As filed with the Securities and Exchange Commission on March 31, 2008

Registration No. 333-144868

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Amendment No. 6

to

Form S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Pioneer Southwest Energy Partners L.P.

(Exact name of registrant as specified in its charter)

 

 

5205 N. O’Connor Blvd., Suite 200

Irving, Texas 75039

(972) 444-9001

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

Mark S. Berg

Pioneer Southwest Energy Partners L.P.

5205 N. O’Connor Blvd., Suite 200

Irving, Texas 75039

(972) 444-9001

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

Copies to:

 

 

 

 

Approximate date of commencement of proposed sale to the public:  As soon as practicable after this Registration Statement becomes effective.

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. o

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

 

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-12 of the Exchange Act. (Check one):

                           (Do not check if a smaller reporting company)

 

 

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

SUBJECT TO COMPLETION DATED MARCH 31, 2008

 

PRELIMINARY PROSPECTUS

 

Pioneer Southwest Energy Partners L.P.
8,250,000 Common Units
Representing Limited Partner Interests

 

We are a Delaware limited partnership recently formed by Pioneer Natural Resources Company to own and acquire producing oil and gas properties. This is the initial public offering of our common units. No public market currently exists for our common units. We expect the initial public offering price to be between $19.00 and $21.00 per common unit. Our common units have been approved for listing on the New York Stock Exchange under the symbol “PSE.”

 

Investing in our common units involves risks. Please read “Risk Factors” beginning on page 16.

 

These risks include the following:

 

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

 

The underwriters expect to deliver the common units on or about          , 2008. We have granted the underwriters a 30-day over-allotment option to purchase up to an additional 1,237,500 common units on the same terms and conditions as set forth above.

 

 

 

 

 

 

          , 2008

 

Pioneer Southwest Energy Partners L.P.

 

	•	Approximately 1,100 Wells with a 75% Average Working Interest

	•	32.7 MMBOE Total Proved Reserves (60% oil, 24% NGL, 16% gas)

	•	Enterprise value of $17.63 per BOE

	•	Average Daily Production of 5,080 BOE (59% oil, 24% NGL, 17% gas)

	•	Reserve-to-Production Ratio of 18 years

	•	Average remaining well life of 35 years

 

 

We own working interests in producing wells in the Spraberry field in the Permian Basin of West Texas. Pursuant to an agreement with Pioneer Natural Resources Company, our area of operations is limited to onshore Texas and eight counties in the southeast region of New Mexico.

 

TABLE OF CONTENTS

 

 

You should rely only on the information contained in this prospectus. We have not, and the underwriters have not, authorized anyone to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. We are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where an offer or sale is not permitted. You should assume that the information appearing in this prospectus is accurate as of the date on the front cover of this prospectus only. Our business, financial condition, results of operations and prospects may have changed since that date.

 

Until          , 2008 (25 days after the date of this prospectus), all dealers that buy, sell or trade our common units, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

This prospectus contains forward-looking statements that are subject to a number of risks and uncertainties, many of which are beyond our control. Please read “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements.”

 

As used in this prospectus, unless we indicate otherwise: (1) “Pioneer Partners,” “the partnership,” “we,” “our,” “us” or like terms refer to Pioneer Southwest Energy Partners L.P. and its subsidiaries, (2) “Pioneer GP” or “our general partner” refers to Pioneer Natural Resources GP LLC, our general partner, (3) “our operating company” refers to Pioneer Southwest Energy Partners USA LLC, (4) “Pioneer” refers to Pioneer Natural Resources Company, a Delaware corporation (NYSE: PXD) and the ultimate parent company of our general partner, and its wholly owned subsidiaries, (5) “Pioneer USA” refers to Pioneer Natural Resources USA, Inc., a wholly owned subsidiary of Pioneer, (6) “Partnership Properties” or “our properties” refers to the properties that will be held by our operating company at the closing of this offering; and (7) our “area of operations” is limited by an agreement with Pioneer to onshore Texas and the southeast region of New Mexico, comprising Chaves, Curry, De Baca, Eddy, Lincoln, Lea, Otero and Roosevelt counties.

 

SUMMARY

 

Pioneer Southwest Energy Partners L.P.

Estimated Proved Reserves at

Reserve-to-

Estimated 2008

December 31, 2007(1)(2)

Production for the Year

Production

Production

Oil

NGL

Gas

Total

Ended December 31, 2007

Ratio

Decline

(MBbl)

(MBbl)

(MMcf)

(MBOE)(3)

(MBOE)(2)

(Years)(4)

Rate(5)

19,570

7,728

32,285

32,679

1,854

18

5.6%

(1)		The estimates of proved reserves are based on estimates prepared by Pioneer’s internal reservoir engineers and audited by NSAI and include adjustments for the payment of approximately $263.1 million in overhead charges associated with operating the Partnership Properties. The representative prices that were used in the determination of the estimated proved reserves represent a cash market price on December 31, 2007 less all expected quality, transportation and demand adjustments.

(2)		If the underwriters exercise their over-allotment option, we will use the net proceeds to purchase from Pioneer an incremental working interest in certain of the oil and gas properties owned by our operating company at the closing of this offering. If the underwriters exercise their over-allotment option in full, our estimated proved reserves at December 31, 2007 and our production for the year ended December 31, 2007 would increase to 34,335 MBOE and 1,959 MBOE, respectively, and our average working interest would increase to 78%.

(3)		Pioneer will provide to us derivative contracts covering approximately 0.9 MMBOE, 1.2 MMBOE and 1.1 MMBOE, or approximately 72%, 76% and 68%, of our estimated total production for the nine months ended December 31, 2008 and for 2009 and 2010, respectively.

(4)		The average reserve-to-production ratio is calculated by dividing our estimated pro forma proved reserves as of December 31, 2007 by our production for the year ended December 31, 2007.

(5)		Represents the estimated percentage decrease in production from our oil and gas properties in 2008, as estimated by Pioneer and audited by NSAI, when compared to production for the year ended December 31, 2007.

 

Our Relationship with Pioneer

 

Business Strategy

	•	purchase producing properties in our area of operations directly from Pioneer;
	•	purchase producing properties in our area of operations from third parties either independently or jointly with Pioneer;

	•	purchase midstream assets related to our producing properties from Pioneer or third parties;
	•	maintain a balanced capital structure to ensure financial flexibility for acquisitions; and
	•	mitigate commodity price risk through hedging.

 

Competitive Strengths

	•	our relationship with Pioneer:

	•	Pioneer has a significant retained interest in the Spraberry field as well as an active development plan, each of which should generate acquisition opportunities for us over time;
	•	Pioneer’s significant ownership in us provides it an economic incentive to sell producing oil and gas properties to us over time; and
	•	our ability to pursue acquisitions jointly with Pioneer increases the number and type of transactions we can pursue and increases our competitiveness;

	•	our assets are characterized by long-lived and stable production; and
	•	our cost of capital and financial flexibility should provide us with a competitive advantage in pursuing acquisitions.

 

Summary of Risk Factors

	•	We may not have sufficient cash flow from operations to pay quarterly distributions on our common units at the initial distribution level following the establishment of cash reserves and payment of fees and expenses, including reimbursement of expenses to our general partner and its affiliates.
	•	Our estimate of cash available for distributions is based on assumptions that are inherently uncertain and are subject to significant business, economic, financial, legal, regulatory and competitive risks and uncertainties that could cause actual results to differ materially from those estimated.
	•	Our initial assets will consist solely of working interests in identified producing wells, and we will not own undeveloped properties or leasehold acreage that we can develop to maintain our production.
	•	Our proved reserves may be subject to drainage from offset drilling locations.
	•	Because oil and gas properties are a depleting asset and our initial assets consist only of working interests in producing wells, we must make acquisitions in order to maintain our production and reserves and sustain our distributions over time.
	•	We will require substantial capital expenditures to replace our production and reserves, which will reduce our cash available for distribution. We may be unable to obtain needed capital or financing on satisfactory terms, which could adversely affect our ability to replace our production and proved reserves.
	•	The price of oil, natural gas liquids, or NGLs, and gas are at historically high levels and are highly volatile. A sustained decline in these commodity prices will cause a decline in our cash flow from operations, which may force us to reduce our distributions or cease paying distributions altogether.

	•	Our estimated proved reserves are based on many assumptions that may prove to be inaccurate. Any material inaccuracies in these reserve estimates or underlying assumptions will materially affect the quantities and present value of our proved reserves.
	•	Pioneer is the operator of all of our properties and, pursuant to our omnibus operating agreement, we are restricted in our ability to remove Pioneer as operator and have agreed that we will not object to Pioneer’s developing the leasehold acreage surrounding our wells, that well operations proposed by Pioneer will take precedence over our own proposals, and that we will allow Pioneer to use certain of our production facilities in connection with other wells operated by Pioneer, subject to capacity limitations.
	•	We may incur debt to enable us to pay our quarterly distributions, which may negatively affect our ability to execute our business plan and pay distributions.
	•	The nature of our assets exposes us to significant costs and liabilities with respect to environmental and operational safety matters.

	•	Our general partner and its affiliates own a controlling interest in us and will have conflicts of interest with us. Our partnership agreement limits the fiduciary duties that our general partner owes to us, which may permit it to favor its own interests to our detriment and limits the circumstances under which you may make a claim relating to conflicts of interest and remedies available to you in that event.
	•	We will rely on Pioneer to identify and evaluate prospective oil and gas assets for our acquisitions. Pioneer has no obligation to present us with potential acquisitions and is not restricted from competing with us for potential acquisitions. If Pioneer does not present us with, or successfully competes against us for, potential acquisitions, we may not be able to replace or increase our production and proved reserves.
	•	We may issue an unlimited number of additional units, including units that are senior to the common units, without your approval, which would dilute your existing ownership interests.
	•	Unitholders have limited voting rights and are not entitled to elect our general partner or its directors or initially to remove our general partner without its consent, which could lower the trading price of our units.

	•	You will experience immediate and substantial dilution of $15.03 per common unit.

	•	Our tax treatment depends on our status as a partnership for federal income tax purposes. If the Internal Revenue Service, or IRS, were to treat us as a corporation for federal income tax purposes, our cash available for distribution to you would be substantially reduced.
	•	We prorate our items of income, gain, loss and deduction between transferors and transferees of our units each month based upon the ownership of our units on the first day of each month, instead of on the basis of the date a particular unit is transferred. The IRS may challenge this treatment, which could change the allocation of items of income, gain, loss and deduction among our unitholders.
	•	If the IRS contests the federal income tax positions we take, the market for our common units may be adversely impacted and the cost of any IRS contest will reduce our cash available for distribution to you.
	•	You may be required to pay taxes on your share of our income even if you do not receive any cash distributions from us.

	•	Tax-exempt entities and foreign persons face unique tax issues from owning our common units that may result in adverse tax consequences to them.
	•	As a result of investing in our common units, you may become subject to state and local taxes and return filing requirements in some of the states in which we may make future acquisitions of oil and gas assets.

