This summary highlights information contained elsewhere in this prospectus. You should read the entire prospectus carefully, including “Risk Factors” beginning on page 22 and the historical and pro forma financial statements and the notes to those financial statements. The information presented in this prospectus assumes that the underwriters do not exercise their option to purchase additional common units, unless otherwise indicated.

 

Unless we indicate otherwise, our financial, reserve and operating information in this prospectus is presented on a pro forma basis as if this offering and the other transactions contemplated by this prospectus, including the formation transactions, had occurred on January 1, 2010 or April 1, 2010, as applicable, in the case of pro forma financial income statement or operating data, and on December 31, 2010 or March 31, 2011, as applicable, in the case of pro forma balance sheet information. We include a glossary of some of the oil and natural gas industry terms used in this prospectus in Appendix B.

 

The pro forma estimated proved reserve information for all of the Partnership Properties as of December 31, 2010 contained in this prospectus is based on the following: (1) approximately 53% of the estimated proved reserve volumes are based on a reserve report relating to our South Texas properties prepared by the independent petroleum engineers of Netherland, Sewell & Associates, Inc. (or NSAI), a summary of which is included in this prospectus as Appendix C; (2) approximately 35% of the estimated proved reserve volumes are based on evaluations relating to certain of our East Texas properties prepared by Memorial Resource’s internal reserve engineers and audited by NSAI, a summary of which is included in this prospectus as Appendix D; and (3) the remaining approximately 12% of the estimated proved reserve volumes are based on a reserve report relating to certain of our East Texas properties prepared by the independent petroleum engineers of Miller and Lents, Ltd. (or Miller and Lents), a summary of which is included in this prospectus as Appendix E. We refer to these reports and evaluations collectively as our “reserve reports.”

 

Memorial Production Partners LP

 

We are a Delaware limited partnership formed in April 2011 by Memorial Resource to own and acquire oil and natural gas properties in North America. Our primary business objective is to generate stable cash flows, allowing us to make quarterly cash distributions to our unitholders and, over time, to increase those quarterly cash distributions. We believe our properties are well suited for our partnership because they consist of mature onshore oil and natural gas reservoirs with long-lived, predictable production profiles and modest capital requirements. As of December 31, 2010, our total estimated proved reserves were approximately 325 Bcfe, of which approximately 81% were classified as proved developed reserves. Based on our pro forma average net production for the year ended December 31, 2010 of 52 MMcfe/d, our total estimated proved reserves had a reserve-to-production ratio of 17 years. Based on proved reserves volumes at December 31, 2010, we or Memorial Resource operate 94% of the properties in which we have interests, and we own an average working interest of 41% across our oil and natural gas properties.

 

We believe our business relationship with Memorial Resource, which owns our general partner and will own approximately     % of our outstanding common units and all of our subordinated units, will enhance our ability to maintain or grow our production and expand our proved reserves base over time. Memorial Resource is a Delaware limited liability company formed by Natural Gas Partners VIII, L.P. and Natural Gas Partners IX, L.P., which we refer to as the Funds, to own, acquire, exploit and develop oil and natural gas properties and to own our general partner. As part of the formation transactions, the Funds will contribute to Memorial Resource their respective ownership of five separate portfolio companies (including our predecessor), all of which are engaged in the business of owning, acquiring, exploiting, and developing oil and natural gas properties, and certain of which will contribute the Partnership Properties to us. Memorial Resource will engage in its business with the objective of growing its reserves, production and cash flows, as well as owning our general partner and a significant limited partner interest in us.

 

