Quest Energy Partners, L.P. (NASDAQ: QELP) ("QELP" or "the
Partnership") today announced record unaudited financial results
for the second quarter of 2008, reiterated previously issued
distribution guidance, raised its full year 2008 guidance ranges
for Adjusted EBITDA and Distributable Cash Flow, and provided an
update on development activity.
Adjusted earnings before interest, income taxes, depreciation
and amortization (Adjusted EBITDA), a non-GAAP measure, totaled
$20.9 million for the three months ended June 30, 2008, up 73% from
its predecessor's year ago level. Distributable Cash Flow, also a
non-GAAP measure, totaled $13.6 million for the quarter, or
approximately 1.46 times the previously announced distribution of
$9.3 million. The second quarter's $0.43 per unit distribution was
up 4.9% from the prior quarter and will be paid on August 14, 2008
to unitholders of record at the close of business on August 4,
2008.
Net Income totaled $16.2 million for the three months ended June
30, 2008 as compared to a Net Loss of $5.2 million for its
predecessor's year ago level. Net Cash Provided by Operating
Activities totaled $30.6 million for the three months ended June
30, 2008 as compared to Net Cash Used in Operating Activities of
$146,000 in the predecessor's year ago period. Adjusted EBITDA and
Distributable Cash Flow are reconciled to Net Income (Loss) and Net
Cash Provided by (Used in) Operating Activities, their most
directly comparable GAAP measures in the attached financial
schedules.
Selected financial information in a comparative format for the
three and six months ended June 30, 2008 and 2007 are shown in the
table below. For additional detail, investors can access QELP's
Form 10-Q which was filed with the Securities and Exchange
Commission on August 11, 2008.
Select Financial Data (unaudited, in thousands, except per unit data)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
2008 2007 2008 2007
----------- ----------- ----------- -----------
(Consldtd) (Carve out) (Consldtd) (Carve out)
Total Revenue $ 39,972 $ 27,848 $ 77,372 $ 53,384
Operating Income 9,877 1,880 18,465 5,338
Net Income (Loss) 16,221 (5,231) (1,125) (8,924)
GP's Interest in Net
Income (Loss) 324 N/A (23) N/A
LP's Interest in Net
Income (Loss) 15,897 N/A (1,102) N/A
Net Income (Loss) per
LP unit 0.75 N/A (0.05) N/A
Net Cash Provided by
(Used in) Operating
Activities $ 30,612 $ (146) $ 23,838 $ 2,539
Adjusted EBITDA (1) 20,861 12,063 40,684 23,015
Distributable Cash
Flow (1) 13,603 N/A 26,482 N/A
Weighted Average
Total LP Units
Outst. 21,190 N/A 21,190 N/A
(1) A reconciliation of Adjusted EBITDA and Distributable Cash
Flow to Net Income (Loss) and Net Cash Provided by (Used in)
Operating Activities, their most directly comparable financial
measures calculated and presented in accordance with generally
accepted accounting principles, or GAAP, follows this news
release.
Management Comment
"We are pleased to report solid second quarter operating results
that are within our guidance ranges and allowed for continued high
coverage for our increased distribution. In the first half of the
year, we successfully drilled 243 gross wells and connected 183
gross wells in the Cherokee Basin out of the 325 gross wells
planned for the year. We plan to have all 325 Cherokee Basin wells
drilled by the end of this month and to spread the connections over
the remainder of the year. Production from our oil producing
property in Seminole County, Oklahoma that we acquired in the first
quarter continues to exceed our expectations and we plan to begin
drilling our first new horizontal well on this property in the
third quarter," said Jerry Cash, Chairman and Chief Executive
Officer of the general partner of QELP.
"On July 11, 2008, we completed the purchase of natural gas and
oil producing wellbores and related assets in the Appalachian Basin
from Quest Resource Corporation (NASDAQ: QRCP) ("QRCP") for
approximately $71.6 million, subject to post-closing adjustments.
We were pleased to complete this joint acquisition with QRCP on
attractive terms that gives us long-lived natural gas producing
properties that are immediately accretive to distributable cash
flow per unit, add geographic and geologic diversity, receive
premium natural gas pricing, and offer numerous opportunities to
complete the existing wells in additional formations with proved
developed non-producing reserves."
