PSE Pioneer Southwest Energy Partners L.P. Pioneer Southwest Energy Partners Lp

Pioneer Southwest Energy Partners L.P. (“Pioneer Southwest” or “the Partnership”) (NYSE:PSE) today announced financial and operating results for the quarter ended March 31, 2011.

Pioneer Southwest reported a first quarter net loss of $13 million, or $0.38 per common unit. The loss included unrealized mark-to-market derivative losses of $37 million, or $1.13 per common unit. Without the effect of this item, adjusted income for the first quarter was $24 million, or $0.75 per common unit. Cash flow from operations for the period was $27 million.

Despite the impact of severe winter weather in West Texas, oil and gas sales for the first quarter averaged 6,648 barrels oil equivalent per day (BOEPD), an increase of 4% compared to the first quarter of 2010, reflecting the success of the Partnership’s two-rig drilling program. First quarter oil sales averaged 4,135 barrels per day (BPD), natural gas liquid (NGL) sales averaged 1,447 BPD and gas sales averaged 6 million cubic feet per day.

The first quarter average reported price for oil was $115.48 per barrel. The average reported price for NGLs was $37.94 per barrel and the average reported price for gas was $3.25 per thousand cubic feet.

The Partnership has a large inventory of oil drilling locations in the Spraberry field, with approximately 115 40-acre locations and 1,200 20-acre locations. It continues to operate two drilling rigs. Eleven wells were placed on production during the first quarter of 2011 and 13 additional wells were awaiting completion at March 31, 2011. All wells are being completed in the deeper Wolfcamp formation and organic rich shale/silt intervals. In addition, the Partnership is testing the deeper Strawn formation in certain areas of the field.

For 2011, the Partnership’s capital budget totals $67 million, consisting of $62 million for drilling and $5 million for facilities. The 2011 drilling program includes drilling 40 to 45 wells and is expected to generate full-year production growth of 5+% compared to 2010. Well costs are approximately $1.4 million each.

The Partnership has credit facility availability of $215 million, which is expected to be adequate to fund future growth through drilling and acquisitions.

Pioneer Southwest previously announced an increase in its quarterly cash distribution from $0.50 per outstanding common unit to $0.51 per outstanding common unit for the quarter ended March 31, 2011. This equates to $2.04 per outstanding common unit on an annualized basis. The distribution is payable May 12, 2011, to unitholders of record at the close of business on May 2, 2011.

Distribution sustainability is supported by the Partnership’s low-decline rate Spraberry properties, its large drilling inventory of 40-acre and 20-acre locations and its strong derivative position through 2014. Of the Partnership’s forecasted production, derivative contracts cover approximately 70% for the remainder of 2011, 80% in 2012, 60% in 2013 and 25% in 2014.

Second Quarter 2011 Financial Outlook

The following paragraphs provide the Partnership’s second quarter of 2011 outlook for certain operating and financial items.

Production is forecasted to average 6,600 BOEPD to 7,100 BOEPD. Production costs (including production and ad valorem taxes) are expected to average $20.00 to $23.00 per barrel oil equivalent (BOE) based on current NYMEX strip prices for oil, NGLs and gas. Depreciation, depletion and amortization expense is expected to average $5.00 to $6.00 per BOE.

General and administrative expense is expected to be $1 million to $2 million. Interest expense is expected to be $400 thousand to $600 thousand. Accretion of discount on asset retirement obligations is forecasted to be nominal.

Pioneer Southwest’s cash taxes and effective income tax rate are expected to be approximately 1% of earnings before income taxes as a result of Pioneer Southwest being subject to the Texas Margin tax.

Earnings Conference Call

On Wednesday, May 4, 2011, at 11:00 a.m. Central Time, Pioneer Southwest will discuss its financial and operating results with an accompanying presentation. Instructions for listening to the call and viewing the accompanying presentation are shown below.

Internet: www.pioneersouthwest.comSelect “Investors,” then “Earnings Calls & Webcasts” to listen to the discussion and view the presentation.

