EV Energy Partners, L.P. (NASDAQ:EVEP)
Bank of America Merrill Lynch Energy and Power Leveraged Finance Conference Call
May 13, 2013 3:20 pm ET
Michael E. Mercer – Senior Vice President and Chief Financial Officer
We’re back and our next presentation. We have Mike Mercer from EV Energy Partners. He is the Chief Financial Officer. Mike, thanks a lot.
Michael E. Mercer
Thanks very much and thanks for having me today. What I’ll do is spent a couple of minutes going over kind of the history and review of EV Energy, a little bit of overview of our reserves and our assets and spend a quite a bit of time on the Utica and then talk a little bit about our capital structure, our leverage and our hedging, how we think about debt. First you can see the forward-looking statements here on the presentation. I won’t think about reading through that word by word.
Overview of EVEP, we were an upstream MLP. We were created or went public in September of 2006. The GP were traditional MLP with a general partner and with IVRs and had subordinated years outstanding at the time we went public, although those have been converted into common by now.
Our GP is owned by EnerVest and management and NCAP. I’ll spend a few more minutes on the EnerVest and NCAP are energy private equity firms that have been around for over 20 years each and have had a pretty successful history and track record.
We have almost 43 million units outstanding enterprise value just under $3 billion, current yield, this is as of a couple of days ago 6.9% and total turnaround 200%, compound a little over 20.
Why consider us, number one, we have a pretty steady business, a long PDP a low decline rate or low risk assets and number of basins around the US, we have proven long term acquisition capabilities and track record in going out and buying mature producing properties. We’ve been public almost 7 years and EnerVest has been online for 20 years and it’s been pretty successful of doing that, in acquiring mature assets, in working to generate incremental returns out of that through development and exploitation.
We do believe that the relationship with EnerVest is a benefit and finally we’ll spend some more time on this in a minute. We do have a significant position in Utica Shale both acreage and midstream investments that have been built out right now and overriding royalty interest. The acreage in the midstream business are something that we would probably well at some point we’ll sell. The acreage royalty right now, the midstream investment will probably in future. The overrides, we intent to hold on to those in participating upside of the Utica.
This summarizes the asset base; we have little over 900 Bcf of crude reserves as of year-end. Now that’s under SEC pricing and its $2.76 per Mcf flat pricing. So it would be quite a bit more of used strip prices. We’re 76% crude developed, about two-thirds natural gas, of the reminder about two-thirds of that is NGL, one-third crude oil. We produced last year about 163 million cubic feet equivalents a day, our RPU is about 15 years, that is of course with year-end SEC pricing reserve. On a strip price basis it will be a longer RP.
If you look at where our asset ties, the largest division is in the Barnett Shale, where we have over $500 Bcf of crude reserves. We also have some pretty good size positions in the conventional production Appalachian and, in Michigan or into the mid-continent, in Texas specifically in the Austin Chalk formation and then in the San Juan and the Permian.
We are an U.S. onshore company and intend to remain that way. We don’t have any plans to go offshore or internationally.
And I will just spend a couple of minutes on EnerVest, who I have mentioned is the controlling member of our general partner. It’s been around over 20 years, it had a great track record in managing money for institutional partnerships comprised primarily pension funds, utilities, with them, pension funds, endowment foundations and such. The asset base overall for EnerVest is about three times of what we are, about 3 Bcf that includes the reserves that are at EVEP.
Total production is over 550 million cubic feet equivalents a day, a significant lease position and track record over time in acquisitions. EnerVest is actually the operator of both our properties and of all of the institutional partnership properties. There are over 800 employees; most of them field level employees working on these and EnerVest access operator for us on that 93% of our asset base.
When we went public, we had pretty solid MLP. We had 50 Bcf in two areas; one is the shallow operation production, the other is the mineral field which is located in Louisiana and we’ve run quite a bit since then through acquisitions over the last six years. We have currently about 60% of our crude reserves in the Barnett Shale. That is a percentage that will come down over time. We wouldn’t expect that to maintain that at a 60% level over time, and even to the other areas where our reserve is flat. But we do believe this as having a benefit – be a little bit more diverse than we were just bringing two basins back and we went public.
Our largest producing asset right now is the Barnette shale. That was purchased - t hat position was purchased from the fourth quarter of 2010 to the fourth quarter of 2011 in three primary purchases of assets. We have over 500 Bcf, it’s about 64% crude developed. So we have quite a few cuts in the Barnett shale and as you’ll see that’s where the majority of our capital is going to go this year.
