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LRR Energy, L.P. Announces Third Quarter 2014 Results

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LRR Energy, L.P. (NYSE:LRE) (“LRR Energy”) announced today its operating and financial results for the three and nine months ended September 30, 2014.

Eric Mullins, Chairman and Co-Chief Executive Officer, commented, “Overall we are pleased with our third quarter 2014 results. Despite slightly lower production volumes during the quarter, adjusted EBITDA, distributable cash flow and distribution coverage ratio increased as compared to the second quarter of 2014.”

Selected Financial and Operating Information

A summary of selected financial and operating information follows. For consolidated financial statements for the three and nine months ended September 30, 2014, please see the accompanying tables on pages 7-9.

Three Months Ended Nine Months Ended
September 30, 2014 September 30, 2014
(unaudited)
(in thousands, except distribution coverage ratio)
Oil, natural gas and natural gas liquids sales $ 28,571 $ 90,869
Gain (loss) on commodity derivative
instruments, net (1) $ 19,771 $ 821
Total revenues $ 48,382 $ 91,801
Lease operating expense $ 6,024 $ 18,688
Production and ad valorem taxes $ 2,172 $ 6,820
General and administrative expense $ 2,629 $ 8,510
Interest expense $ 2,551 $ 7,667
Net income (loss) $ 26,232 $ 21,589
Net income (loss) available to unitholders $ 26,232 $ 21,589
Net income (loss) per limited partner unit $ 0.95 $ 0.80
Capital expenditures $ 8,746 $ 25,840
Adjusted EBITDA (2) $ 20,845 $ 61,522
Distributable cash flow (2) $ 13,119 $ 38,307
Cash distribution – common unitholders $ 11,599 $ 32,753
Cash distribution – all unitholders $ 13,839 $ 40,542

Distribution coverage ratio – common unitholders (2)

1.13 1.17

Distribution coverage ratio – all unitholders (2)

0.95 0.94

(1)

See commodity derivative settlements on page 6.

(2)

Non-GAAP financial measure. See reconciliation of non-GAAP financial measures beginning on page 10.
Three Months Ended Nine Months Ended
September 30, 2014 September 30, 2014
Average net production (Boe/d) 6,304 6,363
Average cost per Boe:
Lease operating expense $ 10.39 $ 10.76
Production and ad valorem taxes $ 3.74 $ 3.93
General and administrative expense $ 4.53 $ 4.90

LRR Energy’s average net production for the three and nine months ended September 30, 2014 was negatively impacted by flaring at our Red Lake field of approximately 25 Boe/d and 40 Boe/d, respectively. During the third quarter, production at our non-operated Putnam field was approximately 85 Boe/d below our expectations because of delayed drilling activity and new well production performance. Due to flooding, production at our Corral Canyon field was negatively impacted by approximately 25 Boe/d during the third quarter. Finally, production at our non-operated Corral Canyon field was approximately 20 Boe/d below our third quarter expectations because of the deferment of drilling a well. Normal operations at our Corral Canyon field resumed on October 9, 2014. LRR Energy’s October 2014 average net production through October 24, 2014 was approximately 6,525 Boe/d.

Recent Events

As of October 30, 2014, LRR Energy had $233 million of outstanding borrowings under its revolving credit facility and $50 million of outstanding borrowings under its term loan. LRR Energy’s current liquidity position is approximately $39 million consisting of $27 million of availability under our revolving credit facility and approximately $12 million of available cash on hand. Management believes cash flow from operations, the capacity under the revolving credit facility and the proceeds from its current At-the-Market Offering Program will provide ample financial flexibility to execute its 2014 capital program and distribution strategy.

On October 17, 2014, LRR Energy announced that the Board of Directors of its general partner declared an increased cash distribution for the third quarter of 2014 of $0.4975 per outstanding unit, or $1.99 on an annualized basis. The distribution will be paid on November 14, 2014 to all unitholders of record as of the close of business on October 31, 2014. The declaration represents the ninth consecutive increase to LRR Energy’s quarterly distribution.

Revised 2014 Guidance

LRR Energy has revised its full year 2014 guidance based on actual results for the nine months ended September 30, 2014 and a decreased capital development program for the second half of 2014. The majority of the $2.5 million capital decrease is due to expected lower non-operated development activity at our Putnam and Corral Canyon fields. Based on current estimates, and assuming no future acquisitions, LRR Energy’s revised full year 2014 guidance is as follows:

Previous Revised
Daily Production (Boe/d) 6,450-6,550 6,400-6,450
LOE ($/Boe) $10.75-$11.00 $10.75-$11.00
Capital Expenditures ($MM) $37.5 $35.0

The guidance above sets forth management’s best estimate based on current and anticipated market conditions and other factors. While management believes that these estimates and assumptions are reasonable, they are inherently uncertain and are subject to, among other things, significant business, economic, regulatory, environmental and competitive risks and uncertainties that could cause actual results to differ materially from those management anticipates, as set forth under “Forward-Looking Statements.”