Telephone: Dial (800) 967-7185 confirmation code: 2222336 five minutes before the call to listen to the discussion. View the presentation via Pioneer Southwest’s internet address above.

A replay of the webcast will be archived on Pioneer Southwest’s website. A telephone replay will be available through May 28 by dialing (888) 203-1112 confirmation code: 2222336.

Pioneer Southwest is a Delaware limited partnership, headquartered in Dallas, Texas, with current production and drilling operations in the Spraberry field in West Texas. For more information, visit www.pioneersouthwest.com.

Except for historical information contained herein, the statements in this News Release are forward-looking statements that are made pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements and the business prospects of Pioneer Southwest are subject to a number of risks and uncertainties that may cause Pioneer Southwest’s actual results in future periods to differ materially from the forward-looking statements. These risks and uncertainties include, among other things, volatility of commodity prices, the effectiveness of Pioneer Southwest’s commodity price derivative strategy, reliance on Pioneer Natural Resources Company and its subsidiaries to manage Pioneer Southwest’s business and identify and evaluate drilling opportunities and acquisitions, product supply and demand, competition, the ability to obtain environmental and other permits and the timing thereof, other government regulation or action, the ability to obtain approvals from third parties and negotiate agreements with third parties on mutually acceptable terms, litigation, the costs and results of drilling and operations, availability of equipment, services and personnel required to complete Pioneer Southwest’s operating activities, access to and availability of transportation, processing and refining facilities, Pioneer Southwest’s ability to replace reserves, including through acquisitions, and implement its business plans or complete its development activities as scheduled, uncertainties associated with acquisitions, access to and cost of capital, the financial strength of counterparties to Pioneer Southwest’s credit facility and derivative contracts and the purchasers of Pioneer Southwest’s oil, NGL and gas production, uncertainties about estimates of reserves and the ability to add proved reserves in the future, the assumptions underlying production forecasts, quality of technical data and environmental and weather risks, including the possible impacts of climate change. These and other risks are described in Pioneer Southwest’s 10-K and 10-Q Reports and other filings with the Securities and Exchange Commission. In addition, Pioneer Southwest may be subject to currently unforeseen risks that may have a materially adverse impact on it. Pioneer Southwest undertakes no duty to publicly update these statements except as required by law.

       

PIONEER SOUTHWEST ENERGY PARTNERS L.P.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

  March 31, December 31,   2011     2010     ASSETS Current assets: Cash and cash equivalents $ 282 $ 107 Accounts receivable 17,461 15,824 Inventories 1,033 883 Prepaid expenses 175 260 Deferred income taxes 159 - Derivatives   8,759     18,753   Total current assets   27,869     35,827     Property, plant and equipment, at cost: Oil and gas properties, using the successful efforts method of accounting Proved properties 380,833 364,237 Accumulated depletion, depreciation and amortization   (129,291 )   (125,963 ) Total property, plant and equipment   251,542     238,274     Deferred income taxes 1,957 1,751 Derivatives 3,041 3,783 Other, net   379     425   $ 284,788   $ 280,060       LIABILITIES AND PARTNERS' EQUITY Current liabilities: Accounts payable: Trade $ 11,697 $ 8,422 Due to affiliates 1,030 1,164 Interest payable 133 30 Income taxes payable to affiliate 637 492 Deferred income taxes - 63 Derivatives 23,459 9,673 Asset retirement obligations   500     1,000   Total current liabilities   37,456     20,844     Long-term debt 85,000 81,200 Derivatives 53,571 31,713 Asset retirement obligations 12,140 11,558 Partners' equity   96,621     134,745     $ 284,788   $ 280,060        

PIONEER SOUTHWEST ENERGY PARTNERS L.P.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except for per unit data)