 

Our Partnership Structure and Formation Transactions

	•	we will issue 8,250,000 common units to the public, representing an aggregate 28.6% limited partner interest in us;

	•	we will use the net proceeds of approximately $149.6 million from this offering to purchase a portion of the interests in our operating company, which holds our oil and gas properties, from Pioneer;

	•	Pioneer will contribute the remaining interests in our operating company to us in exchange for a 0.1% general partner interest in us and 20,521,200 common units, representing an aggregate 71.3% limited partner interest in us;

	•	Pioneer will provide to us derivative contracts covering approximately 0.9 MMBOE, 1.2 MMBOE and 1.1 MMBOE of our production for the nine months ended December 31, 2008 and for 2009 and 2010, respectively;

	•	we will have entered into a $300 million unsecured revolving credit facility, which will be available for borrowing upon the completion of this offering;
	•	we will have entered into an omnibus agreement pursuant to which our area of operations will be established, we will be indemnified for certain losses and we will be reimbursed for certain of our production volumes that may be used to satisfy prior obligations of Pioneer;
	•	we will have entered into an omnibus operating agreement that will place restrictions and limitations on our ability to exercise certain rights that would otherwise be available to us under operating agreements pursuant to which Pioneer operates our properties; and
	•	we will have entered into an administrative services agreement pursuant to which Pioneer will manage our assets and perform other administrative services for us for a fee.

 

Management of Pioneer Southwest Energy Partners L.P.

 

Summary of Conflicts of Interest and Fiduciary Duties

 

Other Information

 

The Offering

Common units offered by us		8,250,000 common units.

		9,487,500 common units if the underwriters exercise their over-allotment option in full.

Common units outstanding after this offering		28,771,200 common units, or 30,008,700 if the underwriters exercise their over-allotment option in full.

Use of proceeds		We intend to use the estimated net proceeds of approximately $149.6 million from this offering, after deducting the underwriting discount of approximately $10.7 million and estimated net offering expenses of approximately $4.7 million, to purchase a portion of the interests in our operating company from Pioneer. We will use any net proceeds from the exercise of the underwriters’ over-allotment option to purchase from Pioneer an incremental working interest in certain of the oil and gas properties owned by our operating company at the closing of this offering. Please read “Use of Proceeds.”

Cash distributions		We will pay quarterly distributions at an initial rate of $0.50 per common unit ($2.00 per common unit on an annual basis) to the extent we have sufficient cash from operations after the establishment of cash reserves and payment of fees and expenses. Our ability to pay distributions at this initial distribution rate is subject to various restrictions and other factors described in more detail under the caption “Cash Distribution Policy and Restrictions on Distributions.”

		Our partnership agreement requires us to distribute all of our cash on hand at the end of each quarter, less reserves established by our general partner, or “available cash,” 99.9% to our unitholders and 0.1% to our general partner. These distributions will be paid within 45 days after the end of each quarter. We do not have any subordinated units, and our general partner is not entitled to any incentive distributions. Please read “Description of the Common Units” and “The Partnership Agreement.”

		We will pay unitholders a prorated distribution for the first quarter during which we are a publicly traded partnership. Assuming that we become a publicly traded partnership before June 30, 2008, we will pay unitholders a prorated distribution for the period from the closing of this offering to and including June 30, 2008. We expect to pay this cash distribution on or before August 14, 2008.

		If we had completed the transactions contemplated in this prospectus on January 1, 2007, our pro forma available cash generated during the year ended December 31, 2007 would have been sufficient to allow us to pay the full initial quarterly distributions on our common units during these periods. For a calculation of our ability to make distributions to you based on our pro forma results for the year ended December 31, 2007, please read “Cash Distribution Policy and Restrictions on Distributions” included elsewhere in this prospectus.

		We believe that we will have sufficient cash available for distribution to pay quarterly distributions on all the outstanding common units for each quarter during the twelve months ended March 31, 2009 at the initial distribution rate of $0.50 per unit (prorated for

		the portion of the initial quarter during which we are a publicly traded partnership based on the length of that period). Please read “Cash Distribution Policy and Restrictions on Distributions — Assumptions and Considerations.”

Issuance of additional units		We can issue an unlimited number of additional units, including units that are senior to the common units, on terms and conditions determined by our general partner, without the approval of our unitholders. Please read “Units Eligible for Future Sale” and “The Partnership Agreement — Issuance of Additional Securities.”

Limited voting rights		Our general partner will manage and operate us. Unlike stockholders of a corporation, you will have only limited voting rights on matters affecting our business. You will have no right to elect our general partner or its directors on an annual or other continuing basis. Our general partner may not be removed except by a vote of the holders of at least 662/3% of the outstanding units, including any units owned by our general partner and its affiliates, voting together as a single class. Upon consummation of this offering, Pioneer USA will own 71.3% of our common units (68.4% if the underwriters exercise their over-allotment option in full). This will give Pioneer USA the ability to prevent the removal of our general partner. Please read “The Partnership Agreement — Voting Rights.”

Limited call right		If at any time our general partner and its affiliates own more than 80% of the outstanding common units, our general partner has the right, but not the obligation, to purchase all of the remaining common units at a purchase price not less than the current market price of the common units. Please read “The Partnership Agreement — Limited Call Right.”

Estimated ratio of taxable income to distributions		We estimate that if you own the common units you purchase in this offering through the record date for distributions for the period ended December 31, 2010, you will be allocated, on a cumulative basis, an amount of federal taxable income for that period that will be approximately 80% of the cash distributed to you with respect to that period. For example, if you receive an annual distribution of $2.00 per common unit, we estimate that your average allocated federal taxable income per year will be approximately $1.60 per common unit. Please read “Material Tax Consequences — Tax Consequences of Common Unit Ownership — Ratio of Taxable Income to Distributions” for the basis of this estimate.

Material tax consequences		For a discussion of other material federal income tax consequences that may be relevant to prospective unitholders who are individual citizens or residents of the United States, please read “Material Tax Consequences.”
Agreement to be bound by the partnership agreement		By purchasing a common unit, you will be bound by all of the terms of our partnership agreement.
Listing and trading symbol		Our common units have been approved for listing on the New York Stock Exchange under the symbol “PSE.”

 

Summary Historical and Pro Forma Financial and Operating Data

	•	our sale of 8,250,000 common units to the public for estimated gross proceeds of approximately $165.0 million;

	•	payment of an underwriting discount of $10.7 million and estimated net offering expenses of approximately $4.7 million;

	•	use of net proceeds of approximately $149.6 million to purchase a portion of the interest in our operating company, which holds our oil and gas properties, from Pioneer;

	•	the contribution of the remaining interests in our operating company to us by Pioneer in exchange for a 0.1% general partner interest and the issuance of 20,521,200 common units;

	•	Pioneer’s providing to us derivative contracts covering approximately 0.9 MMBOE, 1.2 MMBOE and 1.1 MMBOE of our production for the nine months ended December 31, 2008 and for 2009 and 2010, respectively;

	•	payment to Pioneer of an administrative fee under an administrative services agreement pursuant to which Pioneer will manage our assets and perform other administrative services for us;
	•	the incurrence of $2.5 million in incremental, direct general and administrative costs associated with being a publicly traded partnership. These direct costs are not reflected in the historical financial statements of Pioneer Southwest Energy Partners L.P. Predecessor;
	•	payment of overhead charges associated with operating the Partnership Properties (commonly referred to as the Council of Petroleum Accountants Societies, or COPAS, fee), instead of the direct internal costs of Pioneer. Overhead charges are usually paid by third parties to the operator of a well pursuant to operating agreements. Because the properties were previously both owned and operated by Pioneer, the payment of the overhead charge associated with the COPAS fee is not included in the historical financial statements of Pioneer Southwest Energy Partners L.P. Predecessor; and
	•	payment to Pioneer pursuant to a tax sharing agreement for our share of state and local income and other taxes (currently only the Texas franchise tax, commonly referred to as the “Texas Margin tax”) to the extent that our results are included in a combined or consolidated tax return filed by Pioneer.

														Pioneer
														Southwest
														Energy
														Partners L.P.
		Pioneer Southwest												(Pro Forma)
		Energy Partners L.P.												Year
		Predecessor												Ended
		Year Ended December 31,												December 31,
		2005				2006				2007				2007
														(Unaudited)
		(In thousands, except per unit data)
Statements of Operations Data:
Revenues:
Oil		$	64,643			$	76,263			$	78,761			$	78,761
Natural gas liquids			13,620				15,383				16,635				16,635
Gas			12,064				9,614				9,167				9,167
			90,327				101,260				104,563				104,563
Expenses:
Production:
Lease operating expense (a)			15,030				17,481				19,077				24,572
Production and ad valorem taxes			7,624				8,859				8,498				8,498
Workover			917				1,013				2,792				2,792
Depletion, depreciation and amortization			6,640				7,282				7,618				8,249
General and administrative			4,736				4,292				4,135				4,510
Accretion of discount on asset retirement obligations			110				100				101				101
Other			64				23				6				6
			35,121				39,050				42,227				48,728
Income before income taxes			55,206				62,210				62,336				55,835
Income tax provision			—				(429	)			(651	)			(586	)
Net income		$	55,206			$	61,781			$	61,685			$	55,249
Net income per common unit														$	1.92
Balance Sheet Data (at period end):
Working capital		$	6,691			$	5,607			$	9,815			$	9,815
Total assets		$	141,990			$	148,251			$	148,872			$	148,872
Long-term debt		$	—			$	—			$	—			$	—
Partners’ equity		$	136,049			$	141,968			$	143,268			$	143,268
Cash Flow Data:
Net cash provided by (used in):
Operating activities		$	59,795			$	70,500			$	67,818
Investing activities		$	(17,174	)		$	(14,638	)		$	(7,433	)
Financing activities		$	(42,621	)		$	(55,862	)		$	(60,385	)
Other Financial Data (unaudited):
EBITDAX		$	61,956			$	69,592			$	70,055			$	64,185

(a)	The historical lease operating expense of the Partnership Predecessor includes direct internal costs of Pioneer to operate the Partnership Properties of $1.1 million, $1.5 million and $1.8 million for the years ended December 31, 2005, 2006 and 2007, respectively. Our pro forma lease operating expense includes a COPAS fee of $7.3 million for the year ended December 31, 2007.

 

Non-GAAP Financial Measures

	•	Depletion, depreciation and amortization;
	•	Impairment of long-lived assets;
	•	Exploration expense;
	•	Accretion of discount on asset retirement obligations;
	•	Interest expense;
	•	Income taxes;
	•	Gain or loss on the disposition of assets;
	•	Noncash commodity hedge related activity; and
	•	Noncash equity-based compensation.

	•	the financial performance of our assets without regard to financing methods, capital structure or historical cost basis;
	•	the ability of our assets to generate cash sufficient to pay interest costs and support our indebtedness;
	•	our operating performance and return on capital as compared to those of other companies in our industry, without regard to financing or capital structure; and
	•	the feasibility of acquisitions and capital expenditure projects and the overall rates of return on alternative investment opportunities.