Our properties are located in South and East Texas and consist of mature, legacy onshore oil and natural gas reservoirs. We believe our properties are well suited for our partnership because they have predictable production profiles, low decline rates, long reserve lives and modest capital requirements. The Partnership Properties consist of operated working interests in producing and undeveloped leasehold acreage and in identified producing wells in South and East Texas, and non-operated working interests in producing and undeveloped leasehold acreage. As of December 31, 2010, we owned 133,309 gross (112,828 net) acres of developed properties and 11,876 gross (4,501 net) acres of undeveloped properties, all held by production, with 345 proved low-risk infill drilling, recompletion and development opportunities in our core operational areas. As of December 31, 2010, we had interests in 1,290 gross (609 net) producing wells across our properties, with an average working interest of 47%. Based on our reserve reports, the average estimated decline rate for our existing proved developed producing reserves is approximately 9% for 2011, approximately 9% compounded average decline for the subsequent four years and approximately 8% thereafter. As of December 31, 2010, approximately 60 Bcfe, or 19%, of our estimated proved reserves were classified as proved undeveloped, of which approximately 83% were natural gas. Based on the production estimates and pricing assumptions included in our reserve reports, we believe that through 2015, our low-risk development inventory will provide us with the opportunity to maintain our targeted average net production of 49 MMcfe/d without acquiring incremental reserves.

 

The following table summarizes pro forma information by producing region regarding our estimated oil and natural gas reserves as of December 31, 2010 and our average net production for the year ended December 31, 2010. The reserve estimates attributable to the Partnership Properties are derived from our reserve reports.

 

 

 

 

We expect to adopt a hedging policy designed to reduce the impact to our cash flows from commodity price volatility. Under this policy, we intend to enter into commodity derivative contracts covering approximately 65% to 85% of our estimated production from total proved developed producing reserves over a three-to-five year period at any given point of time. We may, however, from time to time hedge more or less than this approximate range. Memorial Resource will contribute to us at the closing of this offering derivative contracts for the six months ending December 31, 2011 and the years ending December 31, 2012, 2013, 2014, and 2015 covering approximately 76%, 75%, 69%, 14% and 8%, respectively, of our estimated production from our total proved developed producing reserves existing as of December 31, 2010, based on our reserve reports.

 

Our commodity derivative contracts may consist of natural gas, oil and NGL financial swaps, put options and/or collar contracts and natural gas basis financial swaps. By removing a significant portion of price volatility associated with production, we believe we will mitigate, but not eliminate, the potential negative effects of reductions in commodity prices on our cash flow from operations for those periods. However, our hedging activity may also reduce our ability to benefit from increases in commodity prices. Additionally, we intend to individually identify these non-speculative hedges as “designated hedges” for U.S. federal income tax purposes as we enter into them. For a description of our commodity derivative contracts, please read

“Management’s Discussion and Analysis of Financial Condition and Results of Operations — Pro Forma Liquidity and Capital Resources — Commodity Derivative Contracts.”

 

We view our relationships with Memorial Resource, Natural Gas Partners and the Funds as significant competitive strengths. We believe these relationships will provide us with potential acquisition opportunities from a portfolio of additional oil and natural gas properties that meet our acquisition criteria, as well as access to personnel with extensive technical expertise and industry relationships.

 

Following the completion of this offering, Memorial Resource will be our largest unitholder, holding           common units (approximately     % of all outstanding) and           subordinated units (100% of all outstanding), and will own the voting interests in our general partner and 50% of the economic interest in our incentive distribution rights. After giving effect to the formation transactions, Memorial Resource had (i) total estimated proved reserves of 1,036 Bcfe at December 31, 2010, primarily located in East Texas, North Louisiana and the Rockies, of which approximately 81% were natural gas, and approximately 34% were classified as proved developed reserves, and (ii) interests in over 398,000 gross (173,000 net) acres of undeveloped properties. We believe that many of these properties are (or after additional capital is invested will become) suitable for us, based on our criteria that suitable properties consist of mature onshore oil and natural gas reservoirs with long-lived, low-decline, predictable production profiles. We also believe the largely contiguous and overlapping nature of Memorial Resource’s and our East Texas acreage, along with joint ownership in specific properties, will provide key operational, logistical and technical benefits derived from our aligned interests and information sharing among personnel, in addition to various economic benefits.

 

The following table summarizes pro forma information by producing region regarding Memorial Resource’s estimated oil and natural gas reserves as of December 31, 2010 and its average net production for the year ended December 31, 2010.

