1407463--3/6/2009--Pioneer_Southwest_Energy_Partners

related topics

{tax, income, asset}

{gas, price, oil}

{debt, indebtedness, cash}

{stock, price, operating}

{loss, insurance, financial}

{operation, natural, condition}

{interest, director, officer}

{cost, regulation, environmental}

{investment, property, distribution}

{capital, credit, financial}

{control, financial, internal}

{competitive, industry, competition}

Risks Related to the Partnership s Business The Partnership may not have sufficient cash flow from operations to pay quarterly distributions on its common units following the establishment of cash reserves and payment of fees and expenses, including reimbursement of expenses to the General Partner and its affiliates. The price of oil, NGL and gas are highly volatile. A sustained decline in these commodity prices will cause a decline in the Partnership s cash flow from operations, which could force it to reduce its distributions or cease paying distributions altogether. The Partnership s assets consist primarily of working interests in identified producing wells, and the Partnership does not own undeveloped properties or leasehold acreage that it can develop to maintain its production. Because oil and gas properties are a depleting asset and the Partnership s assets consist primarily of working interests in producing wells, the Partnership will have to make acquisitions or otherwise mitigate production declines in order to maintain its production and reserves and sustain its distributions over time. The Partnership will require substantial capital expenditures to replace its production and reserves, which will reduce its cash available for distribution. The Partnership could be unable to obtain needed capital or financing due to its financial condition, the covenants in its credit agreement or adverse market conditions, which could adversely affect its ability to replace its production and proved reserves. The Partnership may be unable to make attractive acquisitions, and any acquisitions the Partnership completes are subject to substantial risks that could reduce its ability to make distributions to unitholders. The Partnership s proved reserves could be subject to drainage from offset drilling locations. The amount of cash the Partnership has available for distribution to unitholders depends primarily on its cash flow and not solely on profitability. Future price declines could result in a reduction in the carrying value of the Partnership s proved oil and gas properties which could adversely affect the Partnership s results of operations and limit its ability to borrow and make distributions. Changes in the differential between NYMEX or other benchmark prices of oil, NGL and gas and the reference or regional index price used to price the commodities the Partnership sells could have a material adverse effect on its results of operations, financial condition and cash flows. The Partnership s derivative activities could result in financial losses or could reduce its income, which could adversely affect its ability to pay distributions to its unitholders. The failure by counterparties to the Partnership's derivative contracts to perform their obligations could have a material adverse effect on the Partnership's results of operations. The Partnership s derivative transactions could be ineffective in reducing the volatility of its cash flows and in certain circumstances could actually increase the volatility of its cash flows. The Partnership s ability to use derivative transactions to protect it from future oil, NGL and gas price declines will be dependent upon oil, NGL and gas prices at the time the Partnership enters into future derivative transactions and its future levels of derivative activity, and as a result the Partnership s future net cash flow may be more sensitive to commodity price changes. Estimates of proved reserves and future net cash flows are not precise. The actual quantities and net cash flows of the Partnership s proved reserves could prove to be lower than estimated. Producing oil and gas involves numerous risks and uncertainties that could adversely affect the Partnership s financial condition or results of operations and, as a result, its ability to pay distributions to its unitholders. Pioneer is the operator of all of the Partnership s properties, and the Partnership has limited ability to influence or control the operation of these properties. Virtually all of the Partnership s wells are subject to a volumetric production payment, which could cause a decrease in the Partnership s production and could result in a decrease in its revenue and cash available for distribution. The Partnership s actual production could differ materially from its forecasts. Due to the Partnership s lack of asset and geographic diversification, adverse developments in the Spraberry field would reduce its ability to make distributions to its unitholders. The Partnership may not be able to obtain funding, obtain funding on acceptable terms or obtain funding under its credit facility because of the deterioration of the credit and capital markets. This could hinder or prevent the Partnership from meeting its future capital needs. Declining general economic, business or industry conditions could have a material adverse affect on the Partnership's results of operations. The Partnership faces significant competition, and many of its competitors have resources in excess of the Partnership s available resources. The Partnership may incur debt to enable it to pay its quarterly distributions, which could negatively affect its ability to execute its business plan and pay future distributions. The Partnership s future debt levels could limit its flexibility to obtain additional financing and pursue other business opportunities. The Partnership s credit facility has substantial restrictions and financial covenants that could restrict its business and financing activities and its ability to pay distributions. The Partnership s operations are subject to operational hazards and unforeseen interruptions for which the Partnership may not be adequately insured. The Partnership s business depends in part on gathering, transportation, storage and processing facilities owned by Pioneer