EV Energy Partners: An Emerging Powerhouse With Its Utica Shale Play

| About: EV Energy (EVEP)

EV Energy Partners L.P. (NASDAQ:EVEP) is an upstream master limited partnership engaged in acquiring, producing and developing oil and gas properties. EV Energy has a market cap of $2.25 billion with 34.2 million shares/units outstanding.

EV Energy has a rather diverse asset base – total proved reserves are 817.3 Bcfe, i.e., 73.8 Bcfe in the San Juan Basin, 63.4 Bcfe in the Permian Basin, 310.0 Bcfe in the Barnett Shale, 119 Bcfe in Louisiana/Central & East Texas, 79.7 Bcfe in the Mid Continent, 47.9 Bcfe in Michigan, and 123.5 Bcfe in the Appalachian Basin. The reserve life index is 20 years and 70% of the company’s production is natural gas.

Enervest is the company’s main general partner. Enervest is recognized as one of the largest and most successful managers of oil and gas assets for institutional investors. The primary objective of EV Energy is to manage oil and natural gas properties for the purpose of generating cash flow and providing stability and growth of distributions per unit for the long-term benefit of the unit holders. To implement that objective, it strives to only pursue acquisitions of long-lived producing oil and natural gas properties with stable production profiles and low risk development opportunities while reducing cash flow volatility through an active hedging program and maintaining conservative levels of indebtedness to reduce risk and facilitate further acquisition opportunities.

Our primary focus and interest in EV Energy Partners is its holdings in the Appalachian Basin. It acquired the Appalachian Basin properties at their formation in 2006 and acquired additional properties in the Appalachian Basin in December 2007, September 2008, November 2009, March 2010 and June 2010. The EV Energy properties are concentrated in the Ohio and West Virginia area of the Appalachian Basin. The Ohio properties produce mainly from the Clinton formation and other Devonian age sands in 44 counties in Eastern Ohio, and 11 counties in Western Pennsylvania.

In the Appalachian Basin EV Energy has 508,621 gross (189,654 net) developed acres and 540,955 gross (110,072 net) acres. Importantly, substantially all of EV Energy’s developed and undeveloped acreage is held by production.

EnerVest partnerships, including EV Energy Partners, are uniquely positioned in the Utica Shale in Eastern Ohio with a combined 780,000 net acres of mostly held by production acreage. Approximately 60% of this acreage is operated by EnerVest. EV Energy Partners has a total of approximately 159,000 net working interest acres in Ohio, along with the equivalent of a 7.5% overriding royalty interest on approximately 240,000 net acres. All of the Ohio Utica acreage appears to be in either the wet gas window or the oil phase of the Utica play.

In its 2Q 2011 Results and Update Press Release John Walker, Chairman and CEO, said:

The EnerVest partnerships, including EVEP, recently finalized an agreement with Chesapeake (NYSE:CHK) on a long-term joint venture to develop the emerging Utica shale of Eastern Ohio. We believe that CHK is a recognized worldwide leader in all the complex technical, regulatory, relational and logistical skills necessary to rapidly and efficiently develop a major liquids-rich shale play. CHK will operate about 40% of EnerVest's 780,000 net acres. EVEP retains the equivalent of a 7.5% override on 80,000 net acres and has approximately 22,000 net working interest acres in this joint venture. As announced by CHK in late July, they have five rigs drilling in the Utica, a few producing wells and several awaiting completion. The wells are testing all three legs of the play (oil, NGL and dry gas windows) as well as areas both within and outside the core of the play.

EnerVest acts as the operator for EVEP and an EnerVest institutional partnership on over 400,000 net acres in Ohio separate from CHK, most of which are HBP. Within this acreage position EVEP has, on average, an approximate 33% interest (137,000 net working interest acres) and holds the equivalent of a 7.5% overriding royalty interest in approximately 160,000 net acres. Because of its proximity to the CHK joint venture, we believe that there will be meaningful cooperation with CHK's joint venture in forming drilling units and contracting for oilfield services and mid-stream operations, which involves maximizing value from ethane and other NGLs. EnerVest has permitted or is permitting ten wells and plans to drill two to three Utica laterals later this year and early next year.

We are optimistic about the Utica shale, where Ohio records indicate 25 horizontal permits have been granted. We are awaiting more sustained test and production results from the spread of wells in various stages of drilling, completion, testing and production before we can assess the near-term value to EVEP. We expect these results to be released within 30 to 60 days.

Subsequently, on September 29, Chesapeake Energy disclosed the initial horizontal well drilling results from the first four horizontal wells drilled in the wet gas and dry gas phases of the Utica Shale play in Eastern Ohio, and Western Pennsylvania. The three wells in the wet gas phase averaged 2,051 barrels of oil equivalent per day and the Pennsylvania dry gas well achieved a peak rate of 6.4 mmcf per day of dry natural gas. We await the results of their initial evaluation of the oil phase of the play

In the recent conference call, EV Energy Partners referenced the, “game changing potential of the Utica,” and stressed that one should consider Chesapeake and EV Energy as the clear leaders in the core of the Utica Shale Play. They will spend $10 million on the Utica Shale during 2011. It was emphasized that since the EV Energy Partners acreage is all HBP (held by production) acreage there are no time constraints (note the acreage was obtained for and is held by Knox and Clinton formation production).

We also learned from the conference call that the Utica could double the asset value and that when Chesapeake monetizes the Utica position there is a strong likelihood that EVEP will also participate; probably through a “cash and carry” deal. The company also stated that the Utica should be largely self funding and/or cash neutral. At this stage of the play, Chesapeake is de-risking the play and the early EVEP emphasis will be on the Chesapeake joint venture and not the EVEP/Enervest operated acreage.

EVEP also stressed the value of the non-cost bearing overriding royalty interest. EVEP also stated (although it is not privy to as many Utica well results as Chesapeake) that from what it has learned at this early stage that it agrees with Chesapeake that the Utica Shale will compare favorably with the economics of the Eagle Ford Shale. The Ohio Utica has a favorable political and geographical profile, good topography and the leases are not in populated areas.

In addition to the Utica Shale upside, EVEP provides a healthy yield of 4.4% (with additional future upside) with the most recent quarterly cash distribution of $0.761 per unit paid August 12.

Disclosure: I am long EVEP.

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