About 74 Bcf arrangement, Mcf per day a production is out of the Barnett and has a pretty long life. Well spent about spent about $60 million there this year to grow 70 gross wells. Our working interest on an average is about 30% or 31% in this area. Our focus is if you look at here and you see the colors, the area on the right the pink color is the dry gas area. We have production there but given where gas prices are we really aren’t spending any capital there right now. Where we are spending our capital is in the wet gas in combo areas, that’s the yellow and green areas.
And as we own this, and I got my hands around we have continued to drive down cost there and become more efficient in our development drilling. But when we bought this it wasn’t an exploration by shale play. It was the Barnett shale was really the first shale play. And size in the U.S. and when we bought this it was primarily production plus infill opportunities. We’re in the play that we’ve pursing for a couple of years and have a pretty big inventory we’ll have to continue to pursue. We really like the area. At some point we’ll go back and drill the dry gas area and drill those reserves as prices increase in natural gas over time, but we still have plenty to do in the wet gas and the oil window.
Now, I’m going to spend a little bit of time talking about our Utica position. The first thing we’ll talk about is our acreage in the Utica. The second thing we’ll talk about is the midstream position that we have, and then finally the override position that we have and plan to maintain there even after we saw a working interest position.
Page 10 shows a map of the acreage that we’re marketing in the Utica and that we have been marketing. We began this process last year. As many of you know, we had initially planned, projected that we would have this acreage sold by year-end. Clearly we didn’t. And there are quite a number of reasons that we talked about in conference calls over the last few months.
We are continuing to move forward on marketing this acreage. It’s going to be, I think, a smaller chunk than we had originally planned on a county by county basis. In the wet gas window, what we’re selling on the wet gas window acreage and the volatile oil window, there is the potential of the side selling to do a joint venture or one or more joint ventures to get some drilling there. If you look as of today, most of the drillings occurred in the wet gas window and most of the drilling has been Chesapeake so far. Others really, other than a few, haven’t ramped up drilling in a while yet. Part of it is that there is not takeaway capacity, processing capacity for this gas, but it is very wet gas in the wet gas window.
However, you are starting to see a lot of the gas or you’re going to start seeing this gas being processed here. I believe that the Dominion Natrium plant is coming on the stream now and we expect to have our first 200 million a day of processing capacity on live here in June.
We also have some additional acreage that we haven’t been marketing, but you can see, it’s spread out between Ohio and Pennsylvania, some of it in the wet gas window that’s primarily non-op acreage and the volatile oil window. And briefly, we also have a significant overriding ownership in almost 900,000 acres of the Utica.
You can see on Page 12, in the blue and in the red, the positions we have. In the blue acreage, that is where we have overrides in the average about 1.3%, over 400,000 acres and then in the red, we have on an average a 2.7% override that is carved out in over 400,000 acres there.
Our plan is not to sell these overrides, but to retain them. That allows us to participate in the upside of the Utica without any capital cost, without any operating cost burden going forward. And we would expect, we really don’t have much override income yet, but as well really start to come online here in the Utica. We’d expect to have that ramp up quite a bit over the next few years.
If you look at the next page, this just shows the activity that’s occurring in the Utica, the red box is the outline of the Chesapeake, Total and the EnerVest EVEP joint venture. We have quite a bit of capital and drilling is ongoing right now. As you can see there is also quite a few other companies that have began drilling in Utica over the past year, some of them are just really beginning to do so.
Up in the North East you have shale Halcon, we actually have got there, we have Hilcorp, BP is up in the North East or really a little bit more in the North West around Trumbull County. Down the south as many of you follow other public companies, go forward, Carrizo et cetera drilling down there. As the processing capacity that I’ll talk about in just a minute comes online, we’re just going to see an acceleration in drilling as people connect well. Chesapeake still has quite a few wells that they’ve drilled that haven’t been able to bring online because of processing limitations.
Page 14 shows the midstream activity, not just for what we’re doing but for every one there. If you want to see where we’re participating in terms of I guess the yellow box that is in three, that is the Utica East Ohio partnership that we’re in, there is kind of break plan to bring on 800 million a day of processing capacity over the next year. You also have MarkWest, the used building capacity there. You have the Natrium plant on and others. I guess suffice it to say that if you had all this up, we would expect over 2.5 Bcf a day of processing capacity to come online by the end of 2014, which should really help in the production from wells in the Utica.
Now to talk about our Utica Midstream, the most significant investment that we have in the Midstream is the Utica East Ohio partnership. That is a partnership that is building processing, fractionation, storage and transportation. It’s located in Columbiana, Carroll, Harrison counties, but we’ll gather gas and process it from a wider range of counties than that. There are four different trains of 200 million a day, processing capacity. They are going to be brought on. We expect the first 200 million a day to be brought on in June, another 200 million a day late in third or in the fourth quarter. The third 200 million a day train sometime between first quarter and fourth one should be brought before maybe next year.