 

 

 

 

As a result of its significant ownership interests in us and our general partner, we believe Memorial Resource will be motivated to support the successful execution of our business strategy and will provide us with opportunities to pursue acquisitions that will be accretive to our unitholders. Memorial Resource views our partnership as part of its growth strategy, and we believe that Memorial Resource will be incentivized to contribute or sell additional assets to us and to pursue acquisitions jointly with us in the future. However, Memorial Resource will regularly evaluate acquisitions and dispositions and may elect to acquire or dispose of properties in the future without offering us the opportunity to participate in those transactions. Moreover, after

this offering, Memorial Resource will continue to be free to act in a manner that is beneficial to its interests without regard to ours, which may include electing not to present us with future acquisition opportunities. Although we believe Memorial Resource will be incentivized to offer properties to us for purchase, none of Memorial Resource, the Funds or any of their affiliates will have any obligation to sell or offer properties to us following the consummation of this offering. If Memorial Resource fails to present us with, or successfully competes against us for, acquisition opportunities, then our ability to replace or increase our estimated proved reserves may be impaired, which would adversely affect our cash flow from operations and our ability to make cash distributions to our unitholders. Please read “Conflicts of Interest and Fiduciary Duties.”

 

Memorial Resource will also provide management, administrative, and operations personnel to us and our general partner under an omnibus agreement that it will enter into with us and our general partner at the completion of this offering. Under this agreement, we will utilize Memorial Resource’s staff of 50 engineers and geologists and 54 management and administrative personnel as of May 31, 2011, who collectively have an average of 24 years of experience operating properties in our areas of operations. Please read “Management” for more information about the management of our partnership and our use of Memorial Resource personnel, and “Certain Relationships and Related Party Transactions — Agreements Governing the Transactions — Omnibus Agreement” for more information about the omnibus agreement.

 

Founded in 1988, Natural Gas Partners, or NGP, is a family of private equity investment funds with aggregate committed capital of over $7 billion, organized to make direct equity investments in the energy industry. NGP is part of the investment platform of NGP Energy Capital Management, one of the leading investment franchises in the natural resources sector with over $9 billion in aggregate committed capital under management. The employees of NGP are experienced energy professionals with substantial expertise in investing in the oil and natural gas business. In connection with NGP’s business, these employees review a large number of potential acquisitions and are involved in decisions relating to the acquisition and disposition of oil and natural gas assets by the various portfolio companies in which NGP owns interests. We believe that our relationship with NGP, and its experience investing in oil and natural gas companies, provides us with a number of benefits, including increased exposure to acquisition opportunities and access to a significant group of transactional and financial professionals who have experience in assisting the companies in which it has invested to meet their financial and strategic growth objectives. Although we may have the opportunity to make acquisitions as a result of our relationship with NGP, NGP has no legal obligation to offer to us (or inform us about) any acquisition opportunities, may decide not to offer any acquisition opportunities to us and is not restricted from competing with us, and we cannot say which, if any, of such potential acquisition opportunities we would choose to pursue.

 

The Funds, which are two of the private equity funds managed by NGP, collectively own 100% of Memorial Resource. The Funds also will collectively directly own, through non-voting membership interests in our general partner, 50% of the economic interest in our incentive distribution rights. The remaining economic interest in our incentive distribution rights is owned by Memorial Resource. Given this alignment of interests between NGP, the Funds, Memorial Resource and us, we believe we will benefit from the collective expertise of NGP’s employees and their extensive network of industry relationships, and accordingly the access to potential acquisition opportunities that might not otherwise be available to us.

 

Our primary business objective is to generate stable cash flows, allowing us to make quarterly cash distributions to our unitholders and, over time, to increase those quarterly cash distributions. To achieve our objective, we intend to execute the following business strategies:

 

 

 

For a more detailed description of our business strategies, please read “Business and Properties — Our Business Strategies.”

 

We believe that the following competitive strengths will allow us to successfully execute our business strategies and achieve our objective of generating and growing cash available for distribution:

 

 

For a more detailed discussion of our competitive strengths, please read “Business and Properties — Our Competitive Strengths.”

 

An investment in our common units involves risks. Below is a summary of certain key risk factors that you should consider in evaluating an investment in our common units. This list is not exhaustive. Please read the full discussion of these risks and other risks described under “Risk Factors” beginning on page 22.

