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Eagle Rock Energy Partners, L.P. (NASDAQ:EROC)

Q1 2014 Earnings Call

May 01, 2014 2:00 pm ET

Executives

Jeffrey P. Wood - Chief Financial Officer of Eagle Rock Energy G&P LLC, Principal Accounting Officer of Eagle Rock Energy G&P LLC, Senior Vice President of Eagle Rock Energy G&P LLC, Treasurer of Eagle Rock Energy G&P LLC and Member of Enterprise Risk Committee

Joseph A. Mills - Chairman of Eagle Rock Energy G&P LLC, Chief Executive Officer of Eagle Rock Energy G&P LLC and Member of Enterprise Risk Committee

Analysts

TJ Schultz - RBC Capital Markets, LLC, Research Division

James Spicer - Wells Fargo & Company

Praneeth Satish - Wells Fargo Securities, LLC, Research Division

Barrett Blaschke

Eric B. Anderson - Hartford Financial Management, Inc.

Operator

Good day, ladies and gentlemen, and welcome to the Eagle Rock Energy Partners First Quarter 2014 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I would like to introduce your host for today's conference, Mr. Jeff Wood, Chief Financial Officer. Sir, you may begin.

Jeffrey P. Wood

Thank you, Trish, and thank you to our unitholders, analysts and other interested parties for joining us today on Eagle Rock Energy's first quarter 2014 earnings call. Before we get started commenting on our first quarter results, there are a few legal items that we would like to cover. First, I want to point out that remarks and answers to questions by partnership representatives on today's call may refer to or contain forward-looking statements. Such remarks or answers are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. And such statements speak only as of today's date or if different, as of the date specified. The partnership assumes no responsibility to update any forward-looking statements as of any future date. The partnership has included in its SEC filings cautionary language identifying important factors, but not necessarily all factors, that could cause actual results to be materially different from those set forth in any forward-looking statements. A more complete discussion of these risks is included on the partnership's SEC filings, including in our 2013 Annual Report on Form 10-K, as well as any other public filings. Our SEC filings are publicly available on the SEC's EDGAR system. Also, you may access both the first quarter 2014 earnings press release and a transcript of this call on our website at www.eaglerockenergy.com. Management may discuss its views on future distributions during this call. Management's objective around future distribution recommendations are subject to change should factors affecting the general business climate, our ability to close the contribution of our Midstream assets to Regency, market conditions, commodity prices, our specific operations, performance of our underlying assets, estimates of maintenance CapEx, applicable regulatory mandates or our ability to consummate accretive growth projects differ from current expectations. Actual future distributions will be determined declared and paid at the discretion of the Board of Directors. Presenters on this earnings call may use the non-GAAP financial measures of adjusted EBITDA and distributable cash flow. You may find a reconciliation of these non-GAAP financial measures to their most directly comparable financial measures calculated and presented in accordance with accounting principles generally accepted in United States or GAAP on our website under Press Releases. I will now turn the call over to Joe Mills, our Chairman and CEO, for a review of the quarter.

