John Walker - Chairman and Chief Executive Officer
Mike Mercer - Chief Financial Officer
Mark Houser - President and Chief Operating Officer
Michael Blum - Wachovia
EV Energy Partners LP (EVEP) Q1 2009 Earnings Call May 12, 2009 9:00 AM ET
Ladies and gentlemen, thank you for standing by, and welcome to the Energy Partners first quarter 2009 conference call on 12th May 2009. Throughout today’s presentation, all participants will be in listen-only mode. After the presentation, there will be an opportunity to ask questions. (Operator instructions)
I will now hand the conference over to Mr. John Walker. Please go ahead, sir. Thank you.
Thank you. Good morning, everyone. During this period of difficult overall economic experiences as well as difficult period for the oil and gas business, I’m happy to report that we did have a good quarter. I’d also hasten to add that I think in particularly in the natural gas business that times are going to be far more difficult over the next several months reaching probably through the balance of the year, anyway in terms of things getting very, very difficult.
We anticipate this period, we think it will be a prolonged period, and yet we continue to be optimistic, because we were prepared for it; we are prepared for it. There are no surprises this quarter. In fact, we’re probably a little bit boring, because nearly all results from every area turned out to be within a few percent of what our budget was as well as our guidance. And it’s probably nice being boring during this period.
Our production revenues, margins, EBITDA all were in line with guidance. I can also say through the first half of the second quarter the same is true. One of the advantages of the diversity that we created operating in eight separate areas is that if we do have a stumble factor in one area, we do have the opportunity to make it up in other areas, and we haven’t had a stumble factor. So things have gone very well.
We have maintained our distribution. We’re also continuing to set aside roughly 30% of our EBITDA as maintenance capital, while at this same time our actual capital spending is less than half that number. We anticipate accretive acquisitions rather than drilling this year, and clearly the acquisition market is a buyer’s market, and we will start seeing a lot more metrics on that.
The GP for EV Energy Partners, EnerVest is active right now and we’re seeing a lot of deals. I’ve said at several conferences that we anticipate that EV will participate in some of the more exciting and most accretive acquisitions along with EnerVest, and I continue to believe that that will be true. EVEP will participate in the acquisition market.
Our hedges are strong through 2013. The last few months alone, we’ve received 7 million per month in terms of hedge payments. Our actual hedge money received for the first quarter was 19.6 million. We have no impairments which says something about the way that we acquired properties during the last two years. We’ve already announced our borrowing base of 465 million. We paid down 17 million of our debt in the first quarter. We’ve already paid down another 10 million. We’re generating extremely good cash flow.
From an operational standpoint, I always start out talking about the Chalk because it’s the one area where we can still drill and receive higher than our targeted rate of return, which is a risk-adjusted 20% rate of return. We’ve drilled four particularly good wells in the last few months. The good news is we’ve had four really good wells. The bad news is we are selling product in a weak market. Those wells, after IP is much higher than the number that I’m going to give you, stabilized at roughly 500 barrels a day and 12.5 million a day, meaning that Chalk continues to outperform. Since inception, since we bought the Chalk, our cash on cash return after capital has been roughly 25%.
Yes, I want to point out that our ownership in the Chalk currently is 13.3%, but again we’re pleased with that. We continue to be active and there are definitely the opportunities for bolt-on acquisitions there.
Another great area was the acquisition that we did in September of last year, the San Juan. Despite the fact that that we had budgeted a rig activity there and have not used any rigs, it’s continuing to perform about 4% above our budget, and we do have plenty of opportunities there, but I don’t anticipate that we’ll be withdrawing much this year. The laggards right now are the Permian Basin where we had anticipated rig activity.
We’re using our capital for workovers and in fact we just had an extremely productive workover there. And two little oil properties that we purchased, they don’t mean much in terms of our overall production, but those are areas that are falling below our guidelines.
In the Appalachian Basin, I talked about previously that we’ve permitted five Marcellus wells. We will use joint ventures there, because we don’t want to take the risk of drilling Marcellus wells in this kind of environment. I anticipate that that would not achieve our 20% rate of return currently.
I’m going to hand it over to Mike Mercer who will discuss specifically the first quarter report.
Thank you, John. For the first quarter of this year, we had adjusted EBITDA of $31.1 million, and we generated distributable cash flow of 16.8 million; that’s approximately a 21% cushion over our distribution that we’ll be making for this quarter.
Net income was $38.3 million or about $2.23 per unit. Now included in net income was 26.6 million of non-cash unrealized gains on our derivatives due to the decline in commodity prices during the quarter and about $600,000 of non-cash compensation-related costs in G&A. Excluding these two items, net income would have been approximately $11.7 million.