Commodity Derivative Contracts

As of September 30, 2014, LRR Energy had the following outstanding derivative contracts.

Index 2014 2015 2016 2017 2018
Natural gas positions
Price swaps (MMBTUs) NYMEX-HH 1,462,599 5,500,236 5,433,888 5,045,760 2,374,800
Weighted average price $ 5.61 $ 5.72 $ 4.29 $ 4.61 $ 4.28
Basis swaps (MMBTUs)

(1)

1,412,369 5,326,559 2,877,047
Weighted average price $ (0.1534 ) $ (0.1661 ) $ (0.1115 ) $ $
Oil positions
Price swaps (BBLs) NYMEX-WTI 204,595 757,321 610,131 266,574 65,280
Weighted average price $ 96.14 $ 93.16 $ 87.27 $ 86.06 $ 86.45
Basis swaps (BBLs) Argus- 95,570 397,035
Weighted average price Midland-Cushing $ (1.0000 ) $ (3.4087 ) $ $ $
NGL positions
Price swaps (BBLs) Mont Belvieu 66,569 236,149
Weighted average price $ 34.71 $ 34.46 $ $ $
(1) Our natural gas basis swaps are traded on the following indices: Centerpoint East, Houston Ship Channel, WAHA and TEXOK.

Subsequent to September 30, 2014, LRR Energy acquired the following commodity hedges.

Index 2017 2018
Oil positions
Price swaps (BBLs) NYMEX- 118,286 183,920
Weighted average price WTI 83.75 $ 83.43

Quarterly Report on Form 10-Q

LRR Energy expects to file its Quarterly Report on Form 10-Q with the Securities and Exchange Commission no later than November 10, 2014. The 10-Q will be available on the Investor Relations page of LRR Energy’s website, www.lrrenergy.com, or from the Securities and Exchange Commission website, www.sec.gov.

Webcast and Conference Call

LRR Energy will host a webcast and conference call on Friday, October 31, 2014, at 10:00 a.m. Eastern time (9:00 a.m. Central time) to discuss these results. Interested parties are invited to participate in the call by dialing 1-877-493-8071 (conference ID: 14656771). It is recommended that participants dial in approximately 10 minutes prior to the start of the conference call. Participants may access the webcast from LRR Energy’s website, www.lrrenergy.com, under the tab for “Investor Relations.”

A telephonic replay will be available after the call through November 14, 2014. Participants may access this replay by dialing 1-800-585-8367 (conference ID: 14656771).

About LRR Energy, L.P.

LRR Energy is a Delaware limited partnership formed in April 2011 by affiliates of Lime Rock Resources to operate, acquire, exploit and develop producing oil and natural gas properties in North America. LRR Energy’s properties are located in the Permian Basin region in West Texas and Southeast New Mexico, the Mid-Continent region in Oklahoma and East Texas and the Gulf Coast region in Texas.

Forward-Looking Statements

This press release includes “forward-looking statements” – that is, statements related to future events. Forward-looking statements are based on the current expectations of LRR Energy and include any statement that does not directly relate to a current or historical fact. In this context, forward-looking statements often address expected future business, operational and financial performance, and often contain words such as “may,” “predict,” “pursue,” “expect,” “estimate,” “project,” “plan,” “believe,” “intend,” “achievable,” “anticipate,” “target,” “continue,” “potential,” “should,” “could” and other similar words. Forward-looking statements involve certain risks and uncertainties, and ultimately may not prove to be accurate. These risks and uncertainties include, among other things, a decline in oil, natural gas or NGL prices, the risk and uncertainties involved in producing oil and natural gas, competition in the oil and natural gas industry, governmental regulations and other factors. Actual results and future events could differ materially from those anticipated or implied in the forward-looking statements due to the factors described under the captions “Risk Factors” in LRR Energy’s Annual Report on Form 10-K for the year ended December 31, 2013 and LRR Energy’s subsequent filings with the SEC. All forward-looking statements speak only as of the date of this press release. LRR Energy does not intend to update or revise any forward-looking statements as a result of new information, future events or otherwise. All forward-looking statements are qualified in their entirety by this cautionary statement.

