EV Energy Partners, L.P. (NASDAQ:EVEP)
IPAA Oil and Gas Investment Symposium
September 30, 2013 04:55 pm ET
Mark Houser – President & Chief Executive Officer
Ethan Bellamy – Robert W. Baird & Co.
Ethan Bellamy – Robert W. Baird & Co.
We’re going to keep it going here so we can stay on track. It’s my pleasure to introduce Mr. Mark Houser from EV Energy Partners.
Well good afternoon, everybody, and thanks to IPAA and Ethan and Baird for sponsoring today. It’s great to be here today and visit about you. I was going to try to start out with some reference to the Texans game yesterday but I really can’t think of a good one in terms of that kind of throw that happened, but I’ve never heard collectively as many “Awwww’s” in the United facility as I did in the lounge – it was unbelievable. So anyway, we’ll talk more, or maybe we can talk about Aggie football later.
Right now I’m here to talk about EV Energy Partners. First of all as everyone does, please be aware that we’re going to make forward-looking statements. A little bit about EVEP: EVEP is an upstream MLP. I think we’re the second-oldest of the new generation of MLPs. We IPO’d in September of 2006. Over the long term we’ve generated excellent returns for our investors. Over the most recent while we’ve been a bit more challenged due to the timing of some activity that I’ll speak about.
The GP is owned basically 76% by EnerVest and the management team; and Encap, a very successful private equity firm in its own right owns the other 23%. We have about 42 million outstanding units and we’re currently yielding about 8%, a little bit over 8%.
So the question is why invest in EVEP? We have in our opinion a very solid, long-lived asset base; a very synergistic relationship with EnerVest. For those of you who aren’t aware, EnerVest is a very successful private equity firm as well. It’s most recently in its 13th private equity fund with about a $2 billion equity component to that fund and about $3 billon of spending power.
EnerVest and EV Energy combined have about 3.0 billion to 3.5 billion cubic feet of reserves and what that provides to EV Energy is scale, the ability to really be a bigger operator than you are on your own; and also it provides the ability to do drop down acquisitions over time.
Next, some significant Utica Shale upside. I’ll talk more about that in a little bit; Ethan is very familiar with that. But we have acreage, we have an overriding royalty interest and actually a midstream investment that have all come out of some producing property acquisitions that we did several years ago.
We tend to hedge over the long term. We’re out about three years now, the third year, so that’d be 2015 into 2016, but 2015 we’re about 70% hedged and we’re even more hedged in 2013 and ’14. So I’ll talk more about that in a little bit. And over the long term we’ve also had good performance and growth particularly in the acquisition business and again, I’ll speak more to that in a few minutes.
A little bit on the asset base: we have almost about 900 Bcf of reserves as of the end of last year. 76% of it is proved developed. We’d like to be somewhere say 75% to 80%, maybe even a little bit higher than that over time. We’re about two-thirds gas. We’re agnostic against prices because we hedge but we’ve just had a better ability to transact on gas acquisitions and so that’s why we are where we are there. About a 15-year [RB] which is about what we like and right now we’re producing about 167 million cubic feet a day.
And that’s in the context of EnerVest in total whose operations are about 700 million cubic feet a day – so again, we get the scale that you wouldn’t expect from a company our size. You can see on the map our spread of assets. We’re spread over twelve states – a primary large position in the Barnett Shale. We also have a real nice position in the Austin Chalk, the San Juan Basin and in the Appalachian Basin and Michigan, which are some of our key focus areas.
If you look at our reserves and capital they pretty much lay down over each other, and obviously we’re dominated by the Barnett Shale right now – about 60% of our reserves and about 60% of our capital. That has been somewhat deliberate. We felt like as the shales mature and the decline rates become more predictable that the MLP is the right vehicle for it. And so we aggressively bought in. We’re actually now about the fifth largest producer in the Barnett Shale.
Over time we’d like to balance that out and reduce our exposure vis-à-vis other basins. That being the case, opportunistically we’ve recently added a little bit of Barnett Shale production which I’ll talk about as well; and again, that was very opportunistic and very synergistic to what we have.