														Pioneer
														Southwest
														Energy
														Partners L.P.
														(Pro Forma)
														Year
		Pioneer Southwest Energy Partners L.P. Predecessor												Ended
		Year Ended December 31,												December 31,
		2005				2006				2007				2007
														(Unaudited)
		(In thousands)
Reconciliation of EBITDAX to net income and net cash provided by operating activities:
Net income		$	55,206			$	61,781			$	61,685			$	55,249
Depletion, depreciation and amortization			6,640				7,282				7,618				8,249
Accretion of discount on asset retirement obligations			110				100				101				101
Income tax provision			—				429				651				586
EBITDAX			61,956				69,592				70,055			$	64,185
Changes in operating assets and liabilities			(2,161	)			908				(2,237	)
Net cash provided by operating activities		$	59,795			$	70,500			$	67,818

 

Summary Reserve and Operating Data

														Pioneer Southwest
														Energy Partners L.P.
		Pioneer Southwest Energy Partners L.P.												(Pro Forma)
		Predecessor												Year Ended
		Year Ended December 31,												December 31,
		2005				2006				2007				2007
Reserve Data:
Estimated proved reserves(1):
Oil (MBbl)			22,173				20,560				20,586				19,570
Natural gas liquids (MBbl)			7,736				7,152				8,133				7,728
Gas (MMcf)			32,136				30,312				34,030				32,285
Total (MBOE)			35,264				32,763				34,391				32,679
Proved developed (MBOE)			33,271				32,287				34,391				32,679
Proved undeveloped (MBOE)			1,993				476				—				—
Proved developed reserves as a % of total proved reserves			94	%			99	%			100	%			100	%
Standardized Measure (in thousands)(1)(2)		$	459,656			$	395,995			$	646,782			$	593,386
Representative Oil, NGL and Gas Prices(3):
Oil per Bbl		$	60.06			$	60.90			$	95.75			$	95.75
Natural gas liquids per Bbl		$	31.99			$	27.43			$	52.52			$	52.52
Gas per Mcf		$	6.25			$	4.48			$	5.45			$	5.45

(1)		The pro forma standardized measure and proved reserves are less than the respective historical amounts reflected in the above table as of December 31, 2007 because we will be charged COPAS fees beginning at the closing of this offering, instead of the direct internal costs of Pioneer, which results in a higher lease operating expense. The increase in overhead charges associated with the COPAS fee has the effect of shortening the economic lives of the wells. The pro forma standardized measure as of December 31, 2007 includes $263.1 million (undiscounted) of COPAS fees over the life of the properties, as compared to the historical standardized measure as of December 31, 2007, which includes $77.6 million (undiscounted) of direct internal costs of Pioneer.

(2)		Standardized measure is the estimated future net revenue to be generated from the production of proved reserves, determined in accordance with the rules and regulations of the SEC (using prices and costs in effect as of the date of estimation), less future development, production and income tax expenses, and discounted at 10% per annum to reflect the timing of future net revenue. Our standardized measure does not reflect any future federal income tax expenses because we are not subject to federal income taxes, although we have provided for the payment of Texas Margin taxes. Standardized measure does not give effect to derivative transactions. For a description of our expected derivative transactions, please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Quantitative and Qualitative Disclosures About Market Risk.”

(3)		The representative prices that were used in the determination of standardized measure represent a cash market price on December 31 less all expected quality, transportation and demand adjustments. Representative prices are presented before the effects of hedging.

														Pioneer Southwest
		Pioneer Southwest												Energy Partners L.P.
		Energy Partners L.P.												(Pro Forma)
		Predecessor												Year Ended
		Year Ended December 31,												December 31,
		2005				2006				2007				2007
Production:
Total production (MBOE)			1,999				1,996				1,854				1,854
Average daily production (BOEPD)			5,474				5,469				5,080				5,080
Average Sales Prices per BOE		$	45.21			$	50.73			$	56.40			$	56.40
Production Expenses per BOE		$	11.80			$	13.70			$	16.38			$	19.34

 

The nature of our business activities subjects us to certain hazards and risks. Additionally, limited partner interests are inherently different from capital stock of a corporation. You should consider carefully the following risk factors together with all of the other information included in this prospectus in evaluating an investment in our common units.

 

The risk factors set forth below are not the only risks that may affect our business. Our business could also be impacted by additional risks not currently known to us or that we currently deem to be immaterial. If any of the following risks were actually to occur, our business, financial condition or results of operations could be materially adversely affected. In that case, we might not be able to pay the distributions on our common units, the trading price of our common units could decline and you could lose part or all of your investment.

 

We may not have sufficient cash flow from operations to pay quarterly distributions on our common units at the initial distribution level following the establishment of cash reserves and payment of fees and expenses, including reimbursement of expenses to our general partner and its affiliates.

 

We may not have sufficient available cash each quarter to pay the initial quarterly distribution of $0.50 per unit or any other amount.

 

Under the terms of our partnership agreement, the amount of cash otherwise available for distribution will be reduced by our operating expenses and the amount of any cash reserve amounts that our general partner establishes to provide for future operations, future capital expenditures, including acquisitions of additional oil and gas assets, future debt service requirements and future cash distributions to our unitholders. We plan to reinvest a sufficient amount of our cash flow in acquisitions in order to maintain our production and proved reserves, and we plan to use external financing sources to increase our production and proved reserves.

 

The amount of cash we actually generate will depend upon numerous factors related to our business that may be beyond our control, including among other things:

 

 

In addition, the actual amount of cash that we will have available for distribution will depend on other factors, including:

 

 

 

For a description of additional restrictions and factors that may affect our ability to make cash distributions, please read “Cash Distribution Policy and Restrictions on Distributions.”

 

Our estimate of cash available for distribution is based on assumptions that are inherently uncertain and are subject to significant business, economic, financial, legal, regulatory and competitive risks and uncertainties that could cause actual results to differ materially from those estimated.

 

Our estimate of the minimum EBITDAX necessary for us to make a distribution on all units at the initial distribution rate for each of the four quarters ending March 31, 2009, as set forth in “Cash Distribution Policy and Restrictions on Distributions,” is based on our management’s calculations, and we have not received an opinion or report on it from any independent accountants. This estimate is based on assumptions including production quantities, oil and gas prices, hedging activities, expenses, borrowings and other matters that are inherently uncertain and are subject to significant business, economic, financial, legal, regulatory and competitive risks and uncertainties that could cause actual results to differ materially from those estimated. If any of these assumptions proves to have been inaccurate, our actual results may differ materially from those set forth in our estimates, and we may be unable to pay all or part of the initial quarterly distribution on our common units.

 

Our initial assets will consist solely of working interests in identified producing wells, and we will not own undeveloped properties or leasehold acreage that we can develop to maintain our production.

 

At the closing of this offering, our operating company will only own mineral interests and leasehold interests in identified producing wells (often referred to as wellbore assignments), and we will not own any undeveloped properties or leasehold acreage. Any mineral or leasehold interests or other rights that are assigned to us as part of each wellbore assignment will be limited to only that portion of such interests or rights that is necessary to produce hydrocarbons from that particular wellbore, and will not include the right to drill additional wells (other than replacement wells or downspaced wells for which regulatory approval would be needed) within the area covered by the mineral or leasehold interest to which that wellbore relates. In addition, pursuant to the terms of the wellbore assignments from Pioneer, our operation with respect to each wellbore will be limited to the interval from the surface to the depth of the deepest producing perforation in the wellbore at the time of the assignment, plus an additional 100 feet as a vertical easement for operating purposes only. The wellbore assignments also prohibit us from extending the horizontal reach of the assigned interest. As a result, we currently have no ability to drill or participate in the drilling of additional wells. These restrictions on our ability to extend the vertical and horizontal limits of our existing wellbores could materially adversely affect our ability to maintain and grow our production and reserves and to make cash distributions to you.

 

Our proved reserves may be subject to drainage from offset drilling locations.

 

Many of our wells directly offset potential drilling locations held by Pioneer or third parties. The owners of leasehold interests lying contiguous or adjacent to or adjoining our interests could take actions, such as drilling additional wells, that could adversely affect our operations. It is in the nature of petroleum reservoirs that when a new well is completed and produced, the pressure differential in the vicinity of the well causes the migration of reservoir fluids towards the new wellbore (and potentially away from existing wellbores). As a result, the drilling and production of these potential locations could cause a depletion of our proved reserves.

We have agreed in the omnibus operating agreement not to object to such drilling by Pioneer. The depletion of our proved reserves from offset drilling locations could materially adversely affect our ability to maintain and grow our production and reserves and to make cash distributions to you.

 

Because oil and gas properties are a depleting asset and our initial assets consist only of working interests in producing wells, we must make acquisitions in order to maintain our production and reserves and sustain our distributions over time.

 

Producing oil and gas reservoirs are characterized by declining production rates. Because our reserves and production decline continually over time and because we do not own any undeveloped properties or leasehold acreage, we will need to make acquisitions to sustain our level of distributions to unitholders over time. We may be unable to make such acquisitions if:

 

 

Because the timing and amount of these acquisitions is uncertain, we expect to reserve cash each quarter to finance these acquisitions, which will reduce our cash available for distribution. We may use the reserved cash to reduce indebtedness, if any, until we make an acquisition. If we do not make acquisitions, we will be unable to sustain our level of distributions and would expect to reduce our distributions.

 

We will require substantial capital expenditures to replace our production and reserves, which will reduce our cash available for distribution. We may be unable to obtain needed capital or financing due to our financial condition, the covenants in our credit agreement or adverse market conditions, which could adversely affect our ability to replace our production and proved reserves.

 

To fund our acquisitions, we will be required to use cash generated from our operations, additional borrowings or the proceeds from the issuance of additional partnership interests, or some combination thereof, which could limit our ability to sustain our level of distributions. For example, we plan to use 25% to 35% of our cash flow to acquire oil and gas properties in order to maintain our production and proved reserves. To the extent our production declines faster than we anticipate or the cost to acquire additional reserves is greater than we anticipate, we will require a greater amount of capital to maintain our production and proved reserves. The use of cash generated from operations to fund acquisitions will reduce cash available for distribution to our unitholders. Our ability to obtain bank financing or to access the capital markets for future equity or debt offerings may be limited by our financial condition at the time of any such financing or offering, the covenants in our credit facility or future financing agreements, adverse market conditions or other contingencies and uncertainties that are beyond our control. Our failure to obtain the funds necessary for future acquisitions could materially affect our business, results of operations, financial condition and ability to pay distributions. Even if we are successful in obtaining the necessary funds, the terms of such financings could limit our ability to pay distributions to our unitholders. In addition, incurring additional debt may significantly increase our interest expense and financial leverage, and issuing additional partnership interests may result in significant unitholder dilution thereby increasing the aggregate amount of cash required to maintain the then current distribution rate, which could reduce our distributions materially.

Any acquisitions we complete are subject to substantial risks that could reduce our ability to make distributions to unitholders.

 

Even if we do make acquisitions that we believe will increase distributable cash per unit, these acquisitions may nevertheless result in a decrease in available cash per unit. Any acquisition involves potential risks, including, among other things:

 

 

Our decision to acquire a property will depend in part on the evaluation of data obtained from production reports and engineering studies, geophysical and geological analyses and seismic and other information, the results of which are often inconclusive and subject to various interpretations.

 

Also, our reviews of acquired properties are inherently incomplete because it generally is not feasible to perform an in-depth review of the individual properties involved in each acquisition. Even a detailed review of records and properties may not necessarily reveal existing or potential problems, nor will it permit a buyer to become sufficiently familiar with the properties to assess fully their deficiencies and potential problems. Inspections may not always be performed on every well, and environmental problems, such as ground water contamination, are not necessarily observable even when an inspection is undertaken.

 

The amount of cash we have available for distribution to unitholders depends primarily on our cash flow and not solely on profitability.

 

The amount of cash we have available for distribution depends primarily on our cash flow, including cash from financial reserves and working capital or other borrowings, and not solely on profitability, which will be affected by noncash items. As a result, we may make cash distributions during periods when we record losses and may not make cash distributions during periods when we record net income.

 

The price of oil, NGL and gas are at historically high levels and are highly volatile. A sustained decline in these commodity prices will cause a decline in our cash flow from operations, which may force us to reduce our distributions or cease paying distributions altogether.