"On August 15, 2008, we plan to pay a quarterly distribution of
$0.43 per unit, which is 7.5% higher than the level indicated at
our IPO in November 2007. Subject to final approval from QELP's
Board of Directors, we anticipate our Appalachian acquisition and
organic growth from our operations in the Cherokee Basin will allow
the Partnership to increase its distribution paid in November for
the third quarter of 2008 by an additional 16% and 28% to an annual
rate of between $2.00 and $2.20, up from $1.72 currently. The
planned total distribution increase over the second and third
quarters from the first quarter is consistent with the guidance we
provided in conjunction with the closing of the Appalachian Basin
acquisition."
Operating Performance
Quest Energy Partners was formed with the contribution of
substantially all of the oil and gas assets of QRCP, except for its
midstream assets, and as a result the following comparisons reflect
the historical performance of QRCP prior to November 15, 2007 and
QELP after November 15, 2007.
Production and Prices
Total net natural gas equivalent production averaged 57.3
million cubic feet equivalents per day (Mmcfe/d) for the second
quarter of 2008, a 28% increase from an average of 44.7 Mmcfe/d
from the second quarter 2007. The increase was driven by our
development program over the past twelve months as well as the $9.5
million acquisition of oil producing properties in the first
quarter of 2008. Realized natural gas sales prices for the second
quarter of 2008, including the impact of hedges, was $7.44 per Mcf,
up from $6.84 per Mcf in the year ago quarter.
Operating Costs and Production Taxes
Total production costs, excluding gross production and ad
valorem taxes, rose to $6.3 million from $5.6 million due to the
first quarter acquisition, and higher electrical, legal, and road
maintenance costs. On a per Mcfe basis, costs declined to $1.22 per
Mcfe in the second quarter of 2008 from $1.38 per Mcfe in the
second quarter 2007. Gross production taxes rose by approximately
100% from the year ago quarter to $2.4 million from $1.2 million
due to increased production and a 41% increase in wellhead natural
gas prices.
Capital Expenditures
In the first half of 2008, QELP successfully drilled 243 gross
wells and connected 183 gross wells in the Cherokee Basin out of
the 325 gross wells planned for the year. At December 31, 2007,
QELP had the right to develop approximately 558,000 net acres in
the Cherokee Basin, of which approximately 48% were undeveloped. At
year end 2007, QELP had identified approximately 2,100 gross
drilling locations on its acreage in the Cherokee Basin, of which
approximately 800 were classified as proved undeveloped. These
locations represent an approximate six and a half year inventory of
drilling activity at the planned 2008 level of 325 wells.
On July 11, 2008, QELP completed the purchase of natural gas and
oil producing wellbores and related assets with estimated net
proved developed reserves as of May 1, 2008, of 32.9 billion cubic
feet of natural gas equivalent (Bcfe) and net production of
approximately 3.2 Mmcfe/d as of July 11, 2008, in the Appalachian
Basin from QRCP in exchange for cash consideration of approximately
$71.6 million, subject to post-closing adjustments. QRCP acquired
these assets as part of its purchase of privately held PetroEdge
Resources (WV) LLC and simultaneously sold them to QELP.
QELP funded the purchase with borrowings under its existing
revolving credit facility and a $45 million, six-month, bridge
facility. In connection with the acquisition, QELP's lenders
increased the borrowing base of its revolving credit facility to
$190 million from $160 million. Management plans to recommend to
the board of directors of QELP's general partner spending
approximately $4 million on capital projects in the Appalachian
Basin in the second half of 2008, including the completion of
existing wells in the Marcellus Shale or Devonian Sand formations
in Ritchie County, West Virginia and increasing production from
other existing wells through various optimization techniques
including stimulations, recompletions and enhancing production
infrastructure.
Management Guidance
The Partnership provided the following guidance with respect to
certain financial and operational metrics for the third quarter and
full year 2008. Full year 2008 Adjusted EBITDA and Distributable
Cash Flow guidance ranges were increased by approximately $15
million and $10 million, respectively, from prior levels, mainly
due to the Appalachian acquisition that closed on July 11, 2008 and
lower lease operating expense in the Cherokee Basin. In addition,
the high end of prior production guidance was reduced by 1.5 Bcfe,
or 6%, because production in the first half of the year was closer
to the low end of guidance ranges while cash interest expense and
sustaining capital expenditures were increased due to the
Appalachian acquisition.