So talking briefly about the base business, it’s performing very well, very solid. Our Austin Chalk area, which is again, one of our initial positions where we bought in with the EnerVest family – right now we produce about 13 million a day, a little bit under 10% of our production. A very manageable program – we’re having good success with horizontal multi-stage reentries. We’re also completing some other zones in the Chalk. We have a couple of wells recently we’ve drilled that are over 500 barrels a day of oil, some of the best oil wells we’ve ever drilled in the Chalk. So the Austin Chalk continues to be really a cash machine for us.
In the Barnett Shale, our production is actually staying above our guidance levels despite the fact that we’ve actually reduced our drilling activity a bit. And one of the things I want to mention specifically about EV Energy is as an MLP we believe that drilling should be used to maintain or (inaudible) our production and that acquisition should be used to grow more dramatically. We feel like if there’s too much drilling put into an MLP you increase your decline rate too much and it’s just hard to fight that all the time. So we’re very modest. We keep sort of a choke on our drilling so to speak.
We’ve recently actually announced a deal with Carrizo I’ll talk more about where we’re adding to our Barnett position. As I mentioned, we’re actually kind of throttling back to a degree our drilling activity but not our production. Earlier in the year we reduced from three to two rigs in the Barnett because we were actually getting the results from two rigs that we thought we’d get in three. So again, we plan to exit the year at a production rate at or above our guidance and we’ll be drilling a little bit less. Then going into next year we’ll probably manage somewhere around two to three rigs once again.
Now a little bit on the Utica Shale. EVP and EnerVest have one of the largest combined positions in Ohio, over 900,000 HBP acres. We’re also very active in the Chesapeake, the Chesapeake/Total Joint Venture. The EnerVest family has a piece of it. EVEP itself has a small piece, but over time Chesapeake has drilled probably 80% of the wells in the Utica. Now that’s evolving recently. Chesapeake still has about 15 rigs running but I think they have about 30% of the market now, so you can see other operators are getting busy.
But again, we have access through our joint venture with them to well data on probably 100 wells that have been drilled, or actually more than 100 wells that have been drilled – that’s just our interest. There have been about 300 I believe wells drilled now by Chesapeake. We have access to that data on a somewhat limited basis and access to 100 wells where we have interests in all the data.
How have we kind of tried to capture value? First of all we have about 177,000 networking interests in EVEP. We’ve also carved out an override and we’re also participating in midstream investment. And kind of putting a cartoon around that, if you look at it about seven years ago we were in the middle of acquiring some old, tired properties in the Utica mainly for its conventional production. We acquired companies from a couple of small companies [ENEX Co and Range].
As the Utica evolved and through a lot of study of ourselves of over 600 wells that we had good logs on, we were able to identify kind of the upside in the Utica; but we realized that an MLP is really not the place to develop acres. Again, we’re more of a harvest-type structure. With that in mind we set upon a strategy to diversify our revenue sources out of the Utica. Of course we still have the conventional production which is actually a real steady-eddy performer for us.
We’ve also been able to participate in the midstream investments that I’ll speak about in a few minutes two ways – through both gathering and processing. We also have carved out an override which is great for an MLP because it essentially gives you revenue with no capital. And then we’re working to divest the working interest acreage because again, for the most part we feel like that belongs with a development company – not an MLP.
So speaking to each of those components, first being the working interest acreage: just like most of the shale plays, within the Utica there’s essentially a dry gas window, a wet gas window, and then an oil window. In the case of the Utica you actually have a couple different views on the oil window. One is really kind of a volatile oil, kind of a 50-degree API oil; and the other is a heavier oil, kind of in the 40-degree range.
So far it’s been determined that the heavy oil or the black oil area is really not commercial at least today, and the dry gas window seems intriguing but it’s having I guess limited activity – maybe a little bit of a ramp up in activity recently. But the real star so far has been the wet gas window. I believe of the over 300 and some odd wells, almost all of them have been drilled in the wet gas window which is shown in the gold here. And again, Chesapeake and Total and EnerVest have drilled the lion’s share although recently folks like PVC, Gulfport and others are certainly making their names known in the play.
One of the areas of interest is really the volatile oil window that’s shown in blue. While there have been a lot of wells drilled in the wet gas window there’s only been about say ten wells drilled in the volatile oil window. Well, if you look at the chart on the right, EVEP has about 50,000 acres in the wet gas window – well, we’re actively marketing those because it’s been determined to be a market.