 

The oil, NGL and gas markets are highly volatile, and we cannot predict future oil, NGL and gas prices. Oil prices have recently been at historically high levels and gas prices have been at high levels over the past several years when compared to prior periods. Prices for oil and gas may fluctuate widely in response to relatively minor changes in the supply of and demand for oil and gas, market uncertainty and a variety of additional factors that are beyond our control, such as:

 

 

 

In the past, prices of oil, NGL and gas have been extremely volatile, and we expect this volatility to continue. For example, during the year ended December 31, 2007, the NYMEX oil price ranged from a high of $98.18 per Bbl to a low of $50.48 per Bbl, while the NYMEX Henry Hub gas price ranged from a high of $8.64 per MMBtu to a low of $5.38 per MMBtu. For the five years ended December 31, 2007, the NYMEX oil price ranged from a high of $98.18 per Bbl to a low of $25.24 per Bbl, while the NYMEX Henry Hub gas price ranged from a high of $15.38 per MMBtu to a low of $4.20 per MMBtu. During the period from January 1, 2008 through March 24, 2008, the NYMEX oil price ranged from a high of $110.33 per Bbl to a low of $86.99 per Bbl, while the NYMEX Henry Hub gas price ranged from a high of $10.23 per MMBtu to a low of $7.62 per MMBtu.

 

Our revenue, profitability and cash flow depend upon the prices and demand for oil and gas, and a drop in prices can significantly affect our financial results and impede our growth. If we raise our distribution levels in response to increased cash flow during periods of higher commodity prices, we may not be able to sustain those distribution levels during subsequent periods of lower commodity prices.

 

Future price declines may result in a write-down of our asset carrying values, which could adversely affect our results of operations and limit our ability to borrow and make distributions.

 

Declines in oil and gas prices may result in our having to make substantial downward adjustments to our estimated proved reserves. If this occurs, or if our estimates of production or economic factors change, accounting rules may require us to write down, as a noncash charge to earnings, the carrying value of our oil and gas properties for impairments. We are required to perform impairment tests on our assets whenever events or changes in circumstances warrant a review of our assets. To the extent such tests indicate a reduction of the estimated useful life or estimated future cash flows of our assets, the carrying value may not be recoverable and therefore require a write-down. We may incur impairment charges in the future, which could materially affect our results of operations in the period incurred and our ability to borrow funds under our credit facility, which in turn may adversely affect our ability to make cash distributions to our unitholders.

 

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 we sell could have a material adverse effect on our results of operations, financial condition and cash flows.

 

The reference or regional index prices that we use to price our oil, NGL and gas sales sometimes trade at a discount to the relevant benchmark prices, such as NYMEX. The difference between the benchmark price and the price we reference in our sales contract is called a differential. We cannot accurately predict oil, NGL and gas differentials. Increases in the differential between the benchmark price for oil, NGL and gas and the reference or regional index price we reference in our sales contract could have a material adverse effect on our results of operations, financial condition and cash flows.

Our hedging activities could result in financial losses or could reduce our income, which may adversely affect our ability to pay distributions to our unitholders.

 

To achieve more predictable cash flow and to reduce our exposure to adverse fluctuations in the prices of oil, NGL and gas, Pioneer has entered into and will provide to us, and in the future we may enter into, derivative arrangements covering a significant portion of our oil, NGL and gas production that could result in both realized and unrealized hedging losses. We have direct commodity price exposure on the unhedged portion of our production volumes. Approximately 28%, 24% and 32% of our estimated total production for the nine months ended December 31, 2008 and for 2009 and 2010, respectively, is not hedged. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations — How We Evaluate Our Operations — Realized Commodity Prices” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Quantitative and Qualitative Disclosures About Market Risk.”

 

Our hedges may be ineffective in reducing the volatility of our cash flows and in certain circumstances may actually increase the volatility of our cash flows.

 

Our actual future production during a period may be significantly higher or lower than we estimate at the time we enter into derivative transactions for such period. If the actual amount is higher than we estimate, we will have more unhedged production and therefore greater commodity price exposure than we intended. If the actual amount is lower than the nominal amount that is subject to our derivative financial instruments, we might be forced to satisfy all or a portion of our derivative transactions without the benefit of the cash flow from our sale of the underlying physical commodity, resulting in a substantial diminution of our liquidity. As a result of these factors, our derivative activities may not be as effective as we intend in reducing the volatility of our cash flows, and in certain circumstances may actually increase the volatility of our cash flows. In addition, our derivative activities are subject to the risk that a counterparty may not perform its obligation under the applicable derivative instrument.

 

Our ability to use hedging transactions to protect us from future oil, NGL and gas price declines will be dependent upon oil, NGL and gas prices at the time we enter into future hedging transactions and our future levels of hedging, and as a result our future net cash flow may be more sensitive to commodity price changes.

 

At the closing of this offering, Pioneer intends to provide certain derivative hedge contracts to us for the nine months ended December 31, 2008 and for 2009 and 2010 to hedge approximately 72%, 76% and 68%, respectively, of our estimated total production with fixed price commodity swaps. As our hedges expire, more of our future production will be sold at market prices unless we enter into further hedging transactions. Our credit facility requires us to enter into hedging arrangements for not less than 65% (nor more than 85%) of our projected oil, NGL and gas production. Our commodity price hedging strategy and future hedging transactions will be determined by our general partner, which is not under any obligation to hedge a specific portion of our production, other than to comply with the terms of our credit facility for so long as it may remain in place. The prices at which we hedge our production in the future will be dependent upon commodity prices at the time we enter into these transactions, which may be substantially lower than current oil, NGL and gas prices. Accordingly, our commodity price hedging strategy will not protect us from significant and sustained declines in oil, NGL and gas prices received for our future production. Conversely, our commodity price hedging strategy may limit our ability to realize cash flow from commodity price increases. It is also possible that a larger percentage of our future production will not be hedged as compared to the next few years, which would result in our oil and gas revenues becoming more sensitive to commodity price changes.

The agreements with counterparties that will govern the derivative contracts that Pioneer intends to assign to us at the closing of this offering may have less favorable terms than those terms currently being provided to Pioneer. If we are unable to agree upon acceptable terms with the counterparties to those agreements, we will enter into derivative contracts with Pioneer, which has a lower credit rating than such counterparties.

 

At the closing of this offering, Pioneer intends to provide certain derivative contracts to us for the nine months ended December 31, 2008 and for 2009 and 2010 that will hedge approximately 72%, 76% and 68%, respectively, of our estimated total production. Under these contracts, we will pay a floating price and receive a fixed price based on an aggregate notional amount. The assignment of these derivative contracts to us will require the consent of Pioneer’s counterparties. As a condition to the assignment to us of such derivative contracts, these counterparties will require us to execute new agreements that will govern the terms of the derivative contracts between us and the hedge counterparties. These agreements will likely contain terms (including termination events and collateralization requirements) that are less favorable to us than the terms contained in Pioneer’s agreements that govern the terms of the derivative contracts. If new agreements are not executed, we intend to enter into derivative contracts with Pioneer having substantially the same terms as the derivative contracts that Pioneer is unable to provide to us at the closing of this offering. Pioneer’s credit ratings are lower than the credit ratings of the derivative contract counterparties, therefore the risk that we could receive less than the full value of such derivative contracts due to a counterparty default is greater if we enter into derivative contracts with Pioneer than if Pioneer provides such derivative contracts to us on the closing of this offering.

 

Our estimated proved reserves are based on many assumptions that may prove to be inaccurate. Any material inaccuracies in these reserve estimates or underlying assumptions will materially affect the quantities and present value of our proved reserves.

 

It is not possible to measure underground accumulations of oil or gas in an exact way. Oil and gas reserve engineering requires subjective estimates of underground accumulations of oil and gas and assumptions concerning future oil, NGL and gas prices, production levels, and operating and development costs. In estimating our level of proved oil and gas reserves, we and our independent reservoir engineers make certain assumptions that may prove to be incorrect, including assumptions relating to:

 

 

If these assumptions prove to be incorrect, our estimates of proved reserves, the economically recoverable quantities of oil, NGL and gas attributable to any particular group of properties, the classifications of reserves based on risk of recovery and our estimates of the future net cash flows from our proved reserves could change significantly. For example, if oil prices at December 31, 2007 had decreased by $5.00 per barrel, then our pro forma standardized measure of proved reserves as of December 31, 2007 would have decreased by $33.6 million, from $593.4 million to $559.8 million and our pro forma proved reserves as of December 31, 2007 would have decreased 328 MBOE, from 32,679 MBOE to 32,351 MBOE. Our pro forma standardized measure is calculated using unhedged oil, NGL and gas prices and is determined in accordance with the rules and regulations of the SEC. Over time, we may make material changes to reserve estimates to take into account changes in our assumptions and the results of actual drilling and production.

 

The present value of future net cash flows from our estimated proved reserves is not necessarily the same as the current market value of our estimated proved oil and gas reserves. We base the estimated discounted

future net cash flows from our estimated proved reserves on prices and costs in effect on the day of estimate. However, actual future net cash flows from our oil and gas properties also will be affected by factors such as:

 

 

The timing of both our production and our incurrence of expenses in connection with the production and development of oil and gas properties will affect the timing of actual future net cash flows from proved reserves, and thus their actual present value. In addition, the 10% discount factor we use when calculating discounted future net cash flows in compliance with the Financial Accounting Standards Board’s Statement of Financial Accounting Standards No. 69 may not be the most appropriate discount factor based on interest rates in effect from time to time and risks associated with us or the oil and gas industry in general.

 

Producing oil and gas involves numerous risks and uncertainties that could adversely affect our financial condition or results of operations and, as a result, our ability to pay distributions to our unitholders.

 

The operating cost of a well includes variable costs, and increases in these costs can adversely affect the economics of a well. Furthermore, our producing operations may be curtailed or delayed or become uneconomical as a result of other factors, including:

 

 

If any of these factors were to occur with respect to a particular field, we could lose all or a part of our investment in the field, or we could fail to realize the expected benefits from the field, either of which could materially and adversely affect our revenue and profitability.

Pioneer is the operator of all of our properties and, pursuant to our omnibus operating agreement, we are restricted in our ability to remove Pioneer as operator and have agreed that we will not object to Pioneer developing the leasehold acreage surrounding our wells, that well operations proposed by Pioneer will take precedence over our own proposals and that we will allow Pioneer to use certain of our production facilities in connection with other wells operated by Pioneer, subject to capacity limitations.

 

We do not operate any of our properties. Pioneer will operate all of the Partnership Properties pursuant to operating agreements. We have limited ability to influence or control the operation of these properties or the amount of maintenance capital that we are required to fund with respect to them. We have agreed in the omnibus operating agreement that we will not object to Pioneer developing the leasehold acreage surrounding our wells, that Pioneer proposed well operations will take precedence over any conflicting operations we propose and that we will allow Pioneer to use certain of our production facilities in connection with other wells operated by Pioneer, subject to capacity limitations. In addition, we are restricted in our ability to remove Pioneer as the operator of the wells we own. Our dependence on Pioneer and other working interest owners for these projects and our limited ability to influence or control the operation of these properties could materially adversely affect the realization of our targeted returns, resulting in smaller distributions to our unitholders.

 

Virtually all of our wells are subject to a volumetric production payment, which could cause a decrease in our production and could result in a decrease in our revenue and cash available for distribution.

 

During April 2005, Pioneer entered into a volumetric production payment agreement, or VPP, pursuant to which it sold 7.3 MMBOE of proved reserves in the Spraberry field. The VPP obligation required the delivery by Pioneer of specified quantities of gas through December of 2007 and requires the delivery of specified quantities of oil through December 2010. Pioneer’s VPP represents limited-term overriding royalty interests in oil and gas reserves that: (1) entitle the purchaser to receive production volumes over a period of time from specific lease interests; (2) do not bear any future production costs and capital expenditures associated with the reserves; (3) are nonrecourse to Pioneer (i.e., the purchaser’s only recourse is to the reserves acquired); (4) transfer title of the reserves to the purchaser; and (5) allow Pioneer to retain the remaining reserves after the VPP volumetric quantities have been delivered.