LRR Energy, L.P.

Selected Operating Data

(unaudited)

Three Months Ended September 30, Nine Months Ended September 30,
2014 2013 2014 2013
Production:
Oil (MBbls) 219 216 653 614
Natural gas (MMcf) 1,609 1,849 4,897 5,500
NGLs (MBbls) 93 84 268 229
Total (MBoe) 580 608 1,737 1,760
Average net production (Boe/d) 6,304 6,609 6,363 6,447
Average sales price:
Oil (per Bbl):
Sales price $ 87.94 $ 102.96 $ 91.53 $ 92.37
Effect of settled commodity
derivative instruments 2.96 (9.76 ) (0.43 ) (2.92 )
Realized price $ 90.90 $ 93.20 $ 91.10 $ 89.45
Natural gas (per Mcf):
Sales price $ 4.07 $ 3.55 $ 4.53 $ 3.70
Effect of settled commodity
derivative instruments 1.22 1.40 0.82 1.40
Realized price $ 5.29 $ 4.95 $ 5.35 $ 5.10
NGLs (per Bbl):
Sales price $ 29.83 $ 31.61 $ 33.21 $ 31.29
Effect of settled commodity
derivative instruments (0.22 ) 3.83 (1.88 ) 4.88
Realized price $ 29.61 $ 35.44 $ 31.33 $ 36.17
Average cost per Boe:
Lease operating expenses $ 10.39 $ 9.87 $ 10.76 $ 10.27
Production and ad valorem taxes 3.74 4.00 3.93 3.68
Depletion and depreciation 15.02 15.67 14.89 16.92
General and administrative
expenses 4.53 4.39 4.90 5.04
Derivative instrument settlements
and amortization (in thousands):
Commodity 2,594 $ 801 3,231 $ 7,049
Interest rate (238 ) $ (184 ) (642 ) $ (536 )

LRR Energy, L.P.

Consolidated Condensed Statement of Operations

(in thousands, except per unit amounts)

(unaudited)

Three Months Ended September 30, Nine Months Ended September 30,
2014 2013 2014 2013
Revenues:
Oil sales $ 19,258 $ 22,239 $ 59,768 $ 56,714
Natural gas sales 6,542 6,564 22,206 20,364
Natural gas liquids sales 2,771 2,655 8,895 7,165
Gain (loss) on commodity
derivative instruments, net 19,771 (6,282 ) 821 5
Other income 40 19 111 106
Total revenues 48,382 25,195 91,801 84,354
Operating expenses:
Lease operating expense 6,024 6,005 18,688 18,072
Production and ad valorem taxes 2,172 2,434 6,820 6,478
Depletion and depreciation 8,711 9,533 25,856 29,772
Accretion expense 519 486 1,532 1,433
Loss (gain) on settlement of asset
retirement obligations 10 (1 ) 71 334
General and administrative expense 2,629 2,669 8,510 8,866
Total operating expenses 20,065 21,126 61,477 64,955
Operating income (loss) 28,317 4,069 30,324 19,399
Other income (expense), net
Interest expense (2,551 ) (2,349 ) (7,667 ) (6,863 )
Gain (loss) on interest rate
derivative instruments, net 492 (1,401 ) (930 ) 1,371
Other income (expense), net (2,059 ) (3,750 ) (8,597 ) (5,492 )
Income (loss) before taxes 26,258 319 21,727 13,907
Income tax expense (26 ) (35 ) (138 ) (102 )
Net income (loss) $ 26,232 $ 284 $ 21,589 $ 13,805
Net loss (income) attributable to
common control operations (448 )
Net income (loss) available to
unitholders $ 26,232 $ 284 $ 21,589 $ 13,357
Computation of net income (loss)
per limited partner unit:
General partners’ interest in net
income (loss) $ 26 $ $ 22 $ 13
Limited partners’ interest in net
income (loss) $ 26,206 $ 284 $ 21,567 $ 13,344
Net income (loss) per limited partner
unit (basic and diluted) $ 0.95 $ 0.01 $ 0.80 $ 0.53
Weighted average number of limited
partner units outstanding (basic and 27,481 26,169 26,856 25,098
diluted)

LRR Energy, L.P.