Now, the volatile oil window is about 80,000 acres of EVEP’s acreage and it fits in with about 300,000 of overall EnerVest acreage. Well right now the best we can tell, and again, we have about 600 wells that we’ve cored and logged and evaluated, the oil in place in the volatile oil window is about 16 million barrels per section and that compares pretty well to some of the stuff Whiting was talking about in some of their plays. The challenge is getting it out.
And so right now what we’re doing is again, as we market the wet gas window acreage we’re simultaneously pursuing joint venture opportunities with both service companies and production companies to really de-risk the oil play. We feel like we’ll get more value for our oil window acreage that way and so we’re setting upon that, and we’re having good encouragement early on from several companies in terms of participating in that. And we hope to get something done kind of over the winter. Our target is maybe by the end of the year but it may lapse a little bit into next year. But again, we feel like de-risking this play will set aside a whole other side of upside for us.
And speaking of the wet gas window and acreage sales we actually had announced earlier this year our first sale. That was for about 22,000 net acres for EnerVest which is about 4300 acres for EVEP. Over the closing EVEP will receive about $56 million subject to some purchase price adjustment. We’re actually in the middle of closing that transaction as we speak. So again, that’s kind of the first one. The benchmarks are good and we’ve got several other opportunities that we’re working on, and as those are signed we’ll make announcements for that.
Looking a little bit at the override position, again, overrides make great MLP vehicles, MLP assets. Overall we have overrides at EVEP at about 880,000 gross acres. We have 2.7% override at about 400,000 of those acres and a 1.3% override at about 450,000 of those acres. So again, over the long term this’ll be a great asset and we’ll get revenue out of something we’re not spending any capital for.
Now to the midstream. As you all well know, a big challenge to the Utica has been the midstream infrastructure development. Most of the early wells in the Utica were drilled in the wet gas window partly because of the geology – partly because those wells happened to be right along the Dominion East Ohio pipeline and that was the only pipeline available. Well, over time there’s been a good bit of midstream infrastructure created and EVEP has become a part of that.
By contributing some of the acreage into an initial deal, EVEP was able to take a 21% interest in Utica East Ohio Midstream which is one of the first entrants into the midstream play. It’s operated by Momentum, a very successful natural gas processing developer that uses private equity, builds infrastructure and then over time typically has monetized into larger MLPs. Over time we’ve planned 800 million a day of capacity and 135,000 barrels of fractionation capacity along with a significant amount, almost 1 million barrels of story impurity components. And it has 1 million acres dedicated to it, one of the largest dedications of anybody.
It’s online. It came on on time and on budget, the first train that is which was about 200 million a day and about 45,000 of fractionation capacity. Right now we’ve produced as much as 192 million cubic feet a day through the facility, and as many of you also who know the Utica are aware, one of the early systems was Natrium which was taking a good bit of gas. And unfortunately they’ve had a fire and it looks like EVEP, or excuse me, [Utica East Ohio] is going to be able to step in and help continue to make gas deliveries on that until they can get that plant back up. So that’s going to really accelerate a little bit the Kensington plant, the first 200 million reaching its (inaudible) capacity.
One other comment on UEO is our next train should be online that will ramp it up to 400 million a day, should be online by the end of the year producing at full capacity around that time. And we should be up to about 800 million of capacity by mid next year. And again, this is one of the few plants in the area so far that’s been on time and on budget in a very dynamic market.
EVEP also owns a 9% interest in Cardinal Gas Services which is a low-pressure gathering and compression business operated by Access Midstream. And again, the plans are pretty strong there over time. It’s kind of undergirded by the initial 540 wells that are within the Chesapeake Total joint venture committed through the end of 2014 plus the additional plans for continued growth in that play. There’s over 1 Bcf a day of throughput expected through Cardinal within a five-year period so a nice, nice growth opportunity.
So if we summarize the Utica Midstream Capital and EBITDAX for EVEP, we’re talking about spending about $360 million net to EVEP over five years. You can see on the guidance we have listed below that you see pretty substantial EBITDA growth. I’d say generally our thought process on this is that we’re going to build it and we’re going to follow Momentum’s lead. Combined Momentum and EV Energy Partners have 51% interest in this investment in the UEO stream and so we have a lot of leverage there, and so that’s part of it.