 

Of the approximately 1,100 wells that our operating company will own at the closing of this offering, all but 16 are subject to the VPP and will remain subject to the VPP after the closing of this offering. Pioneer will agree that production from its retained properties subject to the VPP will be utilized to meet the VPP obligation prior to utilization of production from our properties subject to the VPP. If any production from the interests in the properties that we own is required to meet the VPP obligation, Pioneer has agreed that it will make a cash payment to us for the value of our production (computed by taking the volumes delivered to meet the VPP obligation times the price we would have received for the related volumes, plus any out-of-pocket expenses or other expenses or losses incurred in connection with the delivery of such volumes) required to meet the VPP obligation. To the extent Pioneer fails to make any cash payment associated with any of our volumes delivered pursuant to the VPP obligation, the decrease in our production would result in a decrease in our cash available for distribution.

 

Due to our lack of asset and geographic diversification, adverse developments in the Spraberry field would reduce our ability to make distributions to our unitholders.

 

We rely exclusively on sales of oil and gas that we produce from, and all of our assets are currently located in, a single field in Texas. All of our oil and gas properties are producing properties, and we do not own any undeveloped properties or leasehold acreage. In addition, our operations are restricted to onshore Texas and the southeast region of New Mexico. Due to our lack of diversification in asset type and location, an adverse development in the oil and gas business of this geographic area would have a significantly greater impact on our results of operations and cash available for distribution to our unitholders than if we maintained more diverse assets and locations.

A substantial amount of our production is purchased by three companies. If these companies reduce the amount of our production that they purchase, our revenue and cash available for distribution will decline to the extent that substitute purchasers negotiate terms that are less favorable than the terms of the current marketing agreements.

 

For the year ended December 31, 2007, Plains Marketing, L.P., TEPPCO Crude Oil and ONEOK Inc. accounted for approximately 58%, 11% and 10% of our sales revenue, respectively. If these companies were to reduce the amount of our production that they purchase, our revenue and cash available for distribution will decline to the extent that substitute purchasers negotiate terms that are less favorable than the terms of the current marketing agreements.

 

Plains Marketing, L.P., ONEOK Inc. and TEPPCO Crude Oil purchase the majority of our oil and NGL production pursuant to existing marketing agreements with Pioneer. We are not and will not be a party to the marketing agreements with Plains Marketing, L.P., ONEOK Inc. and TEPPCO Crude Oil. After the closing of this offering, pursuant to the provisions of standard industry operating agreements to which our properties are subject and to which we are a party, Pioneer, as operator, will market the production on behalf of all working interest owners, including the Partnership, and determine in its sole discretion the terms on which our production will be sold.

 

As is standard in the industry, the crude oil sold under Pioneer’s marketing agreements with Plains Marketing, L.P. and TEPPCO Crude Oil is sold at the West Texas Intermediate (Cushing) price, less the Midland, Texas location and transportation differentials at the time of sale. Also as is standard in the industry, the NGLs sold under Pioneer’s marketing agreement with ONEOK Inc. are sold at the value of the individual NGL component at the Mont Belvieu posted price, less the cost of transportation and refractionation. The primary term of Pioneer’s marketing agreement with Plains Marketing, L.P. expires on January 1, 2011, after which time the contract will automatically be extended on a month-to-month basis until either party gives 90 days advance written notice of non-renewal. The marketing agreements between Pioneer and TEPPCO Crude Oil and between Pioneer and ONEOK Inc. are currently month-to-month and may be terminated upon 30 days advance written notice by either party to the agreement.

 

We may be unable to compete effectively with larger companies, which may adversely affect our ability to generate sufficient revenue to allow us to pay distributions to our unitholders.

 

The oil and gas industry is intensely competitive with respect to acquiring producing properties, marketing oil and gas and securing equipment and trained personnel, and we compete with other companies that have greater resources. Many of our competitors are major and large independent oil and gas companies, and possess and employ financial, technical and personnel resources substantially greater than ours. Those companies may be able to develop and acquire more producing properties than our financial or personnel resources permit. Our ability to acquire additional properties in the future will depend on Pioneer’s willingness and ability to evaluate and select suitable properties and our ability to consummate transactions in a highly competitive environment. Many of our larger competitors not only drill for and produce oil and gas but also carry on refining operations and market petroleum and other products on a regional, national or worldwide basis. These companies may be able to pay more for oil and gas properties and evaluate, bid for and purchase a greater number of properties than our financial or human resources permit. In addition, there is substantial competition for investment capital in the oil and gas industry. These larger companies may have a greater ability to absorb the burden of present and future federal, state, local and other laws and regulations. Our inability to compete effectively with larger companies could have a material adverse impact on our business activities, financial condition and results of operations.

 

We may incur debt to enable us to pay our quarterly distributions, which may negatively affect our ability to execute our business plan and pay distributions.

 

If we borrow to pay distributions, we would be distributing more cash than we generate from our operations on a current basis. This means that we would be using a portion of our borrowing capacity under our credit facility to pay distributions rather than to maintain or expand our operations. If we use borrowings

under our credit facility to pay distributions for an extended period of time rather than toward funding acquisition expenditures and other matters relating to our operations, we may be unable to support or grow our business. Such a curtailment of our business activities, combined with our payment of principal and interest on our future indebtedness to pay these distributions, will reduce our cash available for distribution on our units and will materially affect our business, financial condition and results of operations. If we borrow to pay distributions during periods of low commodity prices and commodity prices remain low, we would likely have to reduce our distributions in order to avoid excessive leverage.

 

Our future debt levels may limit our flexibility to obtain additional financing and pursue other business opportunities.

 

Following this offering, we will have the ability to incur debt under our credit facility. The level of our future indebtedness could have important consequences to us, including:

 

 

Our ability to service our indebtedness will depend upon, among other things, our future financial and operating performance, which will be affected by prevailing economic conditions and financial, business, regulatory and other factors, some of which are beyond our control. If our operating results are not sufficient to service our current or future indebtedness, we will be forced to take actions such as reducing distributions, reducing or delaying business activities, acquisitions, investments or capital expenditures, selling assets, restructuring or refinancing our indebtedness, or seeking additional equity capital or bankruptcy protection. We may not be able to effect any of these remedies on satisfactory terms or at all.

 

Our credit facility has substantial restrictions and financial covenants that may restrict our business and financing activities and our ability to pay distributions.

 

In connection with this offering, we have entered into a credit facility. The operating and financial restrictions and covenants in our credit facility and any future financing agreements may restrict our ability to finance future operations or capital needs or to engage, expand or pursue our business activities or to pay distributions. Our credit facility limits, and any future credit facility may limit, our ability to:

 

 

We also will be required to comply with certain financial covenants and ratios, such as a leverage ratio, an interest coverage ratio and a net present value of projected future cash flows from our proved reserves to total debt ratio. Our ability to comply with these restrictions and covenants in the future is uncertain and will be affected by the levels of cash flow from our operations and events or circumstances beyond our control. If market or other economic conditions deteriorate, our ability to comply with these covenants may be impaired. If we violate any of the restrictions, covenants, ratios or tests in our credit facility, our indebtedness may become immediately due and payable, our ability to make distributions may be inhibited, and our lenders’ commitment to make further loans to us may terminate. We might not have, or be able to obtain, sufficient funds to make these accelerated payments. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Credit Facility.”

 

Our operations are subject to operational hazards and unforeseen interruptions for which we may not be adequately insured.

 

There are a variety of operating risks inherent in our wells, gathering systems and associated facilities, such as leaks, explosions, mechanical problems and natural disasters, all of which could cause substantial financial losses. Any of these or other similar occurrences could result in the disruption of our operations, substantial repair costs, personal injury or loss of human life, significant damage to property, environmental pollution, impairment of our operations and substantial revenue losses. The location of our wells, gathering systems and associated facilities near populated areas, including residential areas, commercial business centers and industrial sites, could significantly increase the level of damages resulting from these risks.

 

We currently possess property, business interruption and general liability insurance at levels we believe are appropriate; however, insurance against all operational risk is not available to us. We are not fully insured against all risks. In addition, pollution and environmental risks generally are not fully insurable. Additionally, we may elect not to obtain insurance if we believe that the cost of available insurance is excessive relative to the perceived risks presented. Losses could, therefore, occur for uninsurable or uninsured risks or in amounts in excess of existing insurance coverage. Moreover, insurance may not be available in the future at commercially reasonable costs and on commercially reasonable terms. Changes in the insurance markets subsequent to the terrorist attacks on September 11, 2001 and the hurricanes in 2005 have made it more difficult for us to obtain certain types of coverage. There can be no assurance that we will be able to obtain the levels or types of insurance we would otherwise have obtained prior to these market changes or that the insurance coverage we do obtain will not contain large deductibles or fail to cover certain hazards or cover all potential losses. Losses and liabilities from uninsured and underinsured events and a delay in the payment of insurance proceeds could adversely affect our business, financial condition, results of operations and ability to make distributions to you. We will be listed as a named insured on the insurance policies that Pioneer carries with respect to its own assets. Losses by Pioneer will erode the coverage levels under the policy, and if Pioneer sustains a catastrophic loss for which the coverage under the policy is entirely exhausted, we would not have coverage for our losses occurring prior to the time that we were able to obtain additional coverage.

 

Our business depends in part on gathering, transportation and processing facilities owned by Pioneer and others. Any limitation in the availability of those facilities could interfere with our ability to market our oil, NGL and gas production and could harm our business.

 

The marketability of our oil, NGL and gas production depends in part on the availability, proximity and capacity of pipelines, oil, NGL and gas gathering systems and processing facilities. The amount of oil, NGL and gas that can be produced and sold is subject to curtailment in certain circumstances, such as pipeline or processing facility interruptions due to scheduled and unscheduled maintenance, excessive pressure, physical damage or lack of available capacity on such systems. For example, substantially all of our gas is processed at the Midkiff/Benedum and Sale Ranch gas processing plants. If either or both of these plants were to be shut down, we might be required to shut in production from the wells serviced by those plants. The curtailments arising from these and similar circumstances may last from a few days to several months. In many cases, we are provided only with limited, if any, notice as to when these circumstances will arise and their duration. Any

significant curtailment in gathering system, pipeline or processing capacity could reduce our ability to market our oil, NGL and gas production and harm our business.

 

Shortages of drilling rigs, supplies, oilfield services, equipment and crews could delay our operations and reduce our cash available for distribution.

 

To the extent that in the future we acquire and develop undeveloped properties, higher commodity prices generally increase the demand for drilling rigs, supplies, services, equipment and crews, and can lead to shortages of, and increasing costs for, drilling equipment, services and personnel. Over the past three years, oil and gas companies have experienced higher drilling and operating costs. Shortages of, or increasing costs for, experienced drilling crews and equipment and services could restrict our ability to drill wells and conduct operations. Any delay in the drilling of new wells or significant increase in drilling costs could reduce our future revenues and cash available for distribution.

 

The third parties on whom we rely 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 our business.

 

The operations of the third parties on whom we rely for gathering and transportation services are subject to complex and stringent laws and regulations that require obtaining and maintaining numerous permits, approvals and certifications from various federal, state and local government authorities. These third parties may incur substantial costs in order to comply with existing laws and regulation. If existing laws and regulations governing such third party services are revised or reinterpreted, or if new laws and regulations become applicable to their operations, these changes may affect the costs that we pay for such services. Similarly, a failure to comply with such laws and regulations by the third parties on whom we rely could have a material adverse effect on our business, financial condition, results of operations and ability to make distributions to you. Please read “Business — Environmental Matters and Regulation” and “Business — Other Regulation of the Oil and Gas Industry” for a description of the laws and regulations that affect the third parties on whom we rely.