 

Risks Related to Our Business

 

 

Risks Inherent in an Investment in Us

 

 

Tax Risks to Unitholders

 

 

We are a Delaware limited partnership formed by Memorial Resource to own and acquire oil and natural gas properties. In connection with this offering, the following transactions, which we refer to as the formation transactions, will occur:

 

Prior to the closing of this offering:

 

 

At the closing of this offering:

 

 

If the underwriters exercise their option to purchase additional common units, we will use the net proceeds to reduce indebtedness incurred under our new revolving credit facility. If the underwriters exercise in full their option to purchase additional common units, the ownership interest of the public unitholders will increase to           common units, representing an aggregate     % limited partner interest in us, the ownership interest of our general partner will increase to           general partner units, representing a 0.1% general partner interest in us, and the ownership interest of Memorial Resource will remain at           common units and subordinated units, representing an aggregate     % limited partner interest in us.

 

The Partnership Properties consist of properties that will be contributed to us by our predecessor (which consists of the combined financial data of (a) BlueStone Natural Resources Holdings, LLC, (b) certain oil and natural gas properties owned by Classic Hydrocarbons Holdings, L.P., and (c) for periods after April 8, 2011, certain oil and natural gas properties owned by WHT Energy Partners LLC (WHT), each subsidiaries of Memorial Resource). The properties being contributed to us by our predecessor include (1) properties acquired by our predecessor from Forest Oil Corporation (Forest Oil) in June 2010 (with respect to which certain financial statements are included elsewhere in this prospectus), (2) properties acquired by our predecessor from BP America Production Company (BP) in May 2011 (with respect to which certain financial statements are included elsewhere in this prospectus) and (3) a 40% undivided interest in the properties acquired by WHT in April 2011 (with respect to which certain financial statements are included elsewhere in this prospectus).

 

The table and diagram below illustrates our ownership and organizational structure based on total units outstanding after giving effect to this offering and the related formation transactions and assumes that the underwriters do not exercise their option to purchase additional common units.

 

 

 

Our principal executive offices are located at 1401 McKinney, Suite 1025, Houston, Texas 77010, and our phone number is (713) 579-5700. Our website address is www.memorialpp.com and will be activated in connection with the closing of this offering. We expect to make our periodic reports and other information filed with or furnished to the Securities and Exchange Commission, which we refer to as the SEC, available free of charge through our website as soon as reasonably practicable after those reports and other information are electronically filed with or furnished to the SEC. Information on our website or any other website is not incorporated by reference into, and does not constitute a part of, this prospectus.

 

We are managed and operated by the board of directors and executive officers of Memorial Production Partners GP LLC, our general partner. Upon the completion of this offering, the board of directors of our general partner will have five members. At least one of our independent directors will be appointed prior to the date our common units are listed for trading on the NASDAQ Global Market, or NASDAQ. Memorial Resource will appoint our second and third independent directors within 90 days and one year, respectively, of such date. Memorial Resource owns 100% of the voting membership interests in our general partner and has the sole right to appoint its entire board of directors. Unlike shareholders in a publicly traded corporation, our unitholders will not be entitled to elect our general partner or the board of directors of our general partner. Some of the executive officers and/or directors of our general partner currently serve as executive officers and/or directors of Memorial Resource, and some of the directors of our general partner currently serve in executive or other capacities for the Funds and their affiliates, including NGP. For more information about the directors and officers of our general partner, please read “Management — Directors and Executive Officers.”

 

Neither we nor our subsidiaries will have any employees. Our general partner has the sole responsibility for providing the personnel necessary to conduct our operations, whether through directly hiring employees or by obtaining the services of personnel employed by Memorial Resource or others. We will reimburse our general partner and its affiliates for all expenses they incur or payments they make on our behalf. Our partnership agreement provides that our general partner will determine in good faith the expenses that are allocable to us.

 

Prior to the closing of this offering, we and our general partner will enter into an omnibus agreement with Memorial Resource pursuant to which, among other things, Memorial Resource will provide management, administrative and operating services for us and our general partner. Memorial Resource will not be liable to us for its performance of, or failure to perform, services under this agreement unless there has been a final decision determining that Memorial Resource acted in bad faith or engaged in fraud or willful misconduct or, in the case of a criminal matter, acted with knowledge that the conduct was unlawful. Our general partner will determine the expenses (including general and administrative expenses) to be reimbursed by us in accordance with our partnership agreement. We currently expect those general and administrative expenses (including those to be allocated to us by Memorial Resource) to be approximately $5.0 million for the twelve months ending June 30, 2012. Please read “Certain Relationships and Related Party Transactions — Agreements Governing the Transactions — Omnibus Agreement.”