Joseph A. Mills

Great. Thank you, Jeff. Well, good afternoon, ladies and gentlemen, thank you for joining us today. We announced last night our first quarter 2014 earnings. Our first quarter EBITDA came in at $57.6 million, which was essentially flat as compared to our fourth quarter 2013 earnings. Our first quarter EBITDA was impacted by the harsh winter weather in January and February that affected both of our Midstream and Upstream volumes. We estimate the impact of the winter weather on our adjusted EBITDA to total approximately $4.2 million from both of our businesses. On April 23, we announced that we were suspending the payout of our quarterly distribution until we closed our Midstream business sales to Regency in an effort to preserve our liquidity. Given the extended Federal Trade Commission review, our original timeframe for closing the Midstream sale to Regency has also been extended, which created the need to preserve greater liquidity in the interim to fund our growth capital expenditures and other financial obligations. On Tuesday this week, we held our special Unitholder Meeting, where our partnership's common unitholders voted to approve the contribution of our Midstream business to Regency for a total consideration of up to $1.325 billion. Based on the final tabulated results, approximately 60% of our outstanding common units participated in the vote. Of those, 98% voted in favor of the proposal to approve the Midstream business contribution. We're pleased that all significant closing conditions for the Midstream business contribution have been met and satisfied other than the receipt of the antitrust approval from the Federal Trade Commission. Eagle Rock and Regency announced last night that both companies have now certified substantial compliance with the Federal Trade Commission in response to its second request that we both received on February 27, 2014. We will continue to work expeditiously with the FTC on its review of our transaction with Regency. We cannot be assured when the FTC will finalize its review of the transaction or the outcome of the review. However, in order to facilitate the FTC's review, Eagle Rock and Regency have agreed not to close our proposed transaction before June 30, 2014, unless the FTC closes its investigation earlier than that date. The mission transaction is an important and transformative event for our partnership as we exit the Midstream business and refocus our growth efforts as a pure play Upstream MLP. We intend to use the cash proceeds from the contribution of our Midstream business to pay down borrowings under our revolving credit facility. Pursuant to our contribution agreement, Regency launched on April 2, 2014, an exchange offer for the full $550 million face amount of our senior unsecured notes. Due to the extended review by the FTC, Regency did announce on Monday of this week that it has extended the exchange offer until May 28, 2014. Assuming, though, that all the senior unsecured notes are exchanged, Eagle Rock will reduce its total debt by over $1 billion as a result of the Midstream transaction. Following the consummation of this transaction, Eagle Rock will be a pure-play Upstream MLP, with a much improved balance sheet, credit metrics and liquidity for future growth and we will look to reinstate the distribution at that time. We will be focused on growing our cash flows through accretive Upstream acquisitions and through organic growth. We'll discuss more of our go forward plans in a few minutes. Turning now to our operational results for the quarter, our Midstream business gathering volumes averaged 582 million cubic feet per day during the quarter, which was slightly lower than our fourth quarter throughput. Equity NGL and condensate barrels were up, though, almost 14% on a reported basis. NGL equity volumes were up in both the Panhandle and East Texas areas, primarily due to the fact that we did not reject ethane in January as compared to all 3 months in the fourth quarter of last year. We are back in ethane rejection mode across our company, where we can efficiently reject ethane, given that higher -- given the higher natural gas prices relative to ethane prices. Condensate volumes were essentially flat as compared to the fourth quarter. In the Panhandle, gathered volumes were down about 5%, however, the combined equity NGL and condensate volumes were up 4% as compared to the fourth quarter, despite the continued impact of the harsh winter weather on our producer customers drilling and production activity. The continuous severe winter weather during the early part of this year caused shut-ins and prolonged reduced flow from many of the producing wells in the Texas Panhandle segment, as well as delays by producers in hooking up new wells to our gathering systems and also caused reduced recovery efficiencies at some of our plants. The good news is, winter is behind us and we are seeing improved gathered volumes in the Texas Panhandle, as our producer customers continue their drilling and completion activities and are hopefully making up for lost time earlier this year. Currently, there are 12 rigs running on acres dedicated to Eagle Rock and based on our current view of the drilling activity in the Panhandle, we have a line of sight on at least 120 wells to be drilled and hooked into our systems during 2014. There were 38 wells connected to our Panhandle system just during the first quarter. We continue to see a shift of rig activity from the Granite Wash to the oilier Cleveland Sands play as producers target the higher margin oil plays over the