3Q08E FY 2008E
------------- -------------
Total Production (Bcfe) 5.5 - 6.0 22.0 - 23.5
Avg Daily Production (MMcfe/d) 60.0 - 65.0 60.0 - 64.0
Total Operating Expenses ($mm) 18.0 - 20.0 74.0 - 82.0
General & Administrative ($mm) 2.4 - 2.8 10.0 - 12.0
Adjusted EBITDA ($mm) 25.0 - 28.0 91.0 - 99.0
Cash Interest Expense ($mm) 4.6 - 4.7 13.5 - 14.0
Sustaining Capital Expenditures ($mm) 6.0 - 7.0 23.0 - 25.0
Distributable Cash Flow ($mm) 14.4 - 16.3 54.5 - 60.0
Distributable Cash Flow per unit ($) 0.67 - 0.75 2.52 - 2.77
Distribution Coverage 1.3x - 1.4x 1.3x - 1.5x
% of Total Production Hedged 75% 82% 72% 77%
Unhedged Production Pricing Assumptions
------------- -------------
NYMEX Gas Price ($/MMBtu) 8.00 8.00
NYMEX Gas Price Differential % 8% - 12% 8% - 12%
NYMEX Oil Price ($/bbl) 100.00 100.00
NYMEX Oil Price Differential % 2% - 4% 2% - 4%
The ranges for Adjusted EBITDA are based on oil and natural gas
sales within the anticipated range of production, the Partnership's
existing derivative contracts for hedged volumes, and, for unhedged
volumes, the assumed NYMEX Gas and Oil Prices listed above less an
assumed NYMEX Gas and Oil Price differential (which is the
difference between NYMEX Gas and Oil Prices and the price received
at the delivery point).
Management currently believes the assumed prices and
differentials to NYMEX are reasonable based on historical levels
and management experience. However, due to market conditions and
other factors outside the Partnership's control, the actual prices
and differentials realized by the Partnership will be different and
those differences may be material. On August 8, 2008, the closing
spot price at Henry Hub (the pricing point for NYMEX) was
$8.22/MMBtu and the differential from the Southern Star natural gas
price was 14% or $1.12/MMBtu.
Conference Call
Quest will host a conference call to discuss 2008 second quarter
operating and financial results on Tuesday, August 12, 2008 at
11:00 a.m. Eastern time. There will be a question and answer period
following the presentation.
Call: 877-675-4752 (US/Canada) and 719-325-4848 (International)
Passcode: 4681784
Internet: Live and rebroadcast over the Internet: simply log on to
www.qelp.net.
Replay: Telephonically available through August 15, 2008 at
888-203-1112 (US/Canada) and 719-457-0820 (International)
using passcode 4681784 or archived at www.qelp.net.
About Quest Energy Partners, L.P.
Quest Energy Partners, L.P. was formed by Quest Resource
Corporation to acquire, exploit and develop natural gas and oil
properties and to acquire, own, and operate related assets. The
partnership owns more than 2,400 wells and is the largest producer
of natural gas in the Cherokee Basin, which is located in southeast
Kansas and northeast Oklahoma and holds a drilling inventory of
nearly 2,100 locations in the Basin. The partnership also owns
natural gas and oil producing wells in the Appalachian Basin of the
northeastern United States and in Seminole County, Oklahoma. For
more information, visit the Quest Energy Partners website at
www.qelp.net.
Quest Resource Corporation is a fully integrated E&P company
that owns: the right to develop approximately 130,000 net acres in
the Appalachian Basin of the northeastern United States, including
more than 122,000 acres prospective for the Marcellus Shale; 100%
of the general partner and a 57% limited partner interest in Quest
Energy Partners, L.P.; and 85% of the general partner and a 36%
limited partner interest in Quest Midstream Partners, L.P. Quest
Resource operates and controls Quest Energy Partners and Quest
Midstream Partners through its ownership of their general partners.
For more information, visit the Quest Resource website at
www.qrcp.net.
Quest Midstream Partners, L.P. was formed by Quest Resource
Corporation to acquire and develop transmission and gathering
assets in the midstream natural gas and oil industry. The
partnership owns more than 2,100 miles of natural gas gathering
pipelines and over 1,100 miles of interstate natural gas
transmission pipelines in Oklahoma, Kansas, and Missouri. For more
information, visit the Quest Midstream Partners website at
www.qmlp.net.
