Gerry Willinger - Interim CEO, Manager of the General Partner Chuck Ward - CFO, Treasurer, Secretary

Jay Abella - Investment Partners Group Lin Shen - HITE Hedge Asset Management LLC

Good morning and welcome to Sanchez Production Partners First Quarter 2015 Earnings Conference. My name is Joseph and I will be moderating today's call. At this time all participants are in a listen-only mode. [Operator Instructions] And as a reminder, today's call is being recorded. If you object to such recording, you may disconnect at this time. I would now like to turn the call over to Chuck Ward, Chief Financial Officer of Sanchez Production Partners. Mr. Ward, you may begin.

Good morning and thanks for joining us. With me here today in Houston is Gerry Willinger, our Interim Chief Executive Officer and Pat Sanchez, our Chief Operating Officer. Joining the call from outside the office today is Tony Sanchez III, who was elected last week by the Board of Directors of our General Partner to serve as Chairman of the Board. Before we get started with today's discussion a few housekeeping items. As you know, we released our first quarter 2015 earnings report last Friday. This morning we updated the investor presentation on our Web site which is www.sanchezbp.com. We would encourage all of our stakeholders to take a look at that material because we think it provides a good overview of SPP. For your convenience we have made the slide deck available as part of today's webcast. So it is now our intention to go page by page through the slide deck this morning, we may make references to specific slides and think it may be useful to have the presentation material available during the question-and-answer portion of today's call. We intend to file the slide deck and an 8-K with the SEC later today. Second, our slides and discussion this morning will 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 Web site. We will also use non-GAAP financial measures in this morning's discussion to help our unitholders and the investment community better understand our operating performance. The presentation available on our Web site includes an appendix that reconciles these non-GAAP financial measures to GAAP measures. And with that, I'd now like to turn the call over to Gerry Willinger.

Thanks, Chuck. During the quarter, SPP completed its conversion from a limited liability company to a limited partnership with the overwhelming support of its unitholders, capping off a process undertaken in the summer of 2014 that has been the cornerstone of our strategic plan for SPP since August 2013. On the heels of completing the conversion, SPP executed its first transaction with Sanchez Energy by acquiring escalating working interest in 59 well bores in the Eagle Ford Shale that are expected to add approximately 1,000 barrel of oil equivalents per day to the partnership's average daily production over the period 2015 to 2019. As we noted at the time of the transaction, we believe the Eagle Ford acquisition sets the stage for other similar and potentially larger transactions in 2015 and beyond, which as discussed during our last call, may also involve the acquisition of Integrated Midstream Assets. We believe a large scale transaction will be key to recapitalizing SPP and resuming distributions to our unitholders. In conjunction with the Eagle Ford acquisition, we successfully refinanced SPP's credit facility, thereby expanding the Partnership's borrowing base, bank syndicate and hedge capabilities and tapped the capital markets to raise equity for SPP for the first time since 2008. These initiatives are directly related to and result from our ongoing efforts to further align the Partnership with Sanchez Oil & Gas Corporation or SOG. We believe SPP's relationship with SOG provides the Partnership with a robust operational platform and deal flow as evidenced by the transaction with Sanchez Energy, a company that has substantial inventory of assets with characteristics favorable to the MLP model. While SPP's quarterly results were impacted by some non-recurring costs related to our conversion and Eagle Ford acquisition, we believe the structural benefits of the work completed during the first quarter better positions the Partnership for the next phase of its development. We remain committed to returning value to our unitholders and look forward to the opportunities that lie ahead. With that, I'd like to turn the call back to Chuck for a closer look at the quarter.