NGL gas-rich Granite Wash play, which in turn could affect the level of volume growth we can expect in 2014. Turning now to our East Texas and other Midstream segment, gathered volumes were up 4% during the first quarter, with combined equity NGL and condensate volumes up significantly as compared to the fourth quarter. This increase in volumes was due to continued successful drilling activity around our systems, servicing the liquids-rich Woodbine formation in East Texas. We've been pleased that the expansion of prolific liquids-rich Woodbine play around our East Texas gathering systems and based on continuing favorable drilling results from a key producer customer, we expect to see additional drilling activity in the area for this exciting play. This will help drive our production growth in East Texas during 2014. Our Marketing and Trading segment deserves honorable mention this quarter, as it recorded operating income of $9.8 million during the first quarter, which was a 180% increase as compared to our fourth quarter results. The Marketing and Trading segment include the financial results of our crude oil and condensate marketing and natural gas marketing and trading operations. The increase was due to our gas marketing group taking advantage of the higher volatility and greater geographic basis spreads in natural gas prices during the first quarter. Volatility in the natural gas markets have subsided as the severe winter weather has ended, so we expect our margins in the marketing business to moderate in the second quarter. Turning now to our Upstream business. Production volumes in the Upstream business averaged 12,031 barrels of oil equivalent per day during the quarter, which was down almost 4% as compared to our fourth quarter 2013 production volumes, due in part to the negative impact of the severe winter weather. The harsh winter weather continued to impact our oil and natural gas production across the majority of our operating areas during January and February and more specifically, in the Mid-Continent area during early March. A combination of facility freeze-ups, pipeline and trucking curtailments impacted the Mid-Con area during the first quarter and a few major weather-related power outages at third-party gas plants in Texas and Mississippi, along with our BEC plants in Alabama, interrupted production in January and February. All of our operating areas, though, have recovered during the last 3 weeks of March. During the quarter, we maintained 3 operated rigs drilling. 2 rigs were drilling in the Mid-Continent region on our Golden Trend and SCOOP positions, while 1 rig was active in our Big Escambia Creek Field in Southern Alabama. In the Mid-Con area, 1 operating rig is focusing on the horizontal Woodford formation of SCOOP and 1 operating rig is drilling vertical wells in our Golden Trend field, which targets the Big Four and Bromide formations. The oil-bearing Bromide sands and the liquids-rich Big Four formations are our targets for drilling in the Golden Trend field. These wells cost approximately $5.5 million drilling complete, and we project gross EURs of between 300,000 up to 550,000 barrels oil-equivalent per well. These wells could have initial potentials of anywhere between 150 barrels per day and 400 MCF a day, up to 700 barrels a day and 1.2 million cubic feet per day. During the first quarter, we completed 4 wells in the Golden Trend field. The most notable was our [indiscernible] 1-20 well, which averaged 720 barrels of oil per day and 1.1 million cubic feet per day for its first 30 days of sales. Two of the completed wells underperformed our expectations and caused us to alter our drilling schedule to focus on the higher-performing areas of Golden Trend. The variability in production performance in the Bromide Sands is something we are evaluating as we continue to learn more about the subsurface and reservoir characteristics of this exciting play. In the SCOOP play, we completed our fourth operated SCOOP well, the McLemore 1-20H well in Township 5 North, Range 5 West. We drilled this well as a single section 6,100-foot lateral and frac-ed the well in March with a 16-stage frac completion. Total drilling complete cost was approximately $9.6 million. The well has average 350 barrels of oil per day and over 2 million cubic feet per day since being completed right at the end of March. We have since spud-ed the [indiscernible] 117H well, also located in Township 5 North, Range 5 West. This will be a single section 5,300-foot lateral, which we estimate will cost right around $10 million. In addition to these operated wells, we are participating with Newfield and Continental Resources in several wells that they're operating. Most notably is our 36% working interest in the Newfield operated Briar wells, which are located in Township 2 North, Range 4 West. Newfield, which is the operator, is drilling extended lateral wells that will cover 2 sections and open up the wellbore to more of the Woodford section. Newfield is currently drilling 4 wells in this section. The cost to grow each of these wells is approximately $13.5 million and our expectations is each will recover 1.8 million barrels oil equivalent EUR per well. Three of the wells have been drilled to date with no issues and the fourth well is currently being drilled and we expect it will be concluded by the end of this month. If all goes well, Newfield will be frac-ing this well some time in June, with first production in either late June or early July. I'll now turn the call over to Jeff to cover the financial results for our quarter.

