net oil and liquids production was 1,052 barrels, which was up about 87% over the same nine month period of 2013. Like last quarter, our oil and liquids production accounted for about 27% of total production during the quarter. This compares to 19% in the same quarter last year. Our oil and liquids production contributed about 57% of our total sales revenue in the third quarter, which was down from the high of about 60% we set in the prior quarter, due mainly to a shift in our production mix and the recent slide in commodity prices that began during the third quarter. For the year-to-date, oil and liquids production contributed about 54% of our total sales revenue, which compares to about 51% for the same nine month period of last year. During the third quarter 2014, our operating costs which include lease operating expenses, production taxes and general and administrative expenses, net of certain non-cash items averaged about $25.76 per BOE. This compares to $25.41 per BOE in the second quarter of this year and after an adjustment of the $1 million non-recurring item related to the implementation of the shared services agreement with SOG and $26.01 per BOE adjusted for nonrecurring items in the third quarter of 2013. Year-to-date our operating costs net of nonrecurring items came in at about $25.45 per BOE which is still very much in line with our forecast for the full year. Our adjusted EBITDA during the third quarter was $5.7 million which is down relative to the prior quarter and the same quarter last year due primarily to slight shift in our production mix and the recent slide in commodity prices that I mentioned earlier. For the year-to-date our adjusted EBITDA after adjustments for the nonrecurring items in the second quarter was $20.7 million. This marks a 13% improvement in the same nine-month period of 2013 after adjustments for nonrecurring items. During the third quarter we completed six net wells and recompletions on capital spending of $1.2 million. For the year-to-date our capital spending totals about $5 million which is a little less than a quarter at the midpoint of our 2014 forecast. Despite lower capital spending, we remain very much on target relative to our production forecast and adjusted EBITDA and have utilized capital that was planned for drilling earlier this year to resolve the PostRock litigation, implement the services agreement and better position the company for the initiatives planned with SOG. We provide on update on those initiative on Slide 4. As we discussed during our last call, affiliates of SOG began providing services that the company requires to operate its business at the beginning of the third quarter, which is one of the vast majority of our Houston based employees became employees of SOG. We anticipate that there will be no cost savings associated with the implementation of the services agreement in 2014, which is a year of transition. Beyond 2014, cost savings will be a function of more efficient use of shared resources and economies of scale. During the third quarter we also completed efforts to rebrand the company to Sanchez Production Partners. In addition to the name change, this effort involved growing at a new website and our common units trading on the NYSE market under the ticker symbol SPP, which began in early October. The rebranding effort selects the commitment of our sponsor SOG and its affiliates to the future of our company. In conjunction with this commitment we anticipate that we may convert from a limited liability company to a limited partnership, which is a more traditional corporate forum among publicly traded MLPs. The proposed conversion was approved by our Board of Managers during the third quarter and the related registration statement is currently pending SEC review. Longer term we anticipate that acquisitions will be a key part of our sponsor-led growth strategy along the path to distributions, regardless of if or when we implement the conversion. Acquisitions would be aimed at significant increase in the size of the company's asset base or positioning the company for future growth and set the space for potential large scale recapitalization in 2015. We think marketing conditions are favorable on the acquisition front and hope to leverage SOG sponsorship and business development activity to the extent SPPs reach into transactions previously viewed as unattainable due to our size and scope. With that in mind, on Slide 5, we lay out some of our thoughts on planning as we head into 2015. We believe a growth target of 5,000 BOE per day is attainable over time. This would more than double our third quarter 2013 daily production. Realizing this growth target will be achievable primarily through acquisitions, which will be a key part of our strategy going forward. Acquisitions may take the form of joint bid opportunities with the SOG and its affiliates, opportunities to acquire assets from SOG-affiliated companies, and/or independent, “right-sized” transactions with third parties. Ultimately this growth is aimed at reinstating our distribution, which we anticipate may occur as a result of one or more large scale acquisitions. As contemplated under the shared services agreement with SP Holdings, which is an affiliate of SOG our minimum quarterly distribution would initially be set at $0.05 per unit or an annualized rate of $0.20. From there, IDRs are intended to provide an incentive to grow the company and distributions over time. Importantly, as we manage SPP through its next phase of corporate development, we look to balance distributions and growth with financial stability. Three key metrics will guide our approach to managing and maintaining financial stability. First, we look to target debt-to-adjusted EBITDA ratio of three times or less. Second, we look to target our distribution coverage ratio of 1.2 times or more and third, we look to target borrowing base utilization of less than 80%. The key to this balancing act is something we haven’t meaningfully had since 2008 and that’s sponsorship. Sponsorship allows us to leverage the resources and business development expertise of a much larger organization and should allow us to reap benefits from increased scope and scale over time. While implementation of the services agreement with SOG and its affiliates is now complete, integration aimed at business development capital efficiency and cost containment is ongoing. As we looked around the bend on our corporate development efforts, we target an annual G&A cost of about $6.25 million per year. This is an aggressive target, but something we feel is attainable as SPPs role among SOG managed companies solidifies. With those updates and overviews of our plans going forward, I’d like to now turn the presentation over to Chuck for a closer look at our third quarter financials.

