EV Energy Partners, L.P. (NASDAQ:EVEP)
NAPTP 2013 MLP Investor Conference Call
May 23, 2013 10:45 AM ET
Mark A. Houser, President and Chief Executive Officer
Kevin C. Smith – Raymond James & Associates, Inc.
Kevin C. Smith – Raymond James & Associates, Inc.
All right. Next up, we have EV Energy Partners, Mark Houser, presenting on their behalf. As you noticed this is a company that’s going through - that’s got an amazing amount of potential and could grow significantly over the next 6 to 12 months.
So with that, I’ll turn it over to Mark.
Mark A. Houser
Thanks, Kevin, and good morning, everybody. As he mentioned, I’m Mark Houser, and I’ve been with EV, actually with the EnerVest family since 1999, and have been there since the creation of EVEP in 2006. Thanks for your interest in coming today, and I look forward to visiting with you and having Q&A afterwards.
We will be making some forward-looking statements over the course as you normally do, a little bit on the EVEP. We’re an upstream MLP focused on generating distribution to our unitholders through accretive acquisitions, operation and development of oil and gas properties, that’s our fundamental business.
EnerVest is the controlling member of our GP and EnCap were the joint founder of EVEP. Each of these firms has the successful track record in Energy private equity for over 20 years. EVEP has 42.6 million outstanding units and with an enterprise value of $2.7 billion, $1.7 billion in equity market cap, $445 million of bank debt, and $500 million of senior notes that are due in 2019. Our current yield is about 7.7%.
Since our IPO we’ve been one of the top performing MLPs, generating a compound annual rate of return of 22% for our unitholders. However, over the past six months we have clearly underperformed our peers primarily due to delays in the Utica acreage monetizations that we’ve been working on for about the past year.
So given that let me tell you why we believe EVEP is a good investment. We’ve got strong long-term production performance in growth. We have solid long lived assets base. We’ve been – we are very active in hedging and very proactive in hedging, trying to reduce our cash flow volatility, real synergistic relationship with EnerVest even right now there is probably about 2 to 3 Tcf reserves that EnerVest has and the large portion of those are capable of dropdowns over time.
We also have diverse Utica shale upside. We have acreage. We have overriding royalty interest, and we have a Midstream investment, all which we view as - we’ve diversified our Utica position over time and continued to as we move through our process.
So over the next 15 minutes or so, I will dive deeper into these five points and try to share our vision and map out the opportunities for our business.
We have produced solid growth since our IPO as this slide, Slide 5 shows. From 2006 through 2012, we significantly grew our production in EBITDAX through accretive acquisitions. Beginning last year, while focused on the monetization of the Utica, we began a substantial capital program on some very attractive Midstream opportunities in the Utica.
Historically, our distributable cash flow has exceeded our distributions. However, with the explorations and some very attractive hedges that we entered into in 2008 and the recent decline in NGL prices specifically ethane and butane, we were below one times coverage for the first quarter of this year and we would expect to continue that through this year until we have the Utica asset monetization.
Hedges are very important part of our strategy to reduce the effects of commodity price volatility on our cash flows and to support initial acquisition economics.
Historically, we’ve primarily used swaps and costless collars. Through 2015, our natural gas swaps average approximately $5 per Mcf and crude oil hedges are around $90 a barrel. We’re currently hedge 90% for 2013, 80% for 2014, and 70% for 2015, and we’ll continue to add to our existing hedge positions over time. Again, we believe that’s a managed process not a one-time event.
We have a long lived diverse proved reserve base with relatively shallow decline rates. We’re in eight major basins with total proved reserves of nearly 1 Tcf, actually they are over Tcf if you use the five year strip, 76% of that reserve base is proved developed and two-thirds are natural gas.
In 2012, our average daily production was about a 163 million cubic feet equivalent and today it’s more like 166, so it’s continued to grow. To give you an idea of how we’ve grown, our proved reserve base has diversified from a two basin focus in the Appalachian Basin and the Monroe Field in Louisiana, by adding assets in the Utica and Barnett Shale, the Mid Continent, the San Juan and Permian Basins, Central and East Texas and Michigan, most of these areas EnerVest is also in, so again that’s gives us really economies of scale.
And as you can see, we have a significant presence in the Barnett Shale, which is where a majority of our 2013 drilling capital is allocated. So let’s take a look at the Barnett. It’s an excellent example of the benefit our relationship with EnerVest, where directly EVEP owns 31% of these joint purchases. Together, we are a top five Barnett Shale producer and our relationship gives us real economies of scale.