Jeffrey P. Wood

Okay, thank you, Joe. Our reported adjusted EBITDA of $57.6 million for the first quarter was slightly higher than what we reported from the fourth quarter of 2013. As I mentioned last quarter, our adjusted EBITDA excludes the legal, accounting and advisory costs related to our strategic review, and associated directly with the sale of our Midstream business to Regency, which we announced on December 23, 2013. This is also how EBITDA is calculated under our revolving credit facility. This cost totaled approximately $4 million during the fourth quarter and an additional $2.7 million in the first quarter. Unfortunately, we do expect these costs to continue in the near future as we work with our outside legal counsel, economists and other consultants to navigate the Federal Trade Commission's investigation of our Midstream sale. Both our Upstream and Midstream businesses reported improvements in operating income in the first quarter relative to the fourth quarter of '13. Much of this was driven by improvements in our realized prices for natural gas and natural gas liquids. Natural gas prices were up over 40% and NGL prices were up over 10% on average, quarter-over-quarter, for both businesses. We did have some notable events in the quarter. As Joe mentioned, the first was the continued severe winter weather in North Texas and Oklahoma, which negatively impacted our Upstream and Midstream operations. We estimate the weather reduced our Midstream business's contribution to adjusted EBITDA by approximately $2.4 million, as some producers' wells went off-line due to the extreme cold. We further estimate the winter weather reduced our Upstream results by approximately $1.8 million. As such, the total impact across the partnership, as Joe mentioned, was approximately $4.2 million from the severe weather. However, we did have an EBIT margin benefit from the long stretch of winter weather. In the first quarter, with natural gas storage levels relatively low and regional supply issues disrupting certain markets. Geographic basis spreads for natural gas widened substantially. Our Midstream operations team in the Texas Panhandle did a great job during the quarter of keeping our plants up and running despite the weather difficulties. While inlet volumes were down at times, we did not experienced any significant plant downtime and we're able to consistently deliver product. This, combined with our gas marketing group's knowledge of the market and ability to secure transportation agreements allowed our gas marketing segment to capitalize on the basis spreads. We estimate the additional margins generated by our gas marketing group during the quarter to be in excess of $7 million. On the commodity price front, as I mentioned, average NGL and natural gas prices experienced a nice move up in the first quarter. Much of this, however, was driven by price spikes caused by the winter weather and limited volumes in storage. Natural gas prices have stabilized after the big volatility in the first quarter and now hover well over $4 MMBtu today. Our realized natural gas prices were up over 50% of the Midstream business and over 40% in the Upstream business for the first quarter. NGL prices also saw a huge volatility in the first quarter and have also settled back into recent historical ranges. In fact, NGL prices today are mixed relative to where they were at the beginning of the year. Average realized prices for NGLs for the first quarter were up 14% in our Midstream business and 11% in our Upstream business. Now with our extensive hedge portfolio, we gave back much of the price benefit from the elevated commodity price in the first quarter. We recorded a loss of $4.6 million on our realized hedge settlements in our first quarter and that's relative to a $4.4 million realized hedging gain in the fourth quarter of 2013. We have not added hedges in recent months as our focus remains on opportunities to convert some of our near-term proxy hedges into direct hedges for NGLs. Our latest hedging presentation is available on our website for those of you who would like greater detail on our derivatives portfolio and our hedging policies.