Thanks, Gerry. I'd first like to note that the slide deck we posted this morning includes information on our first quarter 2015 performance. So following up on that information and our Earnings Release last Friday, the Partnership produced 324 MBOE during the first quarter 2015 for average net production of about 3600 BOE per day for the quarter which was a decrease of about 11% from the fourth quarter 2014. Oil and liquids accounted for about 19% of our total production during the quarter, and about 46% of our sales revenue. As reported, our operating costs which include lease operating expenses, production taxes, and G&A expenses, net of certain non-cash items, averaged about $39.63 per BOE in the first quarter 2015, which compares to $25.48 per BOE in the fourth quarter 2014. However, as Gerry mentioned, there were a number of non-recurring costs stemming from our conversion and the Eagle Ford acquisition reflected in our first quarter 2015 results. These include employee severance charges of $4.4 million, transaction charges of $600,000, conversion charges of $300,000, and litigation charges of less than $100,000. Excluding these non-recurring items, our operating costs would have averaged about $23.20 per BOE, about 9% lower than fourth quarter 2014. Our adjusted EBITDA for the first quarter 2015 as reported was negative $400,000. Excluding these non-recurring items which totaled about $5.3 million, our adjusted EBITDA for the first quarter would have been about $4.9 million. It's an increase of about 3% compared to the fourth quarter 2014. We had no new wells or recompletion during the quarter and saw about $1 million in capital spending. As we look to divest our Mid-Continent assets we anticipate very little in the way of drilling activity in the operated areas of our asset base which is the primary reason for the production decline experienced in the first quarter 2015. The Mid-Continent sales process which is being led by Lantana is now in full swing with bids expected in early June. As of today, the Partnership has $106 million in debt outstanding under its credit facility which has a borrowing base of $110 million. We reported cash and cash equivalents totaling $2.2 million as of March 31, 2015. The next redetermination on our borrowing base is currently scheduled for the fourth quarter of this year. For the period April 1, 2015 through December 31, 2015, we have hedges in place that cover approximately 3.5 Bcf of our natural gas production at an average NYMEX fixed price of $4.16 per Mcf and 356,000 barrels of our crude oil production at an effective NYMEX fixed price of $75.02 per barrel. Additional information on our hedge positions could be found in our slide deck and in our information on file with the SEC. With that overview of our first quarter 2015 results, I would now like to turn the call back to our moderator and open the line for some questions.

Thank you. We will now begin the question-and-answer session of today's conference. [Operator Instructions] Our first question comes from Jay Abella [Investment Partners Group]. Sir, your line is now open.

Hi, guys. I just wanted to get some clarity on what you may be looking at on a cost per BOE basis for the March 31st transaction with SOG for next year. Do we have that from a pro forma standpoint?

No, we've not provided any pro forma guidance on that.

Okay. I guess I'm trying to assess the moving parts here of possibly selling the legacy assets and then what SPP looks like going forward from a production cash flow and distributable cash basis.

I think I'd expect that upon announcement of a transaction on that, we'd provide an updated pro forma and forecast for 2015 and maybe 2016, depending upon the timing of that transaction.

Okay. Said another way, do we have an expected capital expenditure relative to those assets and/or G&A for the corporation pro forma possibly considering a sale of the legacy assets.

Sure. I'd say incremental G&A from that transaction, if that's what the question is – on an ongoing basis looking forward is none. There's no incremental G&A associated with that. We can do that with everything we have in-hand. And there are no capital requirements. Those are well bore interest only, so we don't have any drilling expenditures associated with that.

Okay. Do you have any lease operating expenses at all?

We do have LOEs that flow through the income statement as typical LOEs do, but we don't – we haven't provided a range of guidance on that.

Okay. I'll get back in the queue. Thanks.

Thanks.

Our next question comes from Lin Shen [HITE Hedge Asset Management LLC]. Your line is now open.

Hi. Thanks for taking my questions. Two questions. First one is you said that as of May 2015, you'll have about $106 million in debt outstanding and $2.2 million cash as of March 31. So I'm just wondering as of May 15 what's the net debt number should be.

We were about a little bit over $4 million last cash report I saw outstanding. So that would be as of I think the middle of last week. So that would put us at 102 net.

Okay. 102. Thank you. And also, you mentioned that expect to announce the asset sales maybe in June or in summer. I'm just wondering like should we expect that [SOG] [ph] should be one transaction or are you also open to like a transaction of like some small scale, like couple of transactions?

Although we haven't – we don't anticipate dividing up the operated portion, there are some non-operated portions that we would accept a bid on those as being separate, but it's primarily focused on the larger operating section that includes the SOG concession.

And also last one is that the natural gas price has been very low year-to-date, is any effect for your estimated valuation?

Well, the good thing is those production -- that production this year and next year is highly hedged. I haven't seen a lot of negative movement in 2017 and further out. So as the potential bid value of that asset has moved down, our hedge book has moved up in value to offset that and I would say a lower bid price or lower sales price actually makes it easier for folks to bid.

Thank you very much. Appreciate it.

You're welcome.

We show no further questions in queue at this time. I would now like to turn the call over back to Mr. Ward.

Thanks again for joining us this morning. We look forward to speaking with you again very soon.

That concludes today's conference. Thank you for your participation. You may disconnect at this time.