Forward-Looking Statements
Opinions, forecasts, projections or statements other than
statements of historical fact, are forward-looking statements that
involve risks and uncertainties. Forward-looking statements in this
announcement are made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. Although the
Partnership believes that the expectations reflected in such
forward-looking statements are reasonable, it can give no assurance
that such expectations will prove to be correct. In particular, the
forward looking statements made in this release are based upon a
number of financial and operating assumptions that are subject to a
number of risks, including without limitation: the uncertainty
involved in exploring for and developing new natural gas reserves,
the sale prices of natural gas and oil, labor and raw material
costs, the availability of sufficient capital resources to carry
out the Partnership's anticipated level of new well development and
Quest Midstream's construction of related pipelines, environmental
issues, weather conditions, competition, general market conditions.
Actual results may differ materially due to a variety of factors,
some of which may not be foreseen by Quest. These risks, and other
risks are detailed in the Partnership's filings with the Securities
and Exchange Commission. You can find the Partnership's filings
with the Securities and Exchange Commission at www.qelp.net or at
www.sec.gov. By making these forward-looking statements, the
Partnership undertakes no obligation to update these statements for
revisions or changes after the date of this release.
Reconciliation of Non-GAAP Financial Measures
Adjusted EBITDA is defined as net income (loss) plus:
-- net interest expense;
-- depreciation, depletion and amortization expense;
-- gain (loss) on sale of assets;
-- provision for impairment of gas and oil properties;
-- cumulative effect of accounting change, net of tax;
-- change in derivative fair value; and
-- non-cash compensation expense.
Distributable Cash Flow is defined as Adjusted EBITDA minus:
-- cash interest expense; and
-- maintenance capital expenditures.
Adjusted EBITDA and Distributable Cash Flow are significant
performance metrics used by the Partnership's management, and by
external users of its financial statements, such as investors,
commercial banks, research analysts and others, to assess (prior to
the establishment of any cash reserves by the Partnership's general
partner) the cash distributions the Partnership expects to pay its
unitholders. Specifically, these financial measures indicate
whether or not the Partnership is generating cash flow at a level
that can sustain or support an increase in its quarterly
distribution rates without regard to the impact of financing
methods, capital structure or historical cost basis of its
assets.
Adjusted EBITDA is used as a supplemental liquidity measure by
the Partnership's management, and by external users of its
financial statements, such as investors, commercial banks, research
analysts and others, to assess the ability of the Partnership's
assets to generate cash sufficient to pay interest costs, support
its indebtedness, and make distributions to its unitholders.
The Partnership's revolving credit agreement requires the
Partnership to maintain a minimum ratio of consolidated EBITDA plus
distribution equivalents paid on unvested equity incentive
compensation awards, if any, to consolidated interest expense (as
defined in its credit facility) and a maximum ratio of total debt
(as defined in its credit facility) to consolidated EBITDA plus
distribution equivalents paid on unvested equity incentive
compensation awards, if any. Consolidated EBITDA under the
Partnership's revolving credit agreement is computed in the same
manner as the way Adjusted EBITDA is presented in this press
release. The Partnership's management believes it is important to
maintain consistency between the way the Partnership reports
Adjusted EBITDA and the way the Partnership is required to
calculate consolidated EBITDA for purposes of its revolving credit
agreement.
Distributable Cash Flow is a significant performance metric used
by management, and by external users of its financial statements,
such as investors, commercial banks, research analysts and others,
to compare basic cash flows generated by the Partnership (prior to
the establishment of any retained cash reserves by our general
partner) to the cash distributions the Partnership expects to pay
its unitholders.
Using this metric, management can quickly compute the coverage
ratio of estimated cash flows to cash distributions. Distributable
Cash Flow is also an important non-GAAP financial measure because
it serves as an indicator of the cash return on investment provided
to investors. Specifically, this financial measure indicates to
investors whether or not the Partnership is generating cash flow at
a level that can sustain or support an increase in the
Partnership's quarterly distribution rates. Distributable Cash Flow
is also a quantitative standard used throughout the investment
community with respect to publicly-traded partnerships and limited
liability companies because the value of a unit of such an entity
is generally determined by the unit's yield (which in turn is based
on the amount of cash distributions the entity pays to a
unitholder). The economic substance behind management's use of
Distributable Cash Flow is to measure the ability of the
Partnership's assets to generate cash flows sufficient to make
distributions to our investors.