 

If third-party pipelines and other facilities interconnected to our gas pipelines and processing facilities become partially or fully unavailable to transport gas, our revenues and cash available for distribution could be adversely affected.

 

We depend upon third party pipelines and other facilities that provide delivery options to and from pipelines and processing facilities that we utilize. Since we do not own or operate these pipelines or other facilities, their continuing operation in their current manner is not within our control. If any of these third-party pipelines and other facilities become partially or fully unavailable to transport gas, or if the gas quality specifications for these pipelines or facilities change so as to restrict our ability to transport gas on these pipelines or facilities, our revenues and cash available for distribution could be adversely affected.

 

The nature of our assets exposes us to significant costs and liabilities with respect to environmental and operational safety matters.

 

We may incur significant costs and liabilities as a result of environmental and safety requirements applicable to our oil and gas production activities. These costs and liabilities could arise under a wide range of federal, state and local environmental and safety laws and regulations, including agency interpretations of the foregoing and governmental enforcement policies, which have tended to become increasingly strict over time. Failure to comply with these laws and regulations may result in the assessment of administrative, civil and criminal penalties, imposition of cleanup and site restoration costs and liens, and to a lesser extent, issuance of injunctions to limit or cease operations. In addition, claims for damages to persons or property may result from environmental and other impacts of our operations.

 

Strict, joint and several liability may be imposed under certain environmental laws, which could cause us to become liable for the conduct of others or for consequences of our own actions that were in compliance with all applicable laws at the time those actions were taken. New laws, regulations or enforcement policies

could be more stringent and impose unforeseen liabilities or significantly increase compliance costs. If we are not able to recover the resulting costs through insurance or increased revenues, our ability to make distributions to you could be adversely affected. Please read “Business — Environmental Matters and Regulation” for more information.

 

The amount of cash distributions that we will be able to distribute to you will be reduced by the costs associated with being a public company, other general and administrative expenses, and cash reserves that our general partner believes prudent to maintain for the proper conduct of our business and for future distributions.

 

Before we can pay distributions to our unitholders, we must first pay or reserve cash for our expenses, including acquisition capital and the costs of being a public company and other operating expenses, and we may reserve cash for future distributions during periods of limited cash flows. Before this offering, we have not filed reports with the SEC. Following this offering, we will become subject to the public reporting requirements of the Securities Exchange Act of 1934. The amount of cash we have available for distribution to our unitholders will be affected by our level of cash reserves and expenses, including the costs associated with being a public company.

 

Our general partner and its affiliates own a controlling interest in us and will have conflicts of interest with us. Our partnership agreement limits the fiduciary duties that our general partner owes to us, which may permit it to favor its own interests to our detriment, and limits the circumstances under which you may make a claim relating to conflicts of interest and the remedies available to you in that event.

 

Following this offering, Pioneer will own a 71.3% limited partner interest in us and Pioneer will own and control our general partner, which controls us. The directors and officers of our general partner have a fiduciary duty to manage our general partner in a manner beneficial to Pioneer. Furthermore, certain directors and officers of our general partner will be directors or officers of affiliates of our general partner, including Pioneer. Conflicts of interest may arise between Pioneer and its affiliates, including our general partner, on the one hand, and us on the other hand. As a result of these conflicts, the directors and officers of our general partner may favor the interests of our general partner and the interests of its affiliates over our interests. Our partnership agreement provides that our general partner’s fiduciary duties are limited and owed only to us, not to our unitholders, and restricts the remedies available to unitholders for actions taken by our general partner that might otherwise constitute breaches of fiduciary duty. These potential conflicts include, among others, the following situations:

 

 

Please read “Certain Relationships and Related Party Transactions” and “Conflicts of Interest and Fiduciary Duties.”

 

We will rely on Pioneer to identify and evaluate prospective oil and gas assets for our acquisitions. Pioneer has no obligation to present us with potential acquisitions and is not restricted from competing with us for potential acquisitions. If Pioneer does not present us with, or successfully competes against us for, potential acquisitions, we may not be able to replace or increase our production and proved reserves.

 

Because we do not have any officers or employees, we will rely on Pioneer to identify and evaluate for us oil and gas assets for acquisition. Pioneer is not obligated to present us with potential acquisitions. Our partnership agreement does not prohibit Pioneer from owning assets or engaging in businesses that compete directly or indirectly with us. In addition, Pioneer may acquire, develop or dispose of additional oil and gas properties or other assets in the future, without any obligation to offer us the opportunity to purchase or develop any of those properties. Pioneer is a large, established participant in the oil and gas industry, and has significantly greater resources and experience than we have, which factors may make it more difficult for us to compete with Pioneer. As a result, competition from Pioneer could adversely impact our results of operations and cash available for distribution. If Pioneer fails to present us with, or successfully competes against us for, potential acquisitions, we may not be able to replace or increase our production and proved reserves, which would adversely affect our cash from operations and our ability to make cash distributions to you. Please read “Conflicts of Interest and Fiduciary Duties.”

 

Cost reimbursements to Pioneer and our general partner and their affiliates for services provided, which will be determined by our general partner, will be substantial and will reduce our cash available for distribution to you.

 

Our partnership agreement requires us to reimburse our general partner and its affiliates for all actual direct and indirect expenses they incur or actual payments they make on our behalf and all other expenses allocable to us or otherwise incurred by our general partner or its affiliates in connection with operating our business including overhead allocated to our general partner by its affiliates, including Pioneer. These expenses include salary, bonus, incentive compensation (including equity compensation) and other amounts paid to persons who perform services for us or on our behalf, and expenses allocated to our general partner by its affiliates. Our general partner is entitled to determine in good faith the expenses that are allocable to us.

 

At the closing of this offering, we expect that we will be a party to agreements with Pioneer, our general partner and certain of their affiliates, pursuant to which we will make payments to our general partner and its affiliates. Payments for these services will be substantial and will reduce the amount of cash available for distribution to unitholders. These agreements include the following:

 

 

 

 

We do not have any officers or employees and rely solely on officers of our general partner and employees of Pioneer. Failure of such officers and employees to devote sufficient attention to the management and operation of our business may adversely affect our financial results and our ability to make distributions to our unitholders.

 

None of the officers of our general partner are employees of our general partner. We intend to enter into an administrative services agreement pursuant to which Pioneer will manage our assets and perform other administrative services for us. Pioneer conducts businesses and activities of its own in which we have no economic interest. If these separate activities are significantly greater than our activities, there could be material competition for the time and effort of the officers and employees who provide services to our general partner and Pioneer. If the officers of our general partner and the employees of Pioneer do not devote sufficient attention to the management and operation of our business, our financial results may suffer and our ability to make distributions to our unitholders may be reduced.

 

We may issue an unlimited number of additional units, including units that are senior to the common units, without your approval, which would dilute your existing ownership interests.

 

Our partnership agreement does not limit the number of additional common units that we may issue at any time without the approval of our unitholders. In addition, we may issue an unlimited number of units that are senior to the common units in right of distribution, liquidation and voting. The issuance by us of additional common units or other equity securities of equal or senior rank will have the following effects:

 

 

Our partnership agreement provides that our general partner’s fiduciary duties are limited and only owed to us, not to our unitholders, and restricts the remedies available to unitholders for actions taken by our general partner that might otherwise constitute breaches of fiduciary duty.

 

Our partnership agreement contains provisions that reduce the standards to which our general partner would otherwise be held by state fiduciary duty law. For example, our partnership agreement:

 

 

 

 

 

By purchasing a common unit, a unitholder will become bound by the provisions of our partnership agreement, including the provisions described above, and a unitholder will be deemed to have consented to some actions and conflicts of interest that might otherwise constitute a breach of fiduciary or other duties under applicable law. Please read “Conflicts of Interest and Fiduciary Duties — Fiduciary Duties” and “Description of the Common Units — Transfer of Common Units.”

 

Unitholders have limited voting rights and are not entitled to elect our general partner or its directors or initially to remove our general partner without its consent, which could lower the trading price of our common units.

 

Unlike the holders of common stock in a corporation, unitholders have only limited voting rights on matters affecting our business and, therefore, limited ability to influence management’s decisions regarding our business. Unitholders will have no right to elect our general partner or its board of directors on an annual or other continuing basis. The board of directors of our general partner is chosen entirely by Pioneer and not by the unitholders. Furthermore, as explained in the following paragraph, even if our unitholders are

dissatisfied with the performance of our general partner, they will, in practice, have no ability to remove our general partner. As a result of these limitations, the price at which the common units will trade could be reduced because of the absence or reduction of a control premium in the trading price.

 

Our unitholders will be unable to remove our general partner without Pioneer’s consent because Pioneer will own a sufficient number of units upon completion of this offering to prevent removal of our general partner. The vote of the holders of at least 662/3% of all outstanding units voting together as a single class is required to remove our general partner. Following the closing of this offering, Pioneer will own 71.3% of our common units (approximately 68.4% if the underwriters exercise their over-allotment option in full).

 

Our partnership agreement restricts the voting rights of unitholders, other than our general partner and its affiliates, owning 20% or more of our common units, which may limit the ability of significant unitholders to influence the manner or direction of management.

 

Our partnership agreement restricts unitholders’ voting rights by providing that any units held by a person that owns 20% or more of any class of units then outstanding, other than our general partner, its affiliates, their transferees and persons who acquired such units with the prior approval of the board of directors of our general partner, cannot vote on any matter. Our partnership agreement also contains provisions limiting the ability of unitholders to call meetings or to acquire information about our operations, as well as other provisions limiting unitholders’ ability to influence the manner or direction of management.

 

Our general partner has a limited call right that may require you to sell your common units at an undesirable time or price.

 

If at any time our general partner and its affiliates own more than 80% of the common units, our general partner will have the right, but not the obligation, which it may assign to any of its affiliates or to us, to acquire all, but not less than all, of the common units held by unaffiliated persons at a price not less than their then-current market price. As a result, you may be required to sell your common units at an undesirable time or price and may not receive any return on your investment. You also may incur a tax liability upon a sale of your common units. For additional information about this call right, please read “The Partnership Agreement — Limited Call Right.”

 

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 may become subject to redemption.

 

In order to comply with U.S. laws with respect to the ownership of interests in oil and gas leases on United States federal lands, our partnership agreement allows us to adopt certain requirements regarding those investors who may own our common units. As used herein, an Eligible Holder means a person or entity qualified to hold an interest in oil and gas leases on federal lands. As of the date hereof, Eligible Holder means: (1) a citizen of the United States; (2) a corporation organized under the laws of the United States or of any state thereof; (3) a public body, including a municipality; or (4) an association of United States citizens, such as a partnership or limited liability company, organized under the laws of the United States or of any state thereof, but only if such association does not have any direct or indirect foreign ownership, other than foreign ownership of stock in a parent corporation organized under the laws of the United States or of any state thereof. For the avoidance of doubt, onshore mineral leases on United States federal lands or any direct or indirect interest therein may be acquired and held by aliens only through stock ownership, holding or control in a corporation organized under the laws of the United States or of any state thereof. In the future, if we own interests in oil and gas leases on United States federal lands, our general partner may require unitholders to certify that they are an Eligible Holder. Unitholders who are not persons or entities who meet the requirements to be an Eligible Holder may run the risk of (1) if they have not delivered a required Eligible Holder Certification, having quarterly distributions on such units withheld or (2) having their units acquired by us at the lower of the purchase price of their units or the then current market price, as determined by our general partner. The redemption price may be paid in cash or by delivery of an unsecured promissory note that shall be subordinated to the extent required by the terms of our other indebtedness, as determined by our

general partner. Please read “Description of the Common Units — Transfer of Common Units” and “The Partnership Agreement — Non-Eligible Holders; Redemption; Withholding of Distributions.”

