EV Energy Partners: Distribution Elimination Likely Coming Soon

| About: EV Energy (EVEP)

Summary

EV Energy Partners is likely to eliminate its distribution soon due to low oil and gas prices.

$40 oil and $2.50 natural gas would result in slightly negative distributable cash flow in 2016 despite some hedges remaining.

$50 oil and $2.75 natural gas may result in slightly positive distributable cash flow of $0.10 to $0.15 per unit in 2016.

Without hedges, EV Energy Partners needs above approximately $3.15 natural gas and $60 oil to reach positive distributable cash flow.

EV Energy Partners (NASDAQ:EVEP) appears likely to eliminate its distribution soon. Its hedges become significantly weaker in 2016, resulting in negative distributable cash flow if oil averages $40 and natural gas averages $2.50 during 2016. Without hedges, EV Energy Partners needs above-$60 oil and $3.15 natural gas to generate positive distributable cash flow.

EV Energy Partners could technically maintain a small distribution in the hope that natural gas averages close to $3 in 2016, but there is a high chance that the distribution would end up getting funded by credit facility borrowings.

2016 Outlook With $2.50 Natural Gas

With on $40 NYMEX oil and $2.50 NYMEX natural gas, EV Energy Partners is expected to produce $253 million in revenue during 2016, including $64 million in hedge value. This assumes that production is maintained at Q4 2015 levels. The consensus is currently for natural gas to average $2.60 per Mcf during 2016, so $2.50 natural gas is pretty close to consensus.

Units

Per Unit

$ Million

Natural Gas (Mmcf)

53,300

$2.05

$109

Oil (Mbbls)

1,440

$36.00

$52

NGLs (Mbbls)

2,670

$10.00

$27

Net Transportation

$1

Hedge Value

$64

Total

$253

Click to enlarge

Total expenses are estimated at $263 million per year, including $65 million in maintenance capital expenditures. Maintenance capital expenditures were previously trending to $52 million per year, but with the increased production post-acquisitions, maintenance capital expenditures will increase. Thus it appears that EV Energy Partners would face a slight deficit of $10 million if it attempts to maintain production in 2016.

$ Million

LOE and Other

$120

Production Taxes

$8

Cash G&A

$25

Cash Interest

$45

Maintenance CapEx

$65

Total

$263

Click to enlarge

Effect On The Distribution

I believe that it is quite likely that EV Energy Partners will eliminate its distribution when it makes its next distribution announcement in late January. It previously mentioned that it would attempt to align future distributions with projected distributable cash flow, and it appears that $40 oil and $2.50 natural gas in 2016 would result in negative distributable cash flow. If prices averaged $50 for oil and $2.75 for natural gas instead, EV Energy Partners may be able to generate around $0.10 to $0.15 per unit in distributable cash flow in 2016.

With both oil and natural gas currently significantly below any of those price points mentioned above, EV Energy Partners would need to be very optimistic about a rebound in natural gas and oil in 2016 to avoid eliminating its distribution completely. Although management was optimistic about future prices during its Q3 2015 conference call, the price of oil was $15 higher at the time while natural gas was slightly higher as well.

Unhedged Breakeven Point

Without hedges, it appears that EV Energy Partners would reach breakeven cash flow at around $3.15 natural gas and $60 oil. At those prices, EV Energy Partners would generate approximately $267 million per year in revenue.

Units

Per Unit

$ Million

Natural Gas (Mmcf)

53,300

$2.70

$