EVEP has over 500 Bcf equivalents in long lived reserves that are currently producing 75 million cubic feet per day and net to our interest. In the first quarter, we drilled 18 gross wells and we are running two to three rigs this year. Initial rates on these wells are 11% above AFE and our costs are 9% below, and we just keep continuing to drive our cost down and get good results out of the Barnett as we learn more and more about this basin. And this is actually an example longer term of as mature shales start to get sold, companies like us, are going to buy these and our job is just to make – get more recovery out of existing assets, which we’ve been doing for over 20 years at EnerVest.
So, now let’s move to our position in the Utica Shale. Through a series of producing property acquisitions over the last seven years, EVEP combined with EnerVest holds one of the largest acreage positions in the Utica, and is an active participant in the 630,000 acre wet gas joint venture with Chesapeake and Total.
EVEP owns a 177,000 working interest acres, 90% of which we operate. Also, we own overriding royalty interest on over 800,000 acres in the play, and we’re also participating in midstream projects through our investments in Utica East Ohio and the Cardinal Gas Services.
We believe the Utica is really coming into its own right now. As of May 13, there were 550 wells permitted of which 326 have been drilled and 97 are producing. A recent study by ODNR projects continued growth in activity with a 1,000 well permits in 2015.
There you go, sorry guys, okay. EnerVest and EVEP have a small interest in a large joint venture with Total and Chesapeake, which gives us great insight into the play. Within this joint venture, there are currently 67 producing wells with 75 wells waiting on pipeline capacity.
We’re seeing drilling costs come down with the installation of rotary steering systems, which is offsetting the higher cost of completions. Completion costs have increased, because wells are being completed with more stages, shorter cluster spacing, and fewer clusters per stage significantly improving IP rates. The point on this is the play is maturing just like every other play.
On the midstream side, the Dominion Natrium plant, which was scheduled to come online last year began operation this month is actually beginning operation as we speak.
Near the end of June, our Utica East Ohio system will come online. So putting in perspective, the opening of these plants will allow production from the joint venture to more than triple from current levels. Right now Chesapeake is producing about 80 million cubic feet gross out of their joint venture because of the bottlenecks. There will be over 300 million by the end of this summer as these two projects come online, and there is additional capacity coming online over the next two years.
This slide reflects the overall industry activity in the Utica to-date. Over 90% of the drilling activity has been in the wet gas window and I’ll try to depict this through that kind of the lists on the map. That shows where most of the activity is and most of it is driven around the Chesapeake, Total joint venture with us, which is in the kind of the box.
Again, you can see that there started to be activity to the south and to the north by other operators as Chesapeake is purely focused. Through activity of several operators, they play has expanded northeast as I said, and so in essence the wet gas window is being de-risked.
We believe on the other hand on the volatile oil window side that it holds significant potential. We estimate based on historical well logs and core data from our conventional wells, that portions of the oil window hold 20 million barrels to 30 million barrels per section. This compares very favorably with other oil shales. However, only six wells have been drilled in the oil window today and the results have not been good.
We believe this is a result of sub optimal completion design and there is more drilling the wall for all codes can be cracked. It will take further work over time. So the burning question is, what happened to our Utica shale? We initiated a marketing process last year for a large portion of our operated acres. We split this acreage into four geographic packages targeting wonderful large caps or majors to acquire one or more of these large packages.
Primary negotiations with a large cap buyer for a significant and majority of this acreage ultimately stalled over an acceptable terms. The prices were okay, but the terms were not acceptable to us. Also, during the sale process, the market shifted directions. More data is needed especially in the volatile oil window plus the lack of midstream infrastructure had delayed wet gas production results. All this while, NGL commodity prices plodded and gas prices declined over the past year and a half overall, they were out a bit lately. However, overall drilling activity has continued to expand in the wet gas window with good results.
So our Utica strategy is now focused on smaller packages on essentially a per county basis, which captures a broader group of potential buyers. In the wet gas window, we have repackaged the deal and reopened the data room. We continue to gain variable information from the Chesapeake joint venture and other wells we participate in, in the wet gas window, particularly in East Ohio where results today have been good.
We’ll also continue to market our properties in the volatile oil window for potential sale. We’ve been approached by oil service companies, E&P companies with oil shale experience and potential financial partners for joint venture opportunities as a means to derisk the play and we’re pursuing those now.
This slide gives you a clear picture as to where our acreage lies in the wet gas and volatile oil windows. Of our total of 177,000 net acres of EVEP, about 54,000 lie in the wet gas window and almost 80,000 acres are in the volatile oil window. If you combine with EnerVest, we’ve got about 800,000 total acres, so again, a huge size.