Adjusted EBITDA and Distributable Cash Flow should not be
considered an alternative to, or more meaningful than, net income,
operating income, cash flows from operating activities or any other
measure of financial performance presented in accordance with GAAP
as measures of operating performance, liquidity or ability to
service debt obligations. Adjusted EBITDA does not include interest
expense and Adjusted EBITDA and Distributable Cash Flow do not
include income taxes, depreciation and amortization expense, change
in derivative fair value or non-cash compensation expense. Because
the Partnership's predecessor has borrowed, and the Partnership
intends to borrow, money to finance the Partnership's operations,
interest expense is a necessary element of the Partnership's costs.
Because the Partnership uses capital assets, depreciation and
amortization are also necessary elements of its costs. Because the
Partnership's predecessor has used, and the Partnership intends to
use, derivative contracts to hedge its exposure to commodity
prices, changes in the fair value of those contracts is also a
necessary element of its costs. Because the Partnership's
predecessor has used, and the Partnership intends to use, non-cash
equity awards as part of its overall compensation package for
directors, non-cash compensation expense is a necessary element of
its costs. Due to fluctuations in commodity prices, Impairments of
oil and gas properties may at times be a material element of the
Partnership's business. Therefore, any measures that exclude these
elements have material limitations. To compensate for these
limitations, the Partnership's management believes that it is
important to consider both net income and net cash provided by
operating activities determined under GAAP, as well as Adjusted
EBITDA and Distributable Cash Flow, to evaluate the Partnership's
financial performance and its liquidity.
Management compensates for the limitations of Adjusted EBITDA
and Distributable Cash Flow as analytical tools by reviewing the
comparable GAAP measures, understanding the differences between the
measures and incorporating this knowledge into management's
decision-making processes.
Reconciliation of Net Income to Adjusted EBITDA and Distributable Cash Flow
(unaudited, in thousands)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
2008 2007 2008 2007
---------- ---------- ---------- ----------
(Carve (Carve
(Consldtd) out) (Consldtd) out)
Net income (loss) $ 16,221 ($ 5,231) ($ 1,125) ($ 8,924)
Net interest expense 2,325 7,086 4,448 13,880
Change in unrealized
derivative value (8,862) (279) 14,969 185
Depreciation, depletion,
and amort.(1) 10,395 7,984 20,586 15,316
(Gain) loss on sale of
assets 26 305 (21) 240
Non-cash equity
compensation 756 2,198 1,827 2,318
---------- ---------- ---------- ----------
Adjusted EBITDA $ 20,861 $ 12,063 $ 40,684 $ 23,015
Cash interest expense (2,158) (5,845) (4,102) (14,160)
Maintenance capital
expenditures(2) (5,100) N/A (10,100) N/A
Distributable Cash Flow $ 13,603 N/A $ 26,482 N/A
Reconciliation of Net Cash Provided By (Used In) Operating Activities to
Adjusted EBITDA and Distributable Cash Flow (unaudited, in thousands)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
2008 2007 2008 2007
---------- ---------- ---------- ----------
(Carve (Carve
(Consldtd) out) (Consldtd) out)
Net cash provided by (used
in) operating activities $ 30,612 ($ 146) $ 23,838 $ 2,539
Net interest expense 2,325 7,086 4,448 13,880
Change in current assets
and liabilities (11,787) 5,731 12,864 7,745
Other net cash changes (289) (608) (466) (1,149)
---------- ---------- ---------- ----------
Adjusted EBITDA $ 20,861 $ 12,063 $ 40,684 $ 23,015
Cash interest expense (2,158) (5,845) (4,102) (14,160)
Maintenance capital
expenditures(2) (5,100) N/A (10,100) N/A
Distributable Cash Flow $ 13,603 N/A $ 26,482 N/A
(1) Includes depreciation and amortization expense associated
with company owned equipment which is included in oil and gas
production costs.
(2) Maintenance capital expenditures are those capital
expenditures management estimates are required to maintain the
Partnership's production levels and asset base over the long term.
The Partnership's predecessor did not characterize capital
expenditures as maintenance or expansion and did not plan capital
expenditures in a manner intended to maintain versus expand its
production or asset base. As a result, management has not included
an estimate of maintenance capital expenditures for the three and
six months ended June 30, 2007.
Company Contact: Jack Collins Investor Relations Phone: (405)
702-7460 Website: www.qelp.net
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