In conjunction with that, EV always building out 135,000 barrels a day fractionation capacity and we’ll have about 870,000 barrels of storage capacity. Now there is a significant chunk of acreage that’s committed to this partnership. The Chesapeake Total JV, which committed that’s about 660,000 acres and then EnerVest [EP] also committed quite a bit of acreage about 290,000 acres. There are other third parties who have committed acreage also to be processed through these facilities.
We own currently a 21% interest in this partnership up until the beginning of this year, we only had 8% interest, but we are able to increase that in December. Momentum though is a private equity backed company is the operator of this project and Access Midstream Partners on 49%.
I will talk in a minute about the capital and cash flow of this business. Here you can see – this just shows you a picture of what’s been happening. This is the first processing side that we bring on stream. There are synergies in plat. You can see what it looks like in November. A couple of months ago it looked like, the initial will be brought on in June and there will be four other trains that will be brought on over the next year.
The Utica East Ohio system represents about 70% of the capital we are spending on the Midstream in the Utica and about 70% is the expected cash flow or at least the initial expected cash flow out of our Midstream.
The second is an entity called Cardinal Gas Services. The Cardinal Gas Services was formed back when Chesapeake Total, EnerVest and EP JV was created and is our own kind of proportionately you will see 66% of our access that at one point was owned by Chesapeake Midstream, 25% by Total, which is their participation in the JV and then we own 9% in it.
Cardinal is a low pressuring gathering system. It is the ones who have build out all of the gathering for the Chesapeake Total JV production and it is a business that is fee based, it’s not percent of proceed, just as UEO fee based, and is setup to generate a specific teens rate of return, in other words fees are just periodically as this moves forward to generate that kind of return to the whole owners of the plant. We can also have gathered and expect it will gather some third party gas outside of the JV.
Page 18 shows the capital that is planned to be invested in the midstream, as you can see that the largest chunk of capital is expected this year. Last year we spent little over $30 million in capital on UEO and Cardinal. This year we’re going to spend a little under $250 million. We’ve spend about $70 million in the first quarter, and then about $60 million to $70 million next year, now why is it so much currently is because the systems are being built out of UEO, if you will remember I said about 70% of the total capital that we plan on spending in the midstream, 70% of approximately $265 million is going to go to UEO and all of that is getting built out between now and mid next year.
We’ll have some continuing capital at Cardinal as those gathering systems continue to be build out, so you can see total of about $360 million of capital, we would expect by 2016-2017 to have over $60 million of EBITDA coming off of these projects.
On capital for upstream we plan on spending in a budget of around $100 million this year. For the first quarter we came in a little below that because we had some efficiencies and as in our Barnett Shale operations, I think the first quarter guidance has been about $26 million of capital, we spent $21 million there. But we would still expect to spend between $90 million and $100 million this year. On our upstream capital, the majority of that as I’d mentioned before is from the Barnett.
The capital structure at the end of the quarter, we had $445 million of bank debt, $500 million of senior notes could be sold in March of 2011 with a follow on in 2012, in equity market cap just little between under $2 billion.
Now if you look at how we finance ourselves over time, this year is up through the end of 2012, how we financed our capital our expenditures. We went public we said that we would expect over time on average to finance ourselves with a majority of equity about 60%. And in fact that is what we have done on average over time. There are times where we financed ourselves more with debt, but we have always come back with some kind of equity component to finance ourselves. And that is about we have done between equity and free cash flow just under 60% up through the end of this past year.
Now we do have a significant amount of capital we are spending on the midstream this year. We have quite a bit more than our upstream business. But we would expect that will effectively disable the Utica acreage or monetization of the midstream business in the Utica, effectively like an equity like component that we can used to finance the midstream. But we believe that over time if you look at us five years from now, we would expect that I think you should be able to look back and assume we’ll have financed ourselves effectively with about 60% equity. And as I said the Utica sale proceeds we can kind of use equity because we didn’t really put up any capital to purchase those assets.
Hedging, we have always been quite a bit hedging we acquired assets and then we continue to lay hedges on overtime. Right now, we’re hedged out through 2015. Just this last month, we had acquired a few natural gas hedges and you can see the average prices in which we are hedged.
Now, these prices are a lot lower than we had over the last few years. If you remember in 2008, natural gas oil prices went way out. We hedged every molecule that we could under our credit facility. The every molecule we were allowed to hedge out for five years were the one which were allowed to hedge it. And a lot of those hedges rolled off at the end of 2012. So these prices are clearly lower than the hedge prices we had last year, but they average about $5 and about $90 per Mcf.