and others. Any limitation in the availability of those facilities could interfere with the Partnership s ability to market its oil, NGL and gas production and could harm its business. Shortages of drilling rigs, supplies, oilfield services, equipment and crews could delay the Partnership s operations and reduce its cash available for distribution. Development drilling involves risks and may not result in commercially productive reserves. The third parties on whom the Partnership relies for gathering and transportation services are subject to complex federal, state and other laws that could adversely affect the cost, manner or feasibility of conducting the Partnership s business. Third-party pipelines and other facilities interconnected to the Partnership s gas pipelines and processing facilities could become partially or fully unavailable to transport gas. The nature of the Partnership s assets exposes it to significant costs and liabilities with respect to environmental and operational safety matters. Risks Related to an Investment in the Partnership The General Partner and its affiliates own a controlling interest in the Partnership and will have conflicts of interest with the Partnership. The Partnership Agreement limits the fiduciary duties that the General Partner owes to the Partnership, which may permit it to favor its own interests to the Partnership s detriment, and limits the circumstances under which unitholders may make a claim relating to conflicts of interest and the remedies available to unitholders in that event. The Partnership relies on Pioneer to identify and evaluate prospective oil and gas assets for the Partnership s acquisitions. Pioneer has no obligation to present the Partnership with potential acquisitions and is not restricted from competing with the Partnership for potential acquisitions. Cost reimbursements to Pioneer and the General Partner and their affiliates for services provided, which are determined by the General Partner, can be substantial and reduce the Partnership s cash available for distribution to unitholders. The Partnership does not have any officers or employees and relies solely on officers of the General Partner and employees of Pioneer. Failure of such officers and employees to devote sufficient attention to the management and operation of the Partnership s business could adversely affect the Partnership s financial results and the Partnership s ability to make distributions to unitholders. The Partnership can issue an unlimited number of additional units, including units that are senior to the common units, without the approval of unitholders, which would dilute their existing ownership interests. The Partnership Agreement provides that the General Partner s fiduciary duties are limited and only owed to the Partnership, not to the Partnership s unitholders, and restricts the remedies available to unitholders for actions taken by the General Partner that might otherwise constitute breaches of fiduciary duty. Unitholders have limited voting rights and are not entitled to elect the General Partner or its directors or initially to remove the General Partner without its consent. The Partnership Agreement restricts the voting rights of unitholders, other than the General Partner and its affiliates, owning 20 percent or more of the Partnership s common units, which could limit the ability of significant unitholders to influence the manner or direction of management. The General Partner has a limited call right that could require unitholders to sell their common units at an undesirable time or price. Unitholders who are not Eligible Holders may not be entitled to receive distributions on or allocations of income or loss on their common units, and their common units could become subject to redemption. Unitholders may not have limited liability if a court finds that unitholder action constitutes control of the Partnership s business. Unitholders may have liability to repay distributions. The General Partner s interest in the Partnership and the control of the General Partner may be transferred to a third party without unitholder consent. Affiliates of the General Partner could sell common units in the public markets, which sales could have an adverse impact on the trading price of the common units. An increase in interest rates could cause the market price of the common units to decline. Tax Risks to Common Unitholders The Partnership s tax treatment depends on its status as a partnership for federal income tax purposes. If the Internal Revenue Service ("IRS") were to treat the Partnership as a corporation for federal income tax purposes, the Partnership s cash available for distribution would be substantially reduced. A material amount of entity-level taxation by individual states would reduce the Partnership s cash available for distribution. The IRS could challenge the Partnership s proration of its items of income, gain, loss and deduction between transferors and transferees of common units, which could change the allocation of items of income, gain, loss and deduction among the Partnership s unitholders. The IRS could contest the federal income tax positions the Partnership takes. Unitholders could be required to pay taxes on their share of the Partnership s income even if they do not receive any cash distributions from the Partnership. Tax gain or loss on the disposition of common units could be more or less than expected. Tax-exempt entities and foreign persons face unique tax issues from owning common units that could result in adverse tax consequences to them. The Partnership will treat each purchaser of common units as having the same tax benefits without regard to the actual common units purchased, which could be challenged by the IRS. The sale or exchange of 50 percent or more of the Partnership s capital and profits interests during any twelve-month period will result in the termination of the Partnership for federal income tax purposes. A unitholder could become subject to state and local taxes and return filing requirements in some of the states in which the Partnership may make future acquisitions of oil and gas assets.

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1407463--3/6/2009--Pioneer_Southwest_Energy_Partners_L.P.