Consolidated Condensed Statement of Cash Flows

(in thousands)

(unaudited)

Nine Months Ended September 30,
2014 2013
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 21,589 $ 13,805
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depletion and depreciation 25,856 29,772
Accretion expense 1,532 1,433
Amortization of equity awards 819 391
Amortization of derivative contracts 510 746
Amortization of deferred financing costs and other 313 290
Loss (gain) on settlement of asset retirement obligations 71 334
Changes in operating assets and liabilities:
Change in receivables 598 (3,317 )
Change in prepaid expenses (1,515 ) (230 )
Change in derivative assets and liabilities 2,698 5,137
Change in amounts due to/from affiliates (6,015 ) (4,270 )
Change in accrued liabilities and deferred tax liabilities 1,838 3,618
Net cash provided by (used in) operating activities 48,294 47,709
CASH FLOWS FROM INVESTING ACTIVITIES
Development of oil and natural gas properties (25,840 ) (24,857 )
Disposition of oil and natural gas properties 50
Net cash provided by (used in) investing activities (25,790 ) (24,857 )
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under revolving credit facility 30,000 45,000
Principal payments on revolving credit facility (30,000 ) (28,000 )
Equity offering, net of expenses 23,419 59,513
Distributions (39,589 ) (36,125 )
Distribution to Lime Rock Resources (60,672 )
Contribution to Lime Rock Resources (734 )
Net cash provided by (used in) financing activities (16,170 ) (21,018 )
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 6,334 1,834
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 4,417 3,467
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 10,751 $ 5,301
Supplemental disclosure of non-cash items to reconcile
investing and financing activities
Property and equipment:
Accrued capital costs $ 2,125 $ 2,892
Asset retirement obligations (235 ) (417 )

LRR Energy, L.P.

Consolidated Condensed Balance Sheet

(in thousands, except unit amounts)

(unaudited)

September 30, 2014 December 31, 2013
ASSETS
Current assets:
Cash and cash equivalents $ 10,751 $ 4,417
Accounts receivable 9,269 9,867
Commodity derivative instruments 14,508 9,726
Due from affiliates 5,760
Prepaid expenses 2,858 1,603
Total current assets 43,146 25,613
Property and equipment (successful efforts method) 904,497 876,674
Accumulated depletion, depreciation and impairment (457,732 ) (431,837 )
Total property and equipment, net 446,765 444,837
Commodity derivative instruments 7,722 16,746
Deferred financing costs, net of accumulated amortization and other 1,100 1,154
TOTAL ASSETS $ 498,733 $ 488,350
LIABILITIES AND UNITHOLDERS’ EQUITY
Current liabilities:
Accrued liabilities $ 4,094 $ 2,300
Accrued capital cost 4,507 2,574
Due to affiliates 255
Commodity derivative instruments 510 2,217
Interest rate derivative instruments 1,781 648
Asset retirement obligations 510 488
Total current liabilities 11,402 8,482
Long-term liabilities:
Commodity derivative instruments 559 174
Interest rate derivative instruments 709 1,554
Term loan 50,000 50,000
Revolving credit facility 200,000 200,000
Asset retirement obligations 37,479 35,838
Deferred tax liabilities 88 44
Total long-term liabilities 288,835 287,610
Total liabilities 300,237 296,092
Unitholders’ equity:
General partner (22,400 units issued and outstanding as of
September 30, 2014 and December 31, 2013) 290 303
Public common unitholders (19,078,939 units issued and
outstanding as of September 30, 2014 and 17,710,334 units
issued and outstanding as of December 31, 2013) 193,516 181,290
Affiliated common unitholders (4,089,600 units issued and
outstanding as of September 30, 2014 and 1,849,600 units
issued and outstanding as of December 31, 2013) 2,088 2,093
Subordinated unitholders (4,480,000 units issued and outstanding
as of September 30, 2014 and 6,720,000 units issued and
outstanding as of December 31, 2013) 2,602 8,572
Total unitholders’ equity 198,496 192,258
TOTAL LIABILITIES AND UNITHOLDERS’ EQUITY $ 498,733 $ 488,350

LRR Energy, L.P.

Non-GAAP Reconciliation

(in thousands)

(unaudited)

LRR Energy defines Adjusted EBITDA as net income (loss) plus or minus income tax expense; interest expense-net, including loss (gain) on interest rate derivative instruments, net; depletion and depreciation; accretion of asset retirement obligations; amortization of equity awards; loss (gain) on settlement of asset retirement obligations; loss (gain) on commodity derivative instruments, net; commodity derivative instrument net cash settlements; impairment of oil and natural gas properties; and other non-recurring items that LRR Energy deems appropriate.

Adjusted EBITDA is used as a supplemental financial measure by LRR Energy’s management and by external users of its financial statements, such as investors, commercial banks, research analysts and others, to assess LRR Energy’s financial performance as compared to that of other companies and partnerships in the industry, without regard to financing methods, capital structure or historical cost basis.