Turning now to our liquidity picture. We ended the quarter with total borrowings of approximately $1.27 billion, that's comprised of our senior unsecured notes and borrowings under our revolving credit facility. Our total debt to adjusted EBITDA or leverage ratio was flat to last quarter at approximately 5.4x at the end of the first quarter. Our covenant level for the first quarter was 5.85x, and that's as a result of the amendment to our credit facility that we secured in February. That amendment, among other things, flexed the total leverage ratio and senior secured leverage ratio of covenants for the first quarter of '14. It also provided for additional liquidity by allowing us to increase the Midstream component of our borrowing base, which we did on March 31. We ended the quarter with approximately $69 million of liquidity under the revolver after taking into account the amendment based on our total borrowing base in our facility borrowings and letters of credit outstanding. Debt at the end of the quarter under the facility totaled about $724 million. Based on some large payments made in early April, however, our credit facility debt balance rose to approximately $755 million at the end of April and that reduced our liquidity to approximately $38 million. Joe spoke about the second request we received from the FTC and the impact that, that has on our thoughts around timing of the Midstream sale. The extended time frame for the transaction has been frustrating. As with the successful unitholder vote this week, we have cleared all other significant hurdles to closing the contribution transaction. Our credit liquidity picture changes dramatically for the better upon the closing of that transaction, so we are all focused on working collaboratively with the FTC to enable them to complete their review, and we continue to believe that area that they're focused on will remain competitive after the transaction and, therefore, remain hopeful that FTC will see it the same way. With that, I'll turn the call back over to Joe.

Joseph A. Mills

Thank you, Jeff. Well, as Jeff just mentioned, our focus remains on the closing of the Midstream sales to Regency. As we've previously discussed, we've taken several important steps in the past few days that moving to closer to conclusion of our transaction with Regency. We obtained the unitholder approval of the transaction on Tuesday this week. I would like to thank our unitholders who took the time to vote their units. Second, yesterday, we and Regency certified substantial compliance with the Federal Trade Commission in response to a second request and we remain very focused on working expeditiously with the FTC on concluding its review of our transaction with Regency. Post the transaction, we will have a smaller but more focused Upstream MLP, with current proved reserves of 57.7 million barrels oil equivalent, of which 74% is proved developed producing and 26% is proved undeveloped drilling inventory, primarily in our SCOOP and Golden Trend fields. We plan to be opportunistic and focused on accretive acquisitions to enhance our distributable cash flows. We are pleased with our timing of selling our Midstream business and we believe we could be entering a good time to acquire appropriate Upstream MLP assets. We're excited about the number of high-quality Upstream assets we continue to see on the market today, as Upstream companies reposition their portfolios. We're currently actively reviewing numerous asset opportunities in and around our core areas. Our plan is to be focused and disciplined in our acquisition strategy. Initially, though, we will be targeting approximately $200 million to $300 million of acquisitions annually as we grow our footprint. Our first priority, though, is to close the Regency transaction. Thereafter, we'll pursue Upstream acquisition opportunities. I would like to thank all of the Eagle Rock employees who are listening on this call for all their hard work and daily commitment to our operational and safety excellence. With that, we will now open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of TJ Schultz of RBC.

TJ Schultz - RBC Capital Markets, LLC, Research Division

I guess, just first, logistically, what's the next step with the FTC? When do you expect to hear back? Is there a clock ticking on its end now?

Jeffrey P. Wood

TJ, this is Jeff. Yes, as you saw in the press release, I mean, this was a big step in the process to certify compliance. What that means is that we and Regency feel that we have adequately addressed what was, as you might imagine, a very extensive request for information that they originally proposed. Again, as you saw, we have, as part of that, we entered into a timing agreement with the FTC and that's got a June 30 date on the backside of that. So we trust that the FTC is working very hard with the information that we've provided and we stand ready to work with them. But that's about as much as we can give you because it's about as much as we know, frankly, about timing right now.

TJ Schultz - RBC Capital Markets, LLC, Research Division

Okay. If it does go as planned and the Midstream sales goes through, just kind of comment on the level that you would expect to reinstate the distribution, kind of how you think about coverage as a pure-play Upstream.

Jeffrey P. Wood

Yes, you're hitting all the right points, TJ. The truth is, I think it's going -- there's going to be a lot of happens between now and the back end of this transaction, and I think that, that distribution decision, which again, we want, as all of you do, we want to speed up as much as we can. But that distribution decision is just going to be based on a lot of factors when we sit around it and talk to the board about it, next -- whatever the next applicable quarterly cycle post the transaction. And frankly, a lot of it is going to be how we view the acquisition environment as we stated many times, right? I think a big driver of both the reinstated distribution, the ability to grow it after that is going to be on our ability to consummate acquisitions. We're going to try to really focus on that as much as we do on the drilling going forward. So there'll be a lot of things at play. I probably just can't give you a firm answer today.