On the overriding – our ORRI is on the acreage that is mostly in the wet gas and oil product windows, in total 880,000 acres. As you can see, we’ve got a 2.75% override on some of it, and 1.3% override on some of it. We’re going to keep this override even on the properties we sell, and it represents significant future cash potential as this Utica acreage is developed. There is a tremendous amount of midstream investment and infrastructure in the Utica. The key takeaway from this slide is that about 2.6 billion cubic feet per day proposed processing projects will be online by the end of 2014, including our Utica East Ohio project, which is highlighted in gold.
I’ll move more specific to UEO. UEO, we own 21% of UEO. UEO will gather, process, and fractionate dedicated wet gas production from the Chesapeake joint venture and other dedicated acreage. By mid-year 2014, it’s expected to have 800 million cubic feet of processing capacity, a 135 million barrels of fractionation capacity, good working gas storage, and again, it has about 660,000 acres through the joint JV along with about 290,000 acres that are dedicated and operated by EnerVest.
The first 200 million cubic feet of processing capacity and 45,000 barrels of fractionation is expected and will be online by the end of June and on budget. The system can be expanded as development drilling in the area increases, which is a source of potential upside. We also own 9% of Cardinal Gas Services. Cardinal Gas Services is a low-pressure gathering and compression system of wet gas from our Chesapeake joint venture production.
It delivers that gas into Utica East Ohio infrastructure and there is just a few stats here. JV firm drilling schedule, the firm drilling schedule for Chesapeake, again, which is carried by Total and Chesapeake has financing for their portion as well, calls for 540 wells by the year-end 2014. There’s plans for over 4,600 gross wells over 18 years and over 1 Bcf a day is expected within five years. So CGS also has upside potential as development drilling expands.
This slide describes our Midstream capital and expected EBITDA from Cardinal and UEO. These are expected to generate a relatively stable long-term cash flow stream from fee-based contract structure. We project our capital investment to range between $335 million to $395 million net to EVEP over 5 years. UEO has a fixed fee contract structure that collects fees for gathering, compression, processing, transport, and fractionation. Cardinal has a cost-of-services arrangement, designed to generate a fixed return. Our gathering fee is re-calculated annually to provide target returns and our operating costs are pass-through. To-date, we financed the investments with bank debt.
So I would like to conclude my remarks by reviewing what we believe is a compelling investment thesis with upside. We believe that our solid track record, diverse long-lived assets, hedging strategies, strong relationship with EnerVest, and our current three-pronged approach to the Utica provides investors with a unique investment opportunity for years to come.
So thanks for your attention today, and I think we have time for a few questions, Mike Mercer, our CFO, is here as well, and so we will be happy to answer questions.
Mark A. Houser
(Out of the) [ph] 54,000 acres of wet gas window, are you marketing all of them or just a portion of it?
Mark A. Houser
The question was out of the 54,000 wet gas window acres, are we marketing all or a portion? We actually have interest in all the acres from different parties and so we’re actually talking to different folks. Some of it is a little bit less matured than others, and so the area that are more developed we are spending more time on and taking – but we are considering all offers. Yes.
Mark A. Houser
Okay. If you bought shares in around 2008, and I’ll lose some of the numbers, but our distribution is actually grown, Mike, and help me out here. Since 2008, when the gas prices flattened, because we had pretty significant distribution growth from 2006 through about 2008 into 2009, and at 2009 or so, as commodity prices came down our distribution growth has been reasonably flat.
And our goal over the long-term has been for 5% annual growth in our distribution rate, that’s our long-term goal. I would say one of the caveats to us has been the Utica monetization. And starting about a year and a half ago, we started to essentially hold back distribution growth anticipating a sale and the monetization of some of this, and candidly that’s taken longer.
So the answer to that is our long-term goal is, as it’s been since we’ve created is to have 5% distribution growth per year. It’s going to go up and down some, we’re in the commodities business, but that’s our goal.
How do you approach a hold versus sell position (inaudible)?
Mark A. Houser
The question is how do you determine hold versus sell positions? I think generally, in the example of the Utica, we see ourselves as an acquirer of producing mature properties, and so our overall goal is to have that in our portfolio. The Utica was a bit unique. We’ve obtained the Utica through the acquisition of mature producing properties, but we realized we had an asset for sale. Our general view is that that’s not the kind of asset that we should hold on to, but we wanted to maximize value for our unitholders and turn that into producing properties.
And so as we’ve gone along, we constantly evaluate on a risk basis, what, as an example, acreage could be worth, and we had certain thresholds. And as we went through the first line of the process, we actually came to a threshold with one party that we felt was acceptable on the financial side, we just couldn’t get to some of the terms relative to long-term liabilities on leases and all that.
So as we move forward, we have kind of minimum cases we’ll take. But generally our view is, is that we don’t want to put EVEP capital into kind of developing of shales, and so that’s been our general strategy. Yes.