    Three Months Ended March 31,   2011     2010   Revenues: Oil and gas $ 49,782 $ 45,508 Interest and other   2     -     49,784     45,508     Costs and expenses: Oil and gas production 9,249 9,127 Production and ad valorem taxes 3,323 3,082 Depletion, depreciation and amortization 3,328 2,968 General and administrative 1,580 1,524 Accretion of discount on asset retirement obligations 227 136 Interest 395 363 Derivative (gain) loss, net   44,609     (11,524 )   62,711     5,676     Income (loss) before taxes (12,927 ) 39,832 Income tax (provision) benefit   200     (386 ) Net income (loss) $ (12,727 ) $ 39,446     Allocation of net income (loss) applicable to the Partnership General partner's interest $ (13 ) $ 39 Limited partners' interest (12,739 ) 39,407 Unvested participating securities' interest   25     -   Net income (loss) applicable to the Partnership $ (12,727 ) $ 39,446     Net income (loss) per common unit - basic and diluted $ (0.38 ) $ 1.19     Weighted average common units outstanding - basic and diluted   33,114     33,114     Distributions declared per common unit $ 0.50   $ 0.50                

PIONEER SOUTHWEST ENERGY PARTNERS L.P.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

  Three Months Ended March 31,   2011     2010     Cash flows from operating activities: Net income (loss) $ (12,727 ) $ 39,446 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depletion, depreciation and amortization 3,328 2,968 Deferred income taxes (344 ) 217 Accretion of discount on asset retirement obligations 227 136 Amortization of debt issuance costs 45 58 Amortization of unit-based compensation 90 19 Commodity derivative related activity 37,383 (18,736 ) Change in operating assets and liabilities, net of effects from acquisitions: Accounts receivable (1,637 ) (955 ) Inventories (150 ) (21 ) Prepaid expenses 85 60 Accounts payable 1,025 489 Interest payable 103 3 Income taxes payable to affiliate 145 169 Asset retirement obligations   (183 )   (47 ) Net cash provided by operating activities   27,390     23,806   Cash flows from investing activities: Additions to oil and gas properties   (14,441 )   (9,715 ) Net cash used in investing activities   (14,441 )   (9,715 ) Cash flows from financing activities: Borrowings under credit facility 16,000 17,000 Principal payments on credit facility (12,200 ) (15,000 ) Distributions to unitholders   (16,574 )   (16,574 ) Net cash used in financing activities   (12,774 )   (14,574 ) Net increase (decrease) in cash and cash equivalents 175 (483 ) Cash and cash equivalents, beginning of period   107     625   Cash and cash equivalents, end of period $ 282   $ 142      

PIONEER SOUTHWEST ENERGY PARTNERS L.P.

UNAUDITED SUMMARY PRODUCTION AND PRICE DATA

  Three Months Ended March 31,   2011     2010   Average Daily Sales Volumes: Oil (Bbls) -   4,135   3,832   Natural gas liquids (Bbls) -   1,447   1,572   Gas (Mcf) -   6,396   6,038   Total (BOE) -   6,648   6,410   Average Reported Prices: Oil (per Bbl) - $ 115.48 $ 103.58   Natural gas liquids (per Bbl) - $ 37.94 $ 48.23   Gas (per Mcf) - $ 3.25 $ 5.46   Total (per BOE) - $ 83.21 $ 78.87  

PIONEER SOUTHWEST ENERGY PARTNERS L.P.UNAUDITED SUPPLEMENTAL EARNINGS PER UNIT INFORMATION(in thousands, except for per unit amounts)

The Partnership follows the two-class method of calculating basic and diluted earnings per unit. Under the two-class method, generally accepted accounting principle ("GAAP") provides that the net income applicable to the Partnership be allocated to all securities that participate in the Partnership's earnings. Accordingly, net income applicable to the Partnership is allocated to the General Partner, unvested participating securities and common unitholders. Net losses applicable to the Partnership are allocated to the General Partner and common unitholders but only to unvested participating securities to the extent that they receive distributions during loss periods because unvested participating securities are not contractually obligated to share in the Partnership's net losses. Unit- and unit-based awards with guaranteed dividend or distribution participation rights qualify as "participating securities" during their vesting periods. The Partnership's basic and diluted net income (loss) per unit attributable to common unitholders is computed as (i) net income (loss) applicable to the Partnership, (ii) less General Partner net income (loss), (iii) less unvested participating securities' basic and diluted net income (iv) divided by weighted average basic and diluted units outstanding.