We are about 90% hedged with production this year, 80% next year and 70% year after that. We view 90% as being pretty fully hedged, because about 4% to 5% of our production, in fact two years to production taxes and we have seen no reasons to hedge for production taxes since we don’t get the benefit or the detriment depending on high commodity price and move. Those really go to the state and then we always want to have a little bit that’s non-hedged, but as you got some operating costs that over time will move with commodity prices.
This shows the volumes that we have hedged. We added about 3 million a day last month for 2013, 15 million a day for 2014 and 2015. Those averaged about 435 to 438 per Mcf on the hedging that we locked in.
And then on oil, you can see the oil hedges we have in place about $42 a barrels. From now till the end of next year and then it draws to 2000 barrels in 2015, we are continuing to add on the oil hedges over time as 2015 and beyond and the same with gas, all of them at about $90 a barrel.
I guess we’ll now be happy to open up for questions.
Sure, I’ll start with them. Going back to some of your comments about the buybacks and regarding many, we got a per shale play and I think you said on you previous calls that basically your production is getting better constantly and going down, given that that kind of (inaudible) for the rest of the shale plays you think that’s going to proliferate across the rest of these shale plays and the opportunity in terms of buying ultimately that on a E&P side of the business?
Michael E. Mercer
Yeah, when we first went public, the plan was always to own long lived mature assets, low risk assets and we thought there was a pretty good market for that and would continue to be a pretty good market – good size market. So well we wouldn’t have any trouble finding assets to buy overtime to replace production which is clearly, we do – everyone do at E&P business as proving assets. But the thing have changed over the past 4 or 5 years is that you now have shale production, now that’s hurt gas prices, because of the significant production that’s come online but over time we view most of the shale plays as potential opportunities for us and MLPs like this to come in and purchase, the buyer now would just show which is the first.
But as other shale plays mature, as you get to the point in the production curve where we can come in and buy some thing that has on a near-term, a low double digit decline rate and then further out kind of levels out to a 5%, 6%, 7% terminal decline rate that has some remaining drilling opportunities in it. That’s what we’d like to do and we think most of the shales will end up being that way over time. So we think there is a long term inventory of things that are going to be available of mature assets to buy overtime as these shale mature.
Now we have on the margin been able to continue to drive down our cost in the Barnett, part of it is just, we were new entered into that and it takes a little while for these to hands around and it becomes more efficient as that, but part of it is on the margin. You should continue to drive these shale, you just learn a little more, you became more efficient. The technology for the industry gets better.
Clearly, we don’t see in the bind-out, we don’t see the efficiency gains that someone due to the drilling of brand new shale is going to see, but on the margin we do see benefits.
And what is in there in terms of – it seems like there is going to be a handful of property deals in the Barnett over time, several quarters over the (inaudible) deal not too long ago, is there still good opportunities there do you think or?
Michael E. Mercer
Yeah, I think there will be opportunities there in the future. So the one thing I would say is that, we’re almost 60% Barnett shale right now on a reserve or production basis. So we really would like to diversify to some other basins, we don’t want to get too concentrated in one basin. So there is a potential that we could buy something additional in the Barnett, but it’s likely we would look elsewhere.
Could you give a little more detail on Utica, I guess – yeah it still seems to be pretty fixated on that shale? Are they overly fixated and could you back up or maybe go in a little more detail on the rationale for the actual things to set a lot of what you are looking for, but maybe some takeaway issue I don’t know and I guess related to that point since it’s going to take longer and by different influence that probably lower prices than you were originally expecting and that you are dealing that as your “equity rates”, are you going to come up with some other sources? Thank you.
Michael E. Mercer
I think the first part of the question was on what rate you fixate it on the Utica. I don’t know you’ll have to judge that. I mean clearly the Utica, and our ownership with that, it’s a significant position that we own and something that we believe will have significant value to our unitholders.
So I guess you guys will have to judge whether you think they are overly fixated or not but it is significant to us and we believe we’ll be significant moving forward about the acreage, the midstream and the override. And clearly people have been looking at us and looking at the Utica and putting some Utica valuation on our units over the past couple of year since the Utica, really took off. So when we bought these assets, the Appalachian assets where the Utica is we weren’t buying them from the Utica, it just came along. And it has really grown over the last couple of years. And the second part of your question?
As it been taking longer time (inaudible) buying at lower prices and you’re giving out of this reputation as your equity rates, so that you don’t have to obviously come out of plans and what were the plans about it?
Michael E. Mercer
I am not sure what you mean by other plans but our plan is as we said is sell some Utica acreage this year. Clearly we saw the Utica acreage that is capital coming and where we have an issue in the Utica equity line and we have effective refund, the midstream investment that we’re making in the Utica. Now the Utica midstream investment will also start to generate cash here and not much this year but next year. Thanks to you.
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