On the CGS or Cardinal Gas Service side, that’s a cost of service arrangement with a fixed internal rate of return. That makes for a very nice investment stream over time. One of the challenges we faced was we actually financed this with bank debt, and unlike most of the acquisitions that upstream MLPs do where you get production immediately from your acquisitions we had to wait a little while for that. And that’s caused our leverage to be a little bit higher than we would normally like it to be. We plan on paying that down through acreage sales and we’re starting to do that.
So I’d like to speak a little bit now about EVEP getting back to business. While we spend the majority of our time focused on delivering on our Utica plans, we’re actually now back to doing some acquisitions. And part of the reason we’re doing that is that as we realize acreage proceeds, again, we had no basis in this acreage from a tax perspective. And so we’re trying to time acquisitions to fit, of course they have to be a good opportunity but also to fit the timing of our sales so that we can have kind of a tax-friendly basis.
And our first acquisition is one of those opportunities, and again, participating with EnerVest helps. In a joint purchase with EnerVest EVEP is going to acquire about $67 million worth of properties for a 31% interest in the Barnett Shale assets formally operated by Carizzo. It qualifies for lifetime exchange treatment and will be closing by October 31. The reserves are in Tarrant County. They’re about 62 Bcf, you can read the metrics there. It’s 100% natural gas, and again, you would say “Well golly, a lot of folks are saying they want to go into liquids.”
But we hedge and we feel like we’ve got a good bit of upside drilling here that we can manage over time, and so we feel like our option value, we can hedge the PDP and then our option value is on these PUDs over the long term. And this, the reservoir here is some of the most high-quality Barnett reservoir we’ve seen, and the rate of return on the incremental PUDs are very, very high. And so we feel like this is a great opportunity, and again, we can control the drilling timing because it’s all HBP.
Which gets back to what we’re really all about, and really what EVEP is all about is acquisitions. It’s acquisitions of steady, performing assets, and you can see through 2012 into 2013 we had a really good history of what I’ll consider if not dramatic growth steady, dramatic growth. That’s slowed down recently primarily because we’ve been working to monetize the Utica. That’s taken longer than we’ve thought. At the same time we’ve had an opportunity on the midstream which requires a good bit of capital, which you can see in the bars on the top right.
You can see our EBITDAX performance has been strong. Again, in 2013 like many companies we came off of some pretty strong hedges and so our EBITDAX projected by a lot of the analysts here is a little bit lower this year. And you can see on the right then our distribution coverage which has historically stayed over 1. And one of our long-term goals, it’s going to be under for the remainder of this year – again, this is not new news but part of that is tied to that capital bar you’re seeing right above it and the timing of sales.
On the capital structure side, as of midyear we had about $520 million of debt plus some senior notes, so a little bit over $1 billion of total debt on an equity market cap of about $1.6 billion, so again, an enterprise value of about $2.6 billion. Our debt is higher than we’d like. Typically we’d like to stay around 3x debt to EBITDA. We’re a good bit higher, in the 4x range on that right now and one of our objectives will be to manage that over time particularly with asset sales; but also knowing that we’re going to have a good bit of EBITDA coming in on through next year through our midstream business. We feel that those two things are going to help us manage it.
On the hedging side again, we’re hedged about 90% for ’13 which is about as high as we’ll go; 80% for ’14 and 70% for ’15. And you’ll look to see us probably over the winter extend that on out into ’16. So we like to stay out four, sometimes even five years is really kind of our objective. We’ve been a little bit lighter on the gas end because we just feel like there is some upside in gas although we don’t go too high. We’re not $5.50 or $6.00 gas people over time but we do feel like there’s some upside in gas, and so we’ve held off a little bit on that compared to usual.
So kind of summarizing why invest in EVEP? This slide hasn’t changed in a long time. We have a long-lived asset base; a good relationship, a synergistic relationship with EnerVest; good upside in the Utica. And frankly the news seems to be getting better and better especially in the wet gas window. The hedging strategy has stayed consistent and again, we have demonstrated over time and will in the future long-term performance and growth.
So with that thanks for your time. I’ll be happy to visit with any of you all in the breakout room, and again, thanks Ethan for you all’s involvement with us and in this conference.
Ethan Bellamy – Robert W. Baird & Co.
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