The following table provides a reconciliation of the Partnership's net income (loss) applicable to the Partnership to basic and diluted net income (loss) attributable to common unitholders, and the calculation of net income (loss) per common unit - basic and diluted, for the three months ended March 31, 2011 and 2010:

        Three Months Ended March 31,   2011           2010       Net income (loss) applicable to the Partnership $ (12,727 ) $ 39,446 Less: General partner's interest 13 (39 ) Unvested participating securities' interest   (25 )   -   Basic and diluted net income (loss) applicable to common unitholders $ (12,739 ) $ 39,407     Weighted average basic and diluted units outstanding   33,114     33,114     Net income (loss) per common unit - basic and diluted $ (0.38 ) $ 1.19    

PIONEER SOUTHWEST ENERGY PARTNERS L.P.UNAUDITED SUPPLEMENTAL NON-GAAP FINANCIAL MEASURES(in thousands)

EBITDAX and distributable cash flow (as defined below) are presented herein and reconciled to the GAAP measures of net cash provided by operating activities and net loss. Management of Pioneer Southwest Energy Partners L.P. believes these financial measures provide additional information to the investment community about the Partnership's ability to generate sufficient cash flow to sustain or increase distributions to its unitholders, among other items. In particular, EBITDAX is used in the Partnership's credit facility to determine the interest rate that we will pay on outstanding borrowings and to determine compliance with the leverage and interest coverage tests. EBITDAX and distributable cash flow should not be considered as alternatives to net cash provided by operating activities or net loss, as defined by GAAP.

    Three Months Ended March 31, 2011   Net cash provided by operating activities $ 27,390 Add/(Deduct): Depletion, depreciation and amortization (3,328 ) Deferred income taxes 344 Accretion of discount on asset retirement obligations (227 ) Amortization of debt issuance costs (45 ) Amortization of unit-based compensation (90 ) Commodity derivative related activity (37,383 ) Changes in operating assets and liabilities   612     Net loss (12,727 ) Add/(Deduct): Depletion, depreciation and amortization 3,328 Accretion of discount on asset retirement obligations 227 Interest expense 395 Income tax benefit (200 ) Amortization of unit-based compensation 90 Commodity derivative related activity   37,383     EBITDAX (a) 28,496 Deduct: Cash reserves to maintain production and cash flow (6,848 ) Cash interest expense (350 ) Cash income taxes   (144 )   Distributable cash flow (b) $ 21,154  

_____________

(a) "EBITDAX" represents earnings before depletion, depreciation and amortization expense; accretion of discount on asset retirement obligations; interest expense; income taxes; amortization of unit-based compensation and noncash commodity derivative related activity.

(b) Distributable cash flow equals EBITDAX less the Partnership's estimated cash reserves to maintain production and cash flow, cash interest expense and cash income taxes.

     

PIONEER SOUTHWEST ENERGY PARTNERS L.P.

SUPPLEMENTAL INFORMATION

Open Commodity Derivative Positions as of May 2, 2011

    2011 Twelve Months Ending December 31, Second Third Fourth           Quarter Quarter Quarter   2012     2013     2014       Average Daily Oil Production Associated with Derivatives: Swap Contracts: Volume (Bbl) 750 750 750 3,000 3,000 - NYMEX price (Bbl) $ 77.25 $ 77.25 $ 77.25 $ 79.32 $ 81.02 $ - Collar Contracts: Volume (Bbl) 2,000 2,000 2,000 - - - NYMEX price (Bbl): Ceiling $ 170.00 $ 170.00 $ 170.00 $ - $ - $ - Floor $ 115.00 $ 115.00 $ 115.00 $ - $ - $ - Collar Contracts with Short Puts: Volume (Bbl) 1,000 1,000 1,000 1,000 1,000 2,000 NYMEX price (Bbl): Ceiling $ 99.60 $ 99.60 $ 99.60 $ 103.50 $ 111.50 $ 133.00 Floor $ 70.00 $ 70.00 $ 70.00 $ 80.00 $ 83.00 $ 90.00 Short Put $ 55.00 $ 55.00 $ 55.00 $ 65.00 $ 68.00 $ 75.00 Percent of total oil production (a)