Distributable Cash Flow is defined as Adjusted EBITDA less cash income tax expense; cash interest expense; and estimated maintenance capital. Distribution Coverage Ratio-common unitholders is defined as the ratio of Distributable Cash Flow to the total quarterly distribution payable on all of LRR Energy’s outstanding common units. Distribution Coverage Ratio-all unitholders is defined as the ratio of Distributable Cash Flow to the total quarterly distribution payable on all of LRR Energy’s outstanding common, subordinated and general partner units.

Distributable Cash Flow and the Distribution Coverage Ratio-common and all unitholders are used as supplemental financial measures by LRR Energy’s 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 LRR Energy (prior to the establishment of any retained cash reserve by its general partner) to the cash distributions it expects to pay its unitholders. Distributable Cash Flow and the Distribution Coverage Ratio-common and all unitholders are also important financial measures for LRR Energy’s unitholders as they serve as indicators of its success in providing a cash return on investment. Specifically, these metrics indicate to investors whether or not LRR Energy is generating cash flow at a level that can sustain or support an increase in its quarterly distribution rates. Distributable Cash Flow and the Distribution Coverage Ratio-common and all unitholders are quantitative standards used throughout the investment community with respect to publicly traded partnerships and limited liability companies because the yield is based on the amount of cash distributions the entity pays to a unitholder compared to the unit price.

LRR Energy’s management believes that Adjusted EBITDA, Distributable Cash Flow and the Distribution Coverage Ratio-common and all unitholders are useful to investors because these measures are used by many partnerships in the industry as measures of operating and financial performance and are commonly employed by financial analysts and others to evaluate its operating and financial performance from period to period and to compare it with the performance of other publicly traded partnerships within the industry. Adjusted EBITDA, Distributable Cash Flow and the Distribution Coverage Ratio-common and all unitholders should not be considered alternatives to net income, operating income or any other measures of financial performance presented in accordance with GAAP. LRR Energy’s Adjusted EBITDA, Distributable Cash Flow and Distribution Coverage Ratio-common and all unitholders may not be comparable to similarly titled measures of another company because all companies may not calculate Adjusted EBITDA, Distributable Cash Flow or the Distribution Coverage Ratio-common and all unitholders in the same manner. The following table presents a reconciliation of Adjusted EBITDA, Distributable Cash Flow and Distribution Coverage Ratio-common and all unitholders to net income (loss), LRR Energy’s most directly comparable GAAP financial performance measure, for the three and nine months ended September 30, 2014 and 2013.

LRR Energy, L.P.

Non-GAAP Reconciliation

(continued)

(in thousands, except distribution coverage ratio)

(unaudited)

Three Months Ended September 30, Nine Months Ended September 30,
2014 2013 2014 2013
Net income (loss) $ 26,232 $ 284 $ 21,589 $ 13,805
Income tax expense 26 35 138 102
Interest expense-net, including loss
(gain) on interest rate derivative
instruments, net 2,059 3,750 8,597 5,492
Depletion and depreciation 8,711 9,533 25,856 29,772
Accretion of asset retirement
obligations 519 486 1,532 1,433
Amortization of equity awards 285 138 819 391
Loss (gain) on settlement of asset
retirement obligations 10 (1 ) 71 334
Loss (gain) on commodity derivative
instruments, net (19,771 ) 6,282 (821 ) (5 )
Commodity derivative instrument net
cash settlements 2,774 1,039 3,741 7,795
Impairment of oil and natural gas
properties
Adjusted EBITDA $ 20,845 $ 21,546 $ 61,522 $ 59,119
Adjusted EBITDA 20,845 21,546 61,522 59,119
Income tax expense (9 ) (35 ) (97 ) (108 )
Cash interest expense (2,717 ) (2,438 ) (8,118 ) (7,054 )
Estimated maintenance capital (1) (5,000 ) (5,075 ) (15,000 ) (15,225 )
Distributable Cash Flow $ 13,119 $ 13,998 $ 38,307 $ 36,732
Cash distribution – common unitholders $ 11,599 $ 9,481 $ 32,753 $ 28,298
Cash distribution – all unitholders $ 13,839 $ 12,768 $ 40,542 $ 38,108
Distribution coverage Ratio – common
unitholders 1.13 1.48 1.17 1.30
Distribution coverage Ratio – all
unitholders 0.95 1.10 0.94 0.96

(1)

Amount represents pro-rated capital for the period. Estimated maintenance capital expenditures as defined by our partnership agreement represent our estimate of the amount of capital required on average per year to maintain our production over the long term.

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