 

As is common with publicly traded partnerships and in order to maintain operational flexibility, we will conduct our operations through subsidiaries. We will initially have one direct subsidiary, Memorial Production Operating LLC, a Delaware limited liability company that will conduct business itself and through any subsidiaries that it may form or acquire.

 

Our general partner has a legal duty to manage us in a manner beneficial to the holders of our common and subordinated units. This legal duty originates in statutes and judicial decisions and is commonly referred to as a “fiduciary duty.” However, the officers and directors of our general partner also have a fiduciary duty to manage the business of our general partner in a manner beneficial to its owner, which is Memorial

Resource. The officers and directors of Memorial Resource, in turn, have a fiduciary duty to manage Memorial Resource’s business in a manner beneficial to its owners, which are the Funds. Memorial Resource, the Funds, and their respective affiliates (including NGP) each manage, own, and hold assets and investments in other entities that compete or may compete with us. Additionally, certain of our general partner’s executive officers and directors will continue to have economic interests, investments and other economic incentives in affiliates of the Funds. As a result of these relationships, conflicts of interest may arise in the future between us and our unitholders, on the one hand, and our general partner and its owners and affiliates, on the other hand. For example, our general partner is entitled to make determinations that affect our ability to generate the cash flows necessary to make cash distributions to our unitholders, including determinations related to:

 

 

These determinations will have an effect on the amount of cash distributions we make to the holders of our units, which in turn has an effect on whether our general partner receives incentive cash distributions. For a more detailed description of the conflicts of interest and fiduciary duties of our general partner, please read “Risk Factors — Risks Inherent in an Investment in Us” and “Conflicts of Interest and Fiduciary Duties.”

 

Delaware law provides that Delaware limited partnerships may, in their partnership agreements, restrict or expand the fiduciary duties owed by the general partner to the limited partners and the partnership. Our partnership agreement limits the liability of our general partner and reduces the fiduciary duties it owes to holders of our common and subordinated units. Our partnership agreement also restricts the remedies available to holders of our common units for actions that might otherwise constitute a breach of the fiduciary duties that our general partner owes to our unitholders. By purchasing a common unit, unitholders agree to be bound by the terms of our partnership agreement and, pursuant to the terms of our partnership agreement, are treated as having consented to various actions contemplated in our partnership agreement and conflicts of interest that might otherwise be considered a breach of fiduciary or other duties under Delaware law. Please read “Conflicts of Interest and Fiduciary Duties — Fiduciary Duties” for a description of the fiduciary duties imposed on our general partner by Delaware law, the material modifications of these duties contained in our partnership agreement and certain legal rights and remedies available to our unitholders.

 

Additionally, neither our partnership agreement nor the omnibus agreement contains any restrictions on the ability of Memorial Resource, the Funds, or any of their respective affiliates (including NGP and its affiliates’ portfolio investments) to compete with us. None of Memorial Resource, the Funds or any of their respective affiliates (including NGP) is under any obligation to offer properties or refer acquisitions or other opportunities to us.

 

 

 

We were formed in April 2011 and do not have historical financial operating results. The following table shows summary historical financial data of our predecessor, which consists of the combined financial data of BlueStone Natural Resources Holdings, LLC, certain oil and natural gas properties owned by Classic Hydrocarbons Holdings, L.P. and for periods after April 8, 2011, certain oil and natural gas properties of WHT Energy Partners LLC, and unaudited pro forma combined financial data of Memorial Production Partners LP, for the periods and as of the dates presented. Due to the factors described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Overview” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Historical and Pro Forma Financial and Operating Data — Pro Forma Results of Operations — Factors Affecting the Comparability of the Pro Forma Results of Our Partnership to the Historical Financial Results of Our Predecessor,” our future results of operations will not be comparable to the historical results of our predecessor.