 

Unitholders may not have limited liability if a court finds that unitholder action constitutes control of our business.

 

A general partner of a partnership generally has unlimited liability for the obligations of the partnership, except for those contractual obligations of the partnership that are expressly made without recourse to the general partner. Our partnership is organized under Delaware law and we will initially conduct business only in the State of Texas. You could have unlimited liability for our obligations if a court or government agency determined that your right to act with other unitholders to remove or replace our general partner, to approve some amendments to our partnership agreement or to take other actions under our partnership agreement constituted “control” of our business. Please read “The Partnership Agreement — Limited Liability” for a discussion of the implications of the limitations of liability on a unitholder.

 

Unitholders may have liability to repay distributions.

 

Under certain circumstances, unitholders may have to repay amounts wrongfully returned or distributed to them. Under Section 17-607 of the Delaware Revised Uniform Limited Partnership Act (the “Delaware Act”), we may not make a distribution to you if the distribution would cause our liabilities to exceed the fair value of our assets. Liabilities to partners on account of their partnership interests and liabilities that are nonrecourse to the partnership are not counted for purposes of determining whether a distribution is permitted. Delaware law provides that for a period of three years from the date of an impermissible distribution, limited partners who received the distribution and who knew at the time of the distribution that it violated Delaware law will be liable to the limited partnership for the distribution amount. A purchaser of common units who becomes a limited partner is liable for the obligations of the transferring limited partner to make contributions to the partnership that are known to such purchaser of units at the time it became a limited partner and for unknown obligations if the liabilities could be determined from our partnership agreement.

 

Our general partner’s interest in us and the control of our general partner may be transferred to a third party without unitholder consent.

 

Our general partner may transfer its general partner interest to a third party in a merger or in a sale of all or substantially all of its assets without the consent of the unitholders. Furthermore, there is no restriction in our partnership agreement on the ability of Pioneer to transfer its equity interest in our general partner to a third party. The new equity owner of our general partner would then be in a position to replace the board of directors and officers of our general partner with their own choices and to influence the decisions taken by the board of directors and officers of our general partner.

 

Unitholders may have limited liquidity for their common units, a trading market may not develop for the common units and you may not be able to resell your common units at the initial public offering price.

 

Prior to the offering, there has been no public market for the common units. After the offering, there will be 8,250,000 publicly traded common units. We do not know the extent to which investor interest will lead to the development of a trading market or how liquid that market might be. You may not be able to resell your common units at or above the initial public offering price. Additionally, a lack of liquidity would likely result in wide bid-ask spreads, contribute to significant fluctuations in the market price of the common units and limit the number of investors who are able to buy the common units.

 

The market price of our common units could be adversely affected by sales of substantial amounts of our common units in the public markets, including sales by our existing unitholders.

 

After this offering, we will have 28,771,200 common units outstanding, which includes the 8,250,000 common units we are selling in this offering that may be resold in the public market immediately. Pioneer’s common units will be subject to resale restrictions under a 180-day lock-up agreement with our

underwriters. The lock-up arrangement with the underwriters may be waived in the discretion of Citigroup Global Markets Inc., Deutsche Bank Securities Inc. and UBS Securities LLC. Under our partnership agreement, our general partner and its affiliates have registration rights relating to the offer and sale of any common units that they hold, subject to certain limitations. Please read “Units Eligible for Future Sale.”

 

If our common unit price declines after the initial public offering, you could lose a significant part of your investment.

 

The initial public offering price for the common units will be determined by negotiations between us and the representatives of the underwriters and may not be indicative of the market price of the common units that will prevail in the trading market. The market price of our common units could be subject to wide fluctuations in response to a number of factors, most of which we cannot control, including:

 

 

In recent years, the securities market has experienced extreme price and volume fluctuations. This volatility has had a significant effect on the market price of securities issued by many companies for reasons unrelated to the operating performance of these companies. Future market fluctuations may result in a lower price of our common units.

 

An increase in interest rates may cause the market price of our common units to decline.

 

Like all equity investments, an investment in our common units is subject to certain risks. In exchange for accepting these risks, investors may expect to receive a higher rate of return than would otherwise be obtainable from lower-risk investments. Accordingly, as interest rates rise, the ability of investors to obtain higher risk-adjusted rates of return by purchasing government-backed debt securities may cause a corresponding decline in demand for riskier investments generally, including yield-based equity investments such as publicly-traded limited partnership interests. Reduced demand for our common units resulting from investors seeking other more favorable investment opportunities may cause the trading price of our common units to decline.

 

You will experience immediate and substantial dilution of $15.03 per common unit.

 

The assumed initial public offering price of $20.00 per common unit exceeds our pro forma net tangible book value of $4.97 per common unit. Based on the initial public offering price, you will incur immediate and substantial dilution of $15.03 per common unit. This dilution results primarily because the assets that our operating company will own at the closing of this offering are recorded at their historical cost, and not their fair value, in accordance with GAAP. Please read “Dilution.”

 

In addition to reading the following risk factors, you should read “Material Tax Consequences” for a more complete discussion of the expected material federal income tax consequences of owning and disposing of common units.

 

Our tax treatment depends on our status as a partnership for federal income tax purposes. If the IRS were to treat us as a corporation for federal income tax purposes, our cash available for distribution to you would be substantially reduced.

 

The anticipated after-tax economic benefit of an investment in our common units depends largely on our being treated as a partnership for federal income tax purposes. We have not requested, and do not plan to request, a ruling from the IRS on this or any other tax matter affecting us.

 

Despite the fact that we are a limited partnership under Delaware law, it is possible in certain circumstances for a partnership such as ours to be treated as a corporation for federal income tax purposes. Although we do not believe, based upon our current operations, that we will be treated as a corporation, a change in our business (or a change in current law) could cause us to be treated as a corporation for federal income tax purposes or otherwise subject us to taxation as an entity.

 

If we were treated as a corporation for federal income tax purposes, we would pay federal income tax on our taxable income at the corporate tax rate, which is currently a maximum of 35%, and would likely pay state income tax at varying rates. Distributions to you would generally be taxed again as corporate distributions, and no income, gains, losses, deductions or credits would flow through to you. Because a tax would be imposed upon us as a corporation, our cash available for distribution to you would be substantially reduced. Therefore, treatment of us as a corporation would result in a material reduction in the anticipated cash flow and after-tax return to the unitholders, likely causing a substantial reduction in the value of our common units.

 

Current law may change so as to cause us to be treated as a corporation for federal income tax purposes or otherwise subject us to entity-level taxation. For example, legislation has been proposed that would eliminate partnership tax treatment for certain publicly traded partnerships. Although this legislation would not apply to us as currently proposed, it could be amended prior to enactment so that it would apply to us. We are unable to predict whether any of these changes or other proposals will ultimately be enacted. Any such changes could negatively impact the value of an investment in our common units.

 

A material amount of entity-level taxation by individual states would reduce our cash available for distribution to you.

 

Changes in current state law may subject us to entity-level taxation by those individual states. Because of widespread state budget deficits and other reasons, several states are evaluating ways to subject partnerships and limited liability companies to entity-level taxation through the imposition of state income, franchise and other forms of taxation. For example, beginning in 2008, we will be required to pay an annual Texas Margin tax at a maximum effective rate of 0.7% of our gross income apportioned to Texas in the prior year. Imposition of such a tax on us by Texas and, if applicable, by any other state will reduce the cash available for distribution to you.

 

We prorate our items of income, gain, loss and deduction between transferors and transferees of our units each month based upon the ownership of our units on the first day of each month, instead of on the basis of the date a particular unit is transferred. The IRS may challenge this treatment, which could change the allocation of items of income, gain, loss and deduction among our unitholders.

 

We prorate our items of income, gain, loss and deduction between transferors and transferees of our units each month based upon the ownership of our units on the first day of each month, instead of on the basis of the date a particular unit is transferred. The use of this proration method may not be permitted under existing Treasury regulations, and, accordingly, our counsel is unable to opine as to the validity of this method. If the

IRS were to challenge this method or new Treasury regulations were issued, we may be required to change the allocation of items of income, gain, loss and deduction among our unitholders. Please read “Material Tax Consequences — Disposition of Common Units — Allocations Between Transferors and Transferees.”

 

If the IRS contests the federal income tax positions we take, the market for our common units may be adversely impacted and the cost of any IRS contest will reduce our cash available for distribution to you.

 

We have not requested a ruling from the IRS with respect to our treatment as a partnership for federal income tax purposes or any other matter affecting us. The IRS may adopt positions that differ from the conclusions of our counsel expressed in this prospectus or from the positions we take. It may be necessary to resort to administrative or court proceedings to sustain some or all of our counsel’s conclusions or the positions we take. A court may not agree with some or all of our counsel’s conclusions or positions we take. Any contest with the IRS may materially and adversely impact the market for our common units and the price at which they trade. In addition, our costs of any contest with the IRS will be borne indirectly by our unitholders and our general partner because the costs will reduce our cash available for distribution.

 

You may be required to pay taxes on your share of our income even if you do not receive any cash distributions from us.

 

Because our unitholders will be treated as partners to whom we will allocate taxable income which could be different in amount than the cash we distribute, you will be required to pay any federal income taxes and, in some cases, state and local income taxes on your share of our taxable income even if you receive no cash distributions from us. You may not receive cash distributions from us equal to your share of our taxable income or even equal to the actual tax liability that results from that income.

 

Tax gain or loss on the disposition of our common units could be more or less than expected.

 

If you sell your common units, you will recognize a gain or loss equal to the difference between the amount realized and your tax basis in those common units. Because distributions in excess of your allocable share of our net taxable income decrease your tax basis in your common units, the amount, if any, of such prior excess distributions with respect to the common units you sell will, in effect, become taxable income to you if you sell such units at a price greater than your tax basis in those units, even if the price you receive is less than your original cost. Furthermore, a substantial portion of the amount realized, whether or not representing gain, may be taxed as ordinary income due to potential recapture items, including depreciation recapture. In addition, because the amount realized includes a unitholder’s share of our nonrecourse liabilities, if you sell your common units, you may incur a tax liability in excess of the amount of cash you receive from the sale. Please read “Material Tax Consequences — Disposition of Common Units — Recognition of Gain or Loss” for a further discussion of the foregoing.

 

Tax-exempt entities and foreign persons face unique tax issues from owning our common units that may result in adverse tax consequences to them.

 

Investment in common units by tax-exempt entities, such as individual retirement accounts (known as IRAs), and non-U.S. persons raises issues unique to them. For example, virtually all of our income allocated to organizations that are exempt from federal income tax, including IRAs and other retirement plans, will be unrelated business taxable income and will be taxable to them. Distributions to non-U.S. persons will be reduced by withholding taxes imposed at the highest applicable effective tax rate, and non-U.S. persons will be required to file United States federal tax returns and pay tax on their share of our taxable income. If you are a tax exempt entity or a foreign person, you should consult your tax advisor before investing in our common units.

We will treat each purchaser of common units as having the same tax benefits without regard to the actual common units purchased. The IRS may challenge this treatment, which could adversely affect the value of the common units.