Production for the quarter was essentially flat with the prior quarter. It was 4 Bcf of gas, 127,000 barrels of crude, and 240,000 barrels of NGLs or a total of 6 Bcfe. Now NGL production in the first quarter did include approximately 35,000 barrels of NGLs that were fractionated by a third party and sold during the first quarter, and these NGLs if you remember had been produced from the wells sent to Mt. Belvieu and put into storage during a turnaround that occurred with our third-party fractionater in the fourth quarter. So all those volumes that have been put into storage essentially were fractionated and sold in the first quarter.
At March 31, we had if you look at our balance sheet, about $33 million of cash and $450 million of debt. As we had mentioned at a conference a few weeks ago, we noted in our K and in our Q, we did pay down approximately $10 million of debt in April to reduce our debt to $440 million, and we currently have over $35 million of cash.
Now after our distribution that we’ll be making later this week, that cash will drop to about 21 million, but we still have a significant amount of cash on the balance sheet as of now.
I think that’s it, and I’ll turn it back over to John.
I don’t have any other comments. Joining me for this call are Mark Houser, the President and Chief Operating Officer; Kathy MacAskie, who heads our A&D effort; Fred Dwyer, our Controller; and Jones Rex Jon who is Chairman of EnerVest, the General Partner. So if you have any questions that we might be able to answer, please ask those.
Our first question comes from Michael Blum.
Michael Blum - Wachovia
A couple of questions. First just on the last point that Mike was making. Just could you walk me through what’s your rationale for keeping so much cash on the balance sheet?
Well, we have been using cash to pay down debt and we’ll continue to do so. But, we’ve just always been comfortable having a little bit of cash on the balance sheet just to maintain the liquidity and to have there. We will be paying down some debt as we move forward. So that balance will be dropping down probably over the quarter as we move through it.
Michael, I would also add that we’ve had some small bolt-on acquisitions that have just been too small to even announce and every now and then if you’re buying things at PV-20, PV-25 having some cash around helps you there.
Michael Blum - Wachovia
Okay, got it. John, on the acquisition front, can you provide any more details in terms of what size, type acquisitions you’re looking at, how would you finance that, are sellers going to take equity, I mean just any sort of insight into the process right now?
Well specifically, as you might anticipate, I can’t right now, Michael, but I would say that we’ve looked at everything from smaller acquisitions to some large ones. In many instances the sellers have been willing to take equity, and so clearly the bran of our acquisitions this year will be using equity and some cash, but we will be participating in that market and I’ll absolutely assure you of that. It’s a very good market right now.
Michael Blum - Wachovia
My last question is just kind of conceptually where do natural gas prices need to recover to or what is your cost structure you need for you to really start drilling again?
Well, that’s really a double-edged question. First, let me talk about well cost. When prices went up, the service companies rapidly increased our cost and basically if you go back to 2001, 2002, then to 2006, and then 2009, you’ve had a doubling and a doubling of well cost. And while we’ve seen some areas where we’ve had extreme drops in cost, for example, on frac services, rig rate, we still have some places that haven’t come down as much, specifically high prices that went up 200% last year. They’ll perhaps come down something n the order of 25%. And so well costs are coming down because they have to, and so that’s dynamic, that’s a moving target.
In terms of our areas where we currently have, the Chalk is one in which we were receiving over a 100% rates of return during the good times and we’re still significantly exceeding the 20% rate of return currently. I would say that the San Juan Basin would be another area that we could get good returns and some places in the Appalachian Basin.
In an environment where people are drilling Haynesville, Marcellus wells why are we cautious? Well, we always think that there is a learning curve that occurs in these projects and as you’re aware EnerVest itself, not EVEP, has a very large Marcellus position. EVEP has about 35,000 net acres in the Marcellus, and we have permitted the five wells in Northern West Virginia but we anticipate that we’ll be putting up a small amount of the capital in a JV with some carry and override and that’s something that we’re working on right now.
Just one other comment on that, Michael. It’s Mark Houser. Part of this is it’s really just a great time to buy right now and so we have choices to make and we can drill some decent return wells or we can use that money to buy small bolt-on acquisitions and increase our position, and so we’re tending to prioritize a bit more that way.
Thank you. (Operator Instructions). There appears to be no further questions at this time. Sir, are there any further points you wish to raise.
Well, I feel like this is an incredible time for investors to own EV Energy Partners. We’re sitting with approximately 16% yield. It’s something that is very important to us. As I’ve said in all of our presentations, I think that we stand out as a management team and that we bought $40 million worth of units last year.
I think I’m now the largest unit holder and anticipate continuing to buy more this year. I have bought some units this year. Net 16% yield and 75% tax deferred it was this past year, and so we feel very good about the future of EV Energy Partners, and I do feel good about this segment. As I’ve said, many times, any time you have 74% of the wealth in the U.S. being stripper wells, this is by far the most efficient way for the public to own oil and gas interest. I don’t have any further comments. Thank you.
Thank you. This concludes the presentation. You may now disconnect.
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