TJ Schultz - RBC Capital Markets, LLC, Research Division

Okay. Fair enough. I guess, just lastly, just trying to think of plan Bs here if the FTC's decision is not variable. And what you can do now in preparation for other scenarios? Or how quickly you kind of need to act? The question's really just trying to understand what you learned from the background process that you outlined in the deal proxy that would steer you in any particular direction, mainly pointing to the interest and the entire entity at a certain valuation that was discussed or thoughts on that, or another option looking at an IPO of the Midstream business, just appreciate any color there.

Joseph A. Mills

Yes, TJ, Ill take that one. This is Joe. Yes, so, clearly, we think about plan B, but obviously, we are -- we feel very confident that we will get to a closing with Regency. But obviously, as we said in our prepared remarks, it's a little out of our control in regards to FTC's review and the timing of it, but we're certainly working closely with them. Honestly, we have other options if we get to that point. As we've talked about before, the SCOOP assets continue to be highly regarded. We continue to see very positive drilling results, not only in our acreage, but on offsetting acreage that Continental and Newfield are drilling. So I do think that whether it's some asset modernizations, looking to our strategic review that we went through last year in terms of the Midstream assets, or Midstream company and/or even some of the Upstream assets, all of that will be considered at that time. But the truth is, we feel that at this point, our, as I said before, our priority is to get to the closing with Regency at the end. And I'll say, Regency remains excited about the acquisition, so we feel like less -- we end up with some unfavorable outcome with the FTC, we feel confident we'll get there.

Jeffrey P. Wood

And TJ, just to make one big clarifying point. You asked what we can do now to speed things up. We want to make it very clear that as part of signing the deal up with Regency, we have agreed to cease all discussions with any other party and not raise any other, so anything from total a partnership perspective or a Midstream business, there are none of those conversations going on and there will not be any of those conversations until the outcome that we would not want to see, which is the deal with Regency has gone away.

Operator

And our next question comes from the line of James Spicer of Wells Fargo.

James Spicer - Wells Fargo & Company

I have a couple of follow-ups for you, just around the whole transaction and liquidity situation. I guess, first of all, what's the real significance of that June 30 date with the timing agreement? What happens with the FTC doesn't come to a decision by that date? Does that date get extended?

Joseph A. Mills

I'll take that one, James. Yes, so again, we certified compliance yesterday. The FTC asked for more time and so we agreed, basically, to stand still between us and Regency not to close our transaction until June 30. So the way it works is basically, the FTC now has all the information, we hope, that they need. They will go through their reviews, sure they will be asking us a lot of questions, but assuming that we get to June 30, and they have not objected to anything, then the Regency in Eagle Rock will be clear to close our deal at that point. However, if the FTC were to ask more questions, with more detail, then, it's possible that they could get extended. Obviously, the outcome we don't want is that the FTC, at some point, determines that the transaction is not something they'll support. Then, of course, we have to -- that could extend the date beyond the June 30, as we engage in dialogue with them. So at this point, we feel like June 30 is a date that we can achieve. But again, a lot of it is outside of our control, it's all subject to the FTC's final review.

James Spicer - Wells Fargo & Company

Okay, okay, that's helpful. And then just onto the liquidity situation. You mentioned in your release that you have your borrowing base redetermination coming up on June 1. What do you think -- do you think that the borrowing base is likely to be reduced at that point in time and if it is, what are your options?

Jeffrey P. Wood

James, this is Jeff. We are just in early conversations with the banks about all of that right now. And frankly, it's probably just -- look, everybody sort of got their eyes on the prize here. So I think it's probably part of just a little more broad liquidity discussion with the banks to make sure that everything is comfortable as we get through this extended time frame. So our expectation is that we'll work things out with the banks, to take -- hopefully take those near-term liquidity pressures off the table through the -- through our -- kind of our revised expectations around closing.