 

Because we cannot match transferors and transferees of common units and because of other reasons, we will adopt depreciation and amortization positions that may not conform to all aspects of existing Treasury Regulations. A successful IRS challenge to those positions could adversely affect the amount of tax benefits available to you. It also could affect the timing of these tax benefits or the amount of gain from your sale of common units and could have a negative impact on the value of our common units or result in audit adjustments to your tax returns. Please read “Material Tax Consequences — Tax Consequences of Common Unit Ownership — Section 754 Election” for a further discussion of the effect of the depreciation and amortization positions we will adopt.

 

The sale or exchange of 50% or more of our capital and profits interests during any twelve-month period will result in the termination of our partnership for federal income tax purposes.

 

We will be considered to have terminated for federal income tax purposes if there is a sale or exchange of 50% or more of the total interests in our capital and profits within a twelve-month period. Our termination would, among other things, result in the closing of our taxable year for all unitholders, which would result in us filing two tax returns (and unitholders receiving two Schedule K-1’s) for one fiscal year. Our termination could also result in a deferral of depreciation deductions allowable in computing our taxable income. In the case of a unitholder reporting on a taxable year other than a fiscal year ending December 31, the closing of our taxable year may also result in more than twelve months of our taxable income or loss being includable in his taxable income for the year of termination. Our termination currently would not affect our classification as a partnership for federal income tax purposes, but instead, we would be treated as a new partnership for tax purposes. If treated as a new partnership, we must make new tax elections and could be subject to penalties if we are unable to determine that a termination occurred. Please read “Material Tax Consequences — Disposition of Common Units — Constructive Termination” for a discussion of the consequences of our termination for federal income tax purposes.

 

As a result of investing in our common units, you may become subject to state and local taxes and return filing requirements in some of the states in which we may make future acquisitions of oil and gas assets.

 

In addition to federal income taxes, you may become subject to state and local taxes that are imposed by various jurisdictions in which we extend our business or acquire assets even if you do not live in any of those jurisdictions. We will initially own assets and do business only in Texas. Texas does not currently impose a personal income tax on individuals but it does impose an entity level tax (to which we will be subject) on corporations and other entities. As we make acquisitions or expand our business, we may own assets or conduct business in additional states (such as New Mexico) that impose a personal income tax, and in that case you may be required to file state and local income tax returns and pay state and local taxes or face penalties if you fail to do so. It is your responsibility to file all United States federal, foreign, state and local tax returns applicable to you in your particular circumstances. Our counsel has not rendered an opinion on the state or local tax consequences of an investment in our common units.

 

We intend to use the estimated net proceeds of approximately $149.6 million from this offering, after deducting the underwriting discount of approximately $10.7 million and estimated net offering expenses of approximately $4.7 million, to purchase a portion of the interests in our operating company from Pioneer. The underwriters have agreed to reimburse us for certain expenses in an amount equal to 0.5% of the gross proceeds of this offering, or approximately $825,000. We will use any net proceeds from the exercise of the underwriters’ over-allotment option to purchase from Pioneer an incremental working interest in certain of the oil and gas properties owned by our operating company at the closing of this offering.

 

Each $1.00 increase or decrease in the assumed initial public offering price of $20.00 per common unit would cause the net proceeds from the offering, after deducting underwriting discounts and estimated offering expenses, to increase or decrease by approximately $7.8 million, which would be reflected in a corresponding increase or decrease in the purchase price of the portion of the interests in our operating company that we will purchase from Pioneer.

 

The following table shows:

 

 

 

This table does not reflect the issuance of up to an additional 1,237,500 common units that may be sold to the underwriters upon exercise of their over-allotment option. We derived this table from, and it should be read in conjunction with and is qualified in its entirety by reference to, the historical and pro forma financial statements and the accompanying notes included elsewhere in this prospectus. You should also read this table in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

 

 

 

 

Dilution is the amount by which the offering price paid by the purchasers of units sold in this offering will exceed the net tangible book value per common unit after the offering. Net tangible book value is our total tangible assets less total liabilities. Assuming an initial public offering price of $20.00 per common unit and assuming that the underwriters do not exercise their over-allotment option, on a pro forma basis as of December 31, 2007, after giving effect to the offering of common units and the application of the related net proceeds, our net tangible book value was $143.3 million, or $4.97 per common unit. Purchasers of common units in this offering will experience substantial and immediate dilution in net tangible book value per common unit for accounting purposes, as illustrated in the following table:

 

 

 

 

 

 

The following table sets forth the number of units that we will issue, assuming that the underwriters do not exercise their over-allotment option, and the total consideration contributed to us by our general partner and its affiliates with respect to their units and by the purchasers of common units in this offering upon consummation of the transactions contemplated by this prospectus:

 

 

 

 

 

 

You should read the following discussion of our cash distribution policy in conjunction with the specific assumptions included in this section. For more detailed information regarding the factors and assumptions upon which our cash distribution policy is based, please read “— Assumptions and Considerations” below. In addition, you should read “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factors” for information regarding statements that do not relate strictly to historical or current facts and certain risks inherent in our business. All information in this section refers to Pioneer Southwest Energy Partners L.P. and the Partnership Properties.

 

For additional information regarding our historical and pro forma operating results, you should refer to the audited historical financial statements of Pioneer Southwest Energy Partners L.P. Predecessor for the years ended December 31, 2005, 2006 and 2007 and the unaudited pro forma financial statements of Pioneer Southwest Energy Partners L.P. as of and for the year ended December 31, 2007 included elsewhere in this prospectus.

 

Our partnership agreement requires us to distribute all of our available cash quarterly. Our available cash is our cash on hand, including cash from borrowings, at the end of a quarter after the payment of expenses and the establishment of cash reserves for future capital expenditures (primarily acquisitions), operational needs and distributions for any one or more of the next four quarters. Our partnership agreement will not restrict our ability to borrow to pay distributions. We may borrow to make distributions to unitholders in certain circumstances, typically where we believe that the distribution level is sustainable over the long-term, but short-term factors may cause available cash from operations to be insufficient to sustain our level of distributions. For example, because we intend to hedge a significant portion of our production, we may be required to pay the derivative counterparties the difference between the fixed price and the market price before we receive the proceeds from the sale of the hedged production.

 

Restrictions and Limitations on Cash Distributions.  There is no guarantee that unitholders will receive quarterly distributions from us. We do not have a legal obligation to pay distributions at our initial quarterly distribution rate, except as provided in our partnership agreement. Our distribution policy is subject to certain restrictions and may be changed at any time, including:

 

 

 

Our Ability to Grow Depends on Our Ability to Access External Growth Capital.  Because our partnership agreement requires us to distribute all of our available cash to our unitholders and our general partner, we expect that we will rely primarily upon external financing sources, including commercial bank borrowings and the issuance of debt and equity securities, to fund acquisitions that will grow our production and proved reserves. As a result, to the extent we are unable to finance growth externally, our cash distribution policy will significantly impair our ability to grow. In addition, because we distribute all of our available cash, our growth may not be as fast as that of businesses that reinvest their operating cash flow to expand ongoing operations. To the extent we issue additional units in connection with any acquisitions or other capital expenditures, the payment of distributions on those additional units may increase the risk that we will be unable to maintain or increase our per unit distribution level, which in turn may impact the available cash that we have to distribute on each unit. There are no limitations in our partnership agreement and we do not expect any limitations under our credit facility on our ability to issue additional units, including units ranking senior to the common units. The incurrence of additional commercial borrowings or other debt to finance our growth strategy would result in increased interest expense, which in turn may impact the amount of available cash that we have to distribute to our unitholders and our general partner.

 

Our Ability to Change Our Cash Distribution Policy.  Our cash distribution policy, as expressed in our partnership agreement, may not be modified or repealed in a manner materially adverse to our unitholders without a vote of the holders of a majority of our common units. At the closing of this offering, Pioneer will own our general partner interest and approximately 71.3% of our outstanding common units and will have the ability to amend our partnership agreement without the approval of any other unitholders.

 

Upon completion of this offering, the board of directors of our general partner will adopt a cash distribution policy pursuant to which we will declare an initial distribution of $0.50 per unit per quarter, or $2.00 per unit per year, to be paid no later than 45 days after the end of each fiscal quarter. We will pay unitholders a prorated distribution for the initial quarter during which we are a publicly traded partnership. Assuming that we become a publicly traded partnership before June 30, 2008, we will pay unitholders a prorated distribution for the period from the closing of this offering to and including June 30, 2008. We expect to pay this cash distribution on or before August 14, 2008.

 

Our initial distribution policy should result in an aggregate cash distribution of approximately $14.4 million per quarter, or approximately $57.6 million per year, based on the common units outstanding immediately after completion of this offering. If the underwriters exercise their over-allotment option, the net proceeds will be used to purchase from Pioneer an incremental working interest in certain of the oil and gas properties owned by our operating company at the closing of this offering. Accordingly, the exercise of the underwriters’ over-allotment option in full will increase the total amount of common units outstanding by 1,237,500 common units and increase the amount of cash needed to pay the aggregate quarterly distribution by approximately $619 thousand, or approximately $2.5 million per year. Our ability to make cash distributions at the initial distribution rate pursuant to this policy will be subject to the factors described above under the caption “— Restrictions and Limitations on Cash Distributions” and “— Our Ability to Change Our Cash Distribution Policy.”

 

As of the date of this offering, our general partner will be entitled to 0.1% of all distributions that we make prior to our liquidation. The general partner’s initial 0.1% interest in these distributions may be reduced if we issue additional units in the future and our general partner does not contribute a proportionate amount of

capital to us to maintain its initial 0.1% general partner interest. Our general partner is not obligated to contribute a proportionate amount of capital to us to maintain its current general partner interest.

 

The following table sets forth the estimated aggregate distribution amounts payable on our common units and our general partner’s 0.1% general partner interest during the year following the closing of this offering at our initial distribution rate of $0.50 per common unit per quarter (or $2.00 per common unit on an annualized basis):

 

 

 

 

These distributions will not be cumulative. Consequently, if distributions on our common units are not paid with respect to any quarter at the initial distribution rate, our unitholders will not be entitled to receive such payments in the future. We will pay our distributions within 45 days after the end of each quarter to holders of record on or about the 1st of each payment month with our initial distribution being made on or before August 14, 2008, for the period from the closing of this offering through the end of June 30, 2008. If the distribution date does not fall on a business day, we will make the distribution on the business day immediately preceding the indicated distribution date.

 

In the sections that follow, we present in detail the basis for our belief that we will be able to pay quarterly distributions on all the outstanding common units for each quarter during the twelve months ended March 31, 2009 at the initial distribution rate of $0.50 per unit (prorated for the portion of the first quarter during which we are a publicly traded partnership based on the length of that period). In those sections we present two tables, reflecting:

 

 

 

If we had completed the transactions contemplated in this prospectus on January 1, 2007, our pro forma available cash to pay distributions for the year ended December 31, 2007 would have been sufficient to pay the full initial distribution amount on all our common units and general partner interest.

The pro forma financial statements, upon which pro forma cash available for distribution is based, do not purport to present our results of operations had the transactions contemplated in this prospectus actually been completed as of the dates indicated. Furthermore, cash available for distribution is a cash accounting concept, while our pro forma financial statements have been prepared on an accrual basis. We derived the amounts of pro forma cash available for distribution shown below in the manner described in the table below. As a result, the amount of pro forma cash available for distribution should be viewed as only a general indication of the amount of cash available for distribution that we might have generated had we been formed in earlier periods.

 

The following table illustrates, on a pro forma basis, for the year ended December 31, 2007, the amount of available cash that would have been available for distribution to our unitholders and our general partner, assuming that this offering had been consummated at the beginning of such period.

 

Pioneer Southwest Energy Partners L.P.

 

Unaudited Pro Forma Available Cash To Pay Distributions