~90

%

~90

%

~90

%

~90

%

~85

%

~40

%

Average Daily NGL Production Associated with Derivatives: Swap Contracts: Volume (Bbl) 750 750 750 750 - - Blended index price (Bbl) (b) $ 34.65 $ 34.65 $ 34.65 $ 35.03 $ - $ - Percent of total NGL production (a)

~50

%

~50

%

~50

%

~50% N/A N/A Average Daily Gas Production Associated with Derivatives: Swap Contracts: Volume (MMBtu) 2,500 2,500 2,500 5,000 2,500 - NYMEX price (MMBtu) (c) $ 6.65 $ 6.65 $ 6.65 $ 6.43 $ 6.89 $ - Percent of total gas production (a)

~40

%

~40

%

~40

%

~80

%

 

~40

%

N/A Basis Swap Contracts: Permian Basin index swaps (MMBtu) (d) - - - 2,500 2,500 - Price differential ($/MMBtu) $ - $ - $ - $ (0.30 ) $ (0.31 ) $ -

_____________

(a) Represents an estimated percentage of forecasted production, which may differ from the percentage of actual production.

(b) Represents blended Mont Belvieu index prices per Bbl.

(c) Represents the NYMEX Henry Hub index price or approximate NYMEX Henry Hub index price based on historical differentials to the index price on the derivative trade date.

(d) Represents swaps that fix the basis differentials between the index price at which the Partnership sells its gas and NYMEX Henry Hub index price used in gas swap contracts.

 

PIONEER SOUTHWEST ENERGY PARTNERS L.P.

UNAUDITED SUPPLEMENTAL INFORMATION

  Derivative Losses, Net (in thousands)         Three Months Ended March 31, 2011   Noncash changes in fair value: Oil derivative losses $ (34,592 ) NGL derivative losses (2,166 ) Gas derivative losses   (625 ) Total noncash derivative losses, net   (37,383 )   Cash settled changes in fair value: Oil derivative losses (6,514 ) NGL derivative losses (1,285 ) Gas derivative gains   573   Total cash derivative losses, net   (7,226 ) Total derivative losses, net $ (44,609 ) Deferred Gains on Discontinued Commodity Hedges as of March 31, 2011 (in thousands)             Second Third Fourth Quarter Quarter Quarter   Commodity hedge gains (a): Oil $ 9,097 $ 9,197 $ 9,197

_____________

(a) Deferred commodity hedge gains will be amortized as increases to oil revenues during the indicated future periods.

PIONEER SOUTHWEST ENERGY PARTNERS L.P.UNAUDITED SUPPLEMENTAL NON-GAAP FINANCIAL MEASURES(in millions, except per unit data)

Net loss adjusted for unrealized mark-to-market derivative losses, as presented in this press release, is presented and reconciled to the Partnership’s net loss determined in accordance with GAAP because the Partnership believes that this non-GAAP financial measure reflects an additional way of viewing aspects of the Partnership’s business that, when viewed together with its financial results computed in accordance with GAAP, provides a more complete understanding of factors and trends affecting its historical financial performance and future operating results, greater transparency of underlying trends and greater comparability of results across periods. In addition, management believes that this non-GAAP measure may enhance investors’ ability to assess the Partnership’s historical and future financial performance. This non-GAAP financial measure is not intended to be a substitute for the comparable GAAP measure and should be read only in conjunction with the Partnership’s consolidated financial statements prepared in accordance with GAAP. Unrealized mark-to-market derivative gains and losses are of a type that will recur in future periods; however, the amount can vary significantly from period to period. The table below reconciles the Partnership’s net loss for the three months ended March 31, 2011, as determined in accordance with GAAP, to adjusted income excluding unrealized mark-to-market derivative losses for that quarter.

      After-tax   Per Common Amounts Unit   Net loss $ (13) $ (0.38)   Unrealized mark-to-market derivative losses 37 1.13   Adjusted income excluding unrealized mark-to-market derivative losses $ 24 $ 0.75