James Spicer - Wells Fargo & Company

Okay. And just looking forward to the second quarter, with the suspended distribution, do you guys anticipate generating free cash flow that could be used to reduce borrowings?

Jeffrey P. Wood

Yes, well, that would depend obviously on a lot of things, James. We thought it was the right decision, obviously, to preserve that liquidity, so we'll just have to see. I mean, the idea would be that we would hope to be able to put that excess cash to good use. As you well know, since you cover the bonds so well, we do have interest payment on June 1 that's roughly the same size as our normal quarterly distribution payment. So while it's all fungible, we just felt, for a number reasons, that it made sense to withhold that distribution money.

James Spicer - Wells Fargo & Company

Okay, okay. And just one more for me. The -- at the time of the extension of the exchange offer for your bonds, it looked like the participation rate was only about 30%. Do you have any idea why it wasn't higher and would you -- obviously, it sounds like you're expecting much higher participation at the end of the day here.

Jeffrey P. Wood

Yes, and that's still our expectations. I mean, first of all, just caution that it’s Regency's exchange, and so I've got limited information. They are the ones conducting it, we don't -- we're doing -- we're not doing that. My understanding of how these exchanges were, talking to the counsel and others, is that much of it comes in at the sort of last day of the exchange period and since it was extended prior to the last day of the exchange period, probably, that 30% is probably not really representative. I'm just telling you, in my conversations with bondholders, those conversations, at least, would seem to indicate that there will be a large percentage that would exchange, so that's still our expectation.

James Spicer - Wells Fargo & Company

Yes, my conversations with bondholders are consistent with that, as well.

Operator

And our next question comes from the line of Praneeth Satish of Wells Fargo.

Praneeth Satish - Wells Fargo Securities, LLC, Research Division

I was just wondering if you could just talk broadly about what the FTC is looking at exactly with respect to this transaction. Is there a specific region or asset that's causing the review to take longer than it normally would?

Joseph A. Mills

Yes, unfortunately -- great question. Thank you, Praneeth. Unfortunately, we really cannot get into that. It's pretty sensitive. Certainly, information that the FTC, I think, would, rather we not discuss. I think I can say this though. It's a fairly limited area where their concerns lie, and so -- but beyond that, we really are not at liberty to discuss kind of what the basis of the review is. So I hope you can appreciate, it's a pretty sensitive nature and we want to make sure that we are honoring the FTC's request.

Praneeth Satish - Wells Fargo Securities, LLC, Research Division

Yes, absolutely. But just broadly speaking, it is a limited part -- a limited portion of the overall package that's correct?

Joseph A. Mills

I can say that, yes.

Jeffrey P. Wood

I think what you can get to is that the -- this is an HSR review. This is about anti-trust concern, so I would just encourage you to get out your maps and you can draw your own conclusions.

Praneeth Satish - Wells Fargo Securities, LLC, Research Division

Okay, very good. And then when you look to potentially reinstate the distribution after assuming the Regency deal goes through, would you have to do it in connection with an acquisition, or could you do it before you have a deal lined up?

Jeffrey P. Wood

Oh, no. I don't think it would have to be specifically in connection with an acquisition. But again, I'll just caution you that those are discussions that are yet to be had and as you know, it's up to the board and we'll just have to see where we are on the back end of this when we make our recommendations and have those discussions. But it is not specifically predicated on an acquisition.

Praneeth Satish - Wells Fargo Securities, LLC, Research Division

Okay. And just last question here. I guess, in -- if it comes to, and in terms of the options that you have for improving liquidity, is selling the Regency units, is that on the table, or do you have a lock up there? What are your thoughts around that?