 

The summary historical combined financial data as of December 31, 2009 and 2010 and for the years ended December 31, 2008, 2009 and 2010 are derived from the audited historical combined financial statements of our predecessor included elsewhere in this prospectus. The summary historical combined financial data as of March 31, 2010 and 2011 and for the three months ended March 31, 2010 and 2011 are derived from the unaudited historical combined financial statements of our predecessor included elsewhere in this prospectus.

 

The summary unaudited pro forma financial data as of March 31, 2011 and for the three months ended March 31, 2011 and the year ended December 31, 2010 are derived from the unaudited pro forma combined financial statements of Memorial Production Partners LP included elsewhere in this prospectus. The pro forma adjustments have been prepared as if certain transactions, which have been completed or which will be effected prior to or in connection with the closing of this offering, had taken place on March 31, 2011, in the case of the unaudited pro forma balance sheet, or as of January 1, 2010, in the case of the unaudited pro forma statements of operations. These transactions include:

 

 

You should read the following table in conjunction with “— Our Partnership Structure and Formation Transactions,” “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the historical combined financial statements of our predecessor and the unaudited pro forma combined financial statements of Memorial Production Partners LP included elsewhere in this prospectus. Among other things, those historical and unaudited pro forma combined financial statements include more detailed information regarding the basis of presentation for the following information.

The following table presents Adjusted EBITDA, which we use in evaluating the liquidity of our business. This financial measure is not calculated or presented in accordance with generally accepted accounting principles, or GAAP. We explain this measure below and reconcile it to net cash from operating activities, its most directly comparable financial measure calculated and presented in accordance with GAAP.

 

 

 

We include in this prospectus the non-GAAP financial measure Adjusted EBITDA and provide our calculation of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net cash provided by operating activities, our most directly comparable financial measure calculated and presented in accordance with GAAP. We define Adjusted EBITDA as net income (loss):

 

 

 

 

 

We expect that we will be required to comply with certain Adjusted EBITDA-related metrics under our new revolving credit facility.

 

Adjusted EBITDA will be used as a supplemental financial measure by our management and by external users of our financial statements, such as investors, commercial banks and others, to assess:

 

 

 

In addition, our management will use Adjusted EBITDA to evaluate actual cash flow available to pay distributions to our unitholders, develop existing reserves, or acquire additional oil and natural gas properties.

 

Adjusted EBITDA should not be considered an alternative to net income, operating income, cash flow from operating activities, or any other measure of financial performance or liquidity presented in accordance with GAAP. Our Adjusted EBITDA may not be comparable to similarly titled measures of another company because all companies may not calculate Adjusted EBITDA in the same manner. The following table presents our calculation of Adjusted EBITDA. The table below further presents a reconciliation of Adjusted EBITDA to net cash flows provided by operating activities, our most directly comparable GAAP financial measure, for each of the periods indicated.

 

Calculation of Adjusted EBITDA

 

 

Reconciliation of Net Cash from Operating Activities to Adjusted EBITDA

 

 

The following tables present summary data with respect to our estimated net proved oil and natural gas reserves and pro forma operating data as of the dates presented.

 

The reserve estimates attributable to the Partnership Properties at December 31, 2010 presented in the table below are based on the following: (1) approximately 53% of the estimated proved reserve volumes are based on a reserve report relating to our South Texas properties prepared by the independent petroleum engineers of NSAI; (2) approximately 35% of the estimated proved reserve volumes are based on evaluations relating to certain of our East Texas properties prepared by Memorial Resource’s internal reserve engineers and audited by NSAI; and (3) the remaining approximately 12% of the estimated proved reserve volumes are based on a reserve report relating to certain of our East Texas properties prepared by the independent petroleum engineers of Miller and Lents. All of these reserve estimates were prepared in accordance with the SEC’s rules regarding oil and natural gas reserve reporting that are currently in effect. The following tables also contain certain summary unaudited information regarding production and sales of oil and natural gas with respect to such properties.

 

Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business and Properties — Oil and Natural Gas Data and Operations — Properties — Estimated Proved Reserves” and the reserve report and reserve audit report summaries included in this prospectus in evaluating the material presented below. The summaries of our reserve reports are included as Appendices C, D and E of this prospectus.

 

Reserve Data

 

 

 

 

Pro Forma Operating Data