Good morning. Thanks Steve. Slide 6 shows comparison of our third quarter 2014 results to the second quarter 2014 and the third quarter 2013. You can see from this comparison that our production during the quarter was relatively flat down less than 1%. Our Oil & Gas sales revenue of $15.8 million was down about 12% relative to the second quarter 2014 and down about 4% relative to the same quarter last year. Building on what Steve said earlier, this was largely a result of a slight shift in our production mix, caused primarily by one of our larger non-op oil wells coming down due to excessive water. The impact of the slide the commodity prices also began during the quarter, which impacted the realized prices in our oil production. You can really see the impact of the commodity price shift in the quarter-on-quarter change in our gain loss from market-to-market activities, which is a non-cash item that’s removed from net income and arriving at our adjusted EBITDA. Our operating expenses in the third quarter 2014 were down about 16% compared to the prior quarter, which has included the nonrecurring item related to the transaction cost on the implementation of shared services agreement and up about 10% relative to the same quarter of last year. Adjusted EBITDA during the quarter came in at $5.7 million as compared to $8 million in the prior quarter, after adjustment again for that nonrecurring item and it was compared to $7.4 million in the same quarter last year. Updating our forecast for the remainder of the year, the company has hedged approximately 1.6 Bcfe of its natural gas production at effective NYMEX fixed price of $5.75 per Mcfe with basis hedges on 0.6 Bcfe in its Mid-Continent production at an average differential of $0.39 per Mcfe. The company also has hedges in place on approximately 73,000 barrels of its 2014 oil production at a fixed price of $95.78 per barrel. Additional information on our hedges can be found in the appendix to today’s slide deck. Turning to our credit facility, we currently have approximately $52 million in debt outstanding, which leaves us about $18 million in borrowing capacity. At September 30, we had $9.7 million in cash and cash equivalents on the balance sheet which is up about $5.2 million since June 30. Back to Steve for some closing remarks.

Thanks Chuck. Our third quarter performance keeps SPP on pace to achieve the results we forecast for 2014. As we look ahead, our sponsor-led strategy targets production growth of more than 5,000 BOE per day for SPP over time. We believe this goal is achievable primarily through acquisitions, which may source from joint bid opportunities with SOG and its affiliates; opportunities to acquire assets from SOG affiliated companies and independent right-sized transaction with third parties. As we manage SPP through its next phase of corporate development, we see sponsorship is the key to our ability to balance distributions and grow the financial stability over time. Now with those updates, I’d like to turn the call back to the moderator and open the line for some questions.

Thank you [Operator Instructions] Our first question today is from Jay Abella. Jay Abella – Investment Partners Asset Management: Hi fellows, congratulations on a pretty good quarter. Just wanted Steve to go over again the parameters for SG&A going forward. I don’t think that I caught exactly what you were saying and if you could provide some color that would be great? Thanks.

Yeah, I'll start and then Chuck can follow up. Right now, most of our employees at the Houston office are SOG employees and what that means is we have the opportunity to share the expense and duties for those employees with the larger company. We think we're going to leverage the benefit of the relationship and that employees will be expensed not just at SPP, but they will be working on other items for different affiliated companies also. As we go forward and we have the ability to increase the size of our production portfolio, we anticipate that a lot of that increase will come from SOG affiliated companies which will come to us operated by SOG and/or those affiliation companies, which means we don't expect to have to add G&A for the significant increase in production that we're anticipating. Jay Abella – Investment Partners Asset Management: And that you're going to be able to run SPP and did you say $6.25 million?

We know it's aggressive and we know it's about half of the current ongoing run rate, but yes we believe that's achievable. Jay Abella – Investment Partners Asset Management: And by when?

We think 2015 is going to be a year of building and transition. So we look to -- towards the end of the year to hopefully achieve that run rate. And there are some other things that we need to do to get there and we're working on them. Chuck did you have any other thoughts?

No that’s a target buildup from probably saying if I try to set up a clean and running SOG affiliated type entity how far could I push it down to and so that would require probably fewer operated assets more one off assets kind of comingling the workforce the way that we have on function right now in a month or so when we're actually in the same facilities. We'll be able to even do that a little more aggressively. Obviously that would be affected by the filings that we have right now up on the conversion. So that's -- there are number of steps in there, but I think that's our build and that's our target just try to push it down one more time. Jay Abella – Investment Partners Asset Management: Okay. So you're going to go from $16 million on the G&A lines, I want to make sure I understand this, $16 million on the G&A line to six?

Yeah, I don't think $16 million is our top line, but I think our goal is how low can we push it as working fully in connection with the folks at Sanchez. Jay Abella – Investment Partners Asset Management: Great, thank you guys.

Thank you. [Operator Instructions].

Okay, well thanks again for joining us this morning. We look forward to speaking to you again on our next call.

Thank you. And this does conclude today's conference. You may disconnect at this time.