Jeffrey P. Wood

We've touched on that in the prior call. You may remember. There's not a specific lockup on the units. We will have registration rights, so we think that's a good option to have if we found the right opportunity and that was what we thought was the best source of funds, then of course, we would do it. There's some tax advantages to holding onto those units and frankly, we think this is a great deal for Regency and we think that holding those units would be a good thing, too, especially as we go forward. It's a much better kind of cost to carry to get that distribution than it is to just pay down very low coupon bank debt. So that will just be something that we evaluate, but it will be an arrow and a quiver. There is not a lockup around it.

Operator

And our next question comes from the line of Barrett Blaschke of Mitsubishi.

Barrett Blaschke

Just a quick question. As you start moving forward, assuming everything moves forward in the FTC and you pay down some debt and you start looking around for acquisitions, is there anything at the parent level that fits into the portfolio as you start thinking about working as a pure-play E&P?

Joseph A. Mills

Thank you, Barrett, I appreciate that. So yes, I mean, obviously -- I think when you refer to parent level, you mean NGP or private equity.

Barrett Blaschke

Yes.

Joseph A. Mills

Yes, so obviously, they still maintain a very strong position in our company. We certainly look at some of their portfolio assets. But as you think, as you well know, they have memorial as kind of their drop-down vehicle. I'm not saying that there wouldn't be or couldn't be some opportunities, but quite frankly, we're targeting more of what we see. There's a number of opportunities on the open market today that we're very excited about. Quite frankly, there are several that we're in conversations with, some large E&P companies on a negotiated basis where we would acquire assets from them. So suffice to say, we're going to be aggressive looking at opportunities, whether it be NGP portfolio assets or third-party assets. But to imply that there is a drop-down, that's, like I said, memorial, really, is their drop-down vehicle going forward since they still control the general partner.

Jeffrey P. Wood

Yes, Barrett, as you know better than everybody, after the 2010 restructuring, they are not -- it's not a parent relationship anymore. They are large and supported unitholders, 3 spots on a nine-member board. But they're obviously not in control of the general partner anymore.

Barrett Blaschke

Right. My point would be that as such a major holder, it would be in their best interest, potentially.

Joseph A. Mills

Potentially. No doubt. No doubt.

Operator

And our next question comes from the line of Eric Anderson of Hartford Financial.

Eric B. Anderson - Hartford Financial Management, Inc.

Joe, quick question. Assuming that the deal does close and you're now a pure-play E&P, have you thought about possibly selling any of the gathering assets that are affiliated with the Upstream side of the company? I'm thinking, primarily, of the Big Escambia Creek.

Joseph A. Mills

Thank you, Eric. Great question. We have talked about and thought about it. Specifically, BEC, that's one that we would probably not sell, and I'm not saying that -- never say never, but the BEC plant and of course, the gathering infrastructure is so integral to the operations of the field itself. And under the C&O agreement, which is akin to a jailway there, it's pretty challenging with our other partners to consider that. But having said that, there are some tax advantage structures that we've been approached about selling kind of those type of assets that are integral to our E&P operations, where you could get some liquidity from them and not lose control over, still maintain some operations over. So I would say to you that we'll be looking at all of the above, certainly, as a way to enhance our returns and improve our liquidity. But, again, first things first, we'll get to the Regency sale first. I would say to you, in the grand scheme of things, those type of assets, the gathering type assets, left inside of our Upstream are fairly small in terms of size and value.

Operator

At this time, I'm showing no further questions in the queue. I would like to turn the call back over to Joe Mills, Chairman and CEO, for any closing remarks.

Joseph A. Mills

Great. Thank you very much. Well, ladies and gentlemen, I want to thank you for taking the time today to hear us. I appreciate the questions. They were all excellent questions. Clearly, I'll say it for the third time, we remain extremely we focus on working closely with FTC and Regency to get us to a closing, and we hope that the next time we talk to you, which will be some time in the near future, we'll be announcing that we're done and hopefully approaching a closing. So we will keep you posted and again, thanks for your time and attention today.

Operator

Ladies and gentlemen, this does conclude the program for today. You may now disconnect. Everyone have a great day.

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Source: Eagle Rock Energy Partners, L.P. Management Discusses Q1 2014 Results - Earnings Call Transcript

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