So what plays are attractive and if you are able to successfully market (inaudible) if you get a bunch of capital to work with, where are the most compelling opportunities (inaudible)?
Mark A. Houser
The question is where are the most compelling opportunities for EVEP to put its capital, moving into new acquisitions? It’s really interesting, because some of the areas we are in, the San Juan Basin, as an example, is a very attractive area, very predictable, long lived and EnerVest, the family of EnerVest knows it very well.
The Austin Chalk has been a really good cash distributor over time. That’s a good potential drop down opportunity for us. We like the Barnett. Given the choice right now, we would prefer it’s not 60%, but that’s because we prefer to have other assets that were bigger, but we do like our performance in the Barnett and how we’ve done. Appalachia is quite good in Michigan.
So a lot of the areas that EVEP is currently in and that EnerVest family is in are very attractive to us.
The areas you probably won’t see us in would be the Gulf of Mexico, and we actually in some ways like California because of the long lived nature of the assets, but for us, we’re just – we have not been in that regulatory environment and so we’re a little reticent to do that. There are some other folks who have just done it longer that probably are better at it. Yes.
How confident are you that the sale of Utica will take place by the end of year (inaudible)?
Mark A. Houser
We’re not going to comment on timing of any sales, but I will say the interest in our new strategy is strong and we are continuing to push towards that. Having time goals has not necessarily served us well, and so we just want to deliver. That’s what we are working on and that’s my top priority. That’s our Chairman’s top priority. That’s our Head of A&D’s top priority. It’s our organization’s top priority.
How likely is the (inaudible)?
Mark A. Houser
The question is how likely is the majority of the Utica sale to be a swap. What we’ll probably see is not a swap, but the potential for like kind of exchanges. We actually went down the road towards a pretty major swap for some of our acreage, but it was hard to get the two parties to meet on valuations, and so we feel the best opportunity for us is to pursue cash transactions. Again, EnerVest has a good number of assets that we could potentially drop-down to make those like kind of exchanges happen. Yes.
Mark A. Houser
We like to stay underneath three, three to one debt-to-EBITDA, more towards 2.5 would be ideal. We’re above that now, but we like being in that range. As we get into more PDP assets, we could go a little bit lower. I’ll just put it this way, EnerVest apparent – essentially has no debt, so we’re not super big believers in leverage overtime and our interest is in keeping that down and manageable.
Mark A. Houser
We actually have a, you are asking what is the price that we pay?
Yeah, how does it work…
Mark A. Houser
Mark A. Houser
What happens we have actually two separate A&D teams. We have an A&D team within EVEP that is purely compensated by EVEP, and then we have our private equity A&D team. When EVEP determined that it had interest in assets within EnerVest, our A&D team of EVEP puts together an evaluation and goes to it, to our Conflicts Committee of EVEP, and says look this is the bid we want to make.
Our Conflicts Committee looks at it, assesses it and then elects to move forward or not on making the offer. When the offer is made, the EnerVest team looks at it, presents it to their private equity board, the private equity board takes a look at it and says did this seem like a fair offer. If our Conflicts Committee of EVEP determines, once we’ve agreed on a price, that they want to further assess the fairness of the deal, they have the independent right to hire outside counsel to do fairness opinions, to do fairness assessments, anything they feel needs to happen in order to ensure fairness.
And we’ve done, of the $1.8 billion of acquisitions EVEP has done, about a third of those have been drop-downs so far, but there is a very formal process and both sides want to make sure there is a fair price. EVEP has not been a generally set itself up, it’s like a – having a first right to match and offer, because that’s – the institutions don’t like us doing that. So it’s a – EVEP will make a first offer. If we can reach a deal with the institution, it’s fine. Otherwise, the institutions will sell it themselves and EVEP will not be a part of that. Yes.
Will you consider additional midstream investment outside of Utica?
Mark A. Houser
The question is will we consider additional investments outside of the Utica in the midstream. We never say never and a lot of gathering assets really are tied to reserves, but our long-term strategy, we feel like the market for upstream assets is big enough for us, particularly with shales maturing to stay in that game.
The midstream business for us was an amazing opportunity. It was a great way to actually diversify our Utica risk. We’ve carved out overrides over time. We’ve participated in the midstream investment in the Utica. So we’ve been able to diversify out of just the acreage play. The builder of our midstream investment Utica East Ohio is momentum. They have a very good track record at buying, fixing – buying and creating organic positions and then selling.
The two of this combined have 51% of the investment in UEO, and so, we have a lot of – and we are very much aligned. And so over time, everything is always for sale, but assuming the right price, you could see us exit, and redeploy that into upstream assets. So is that it? Thank you very much I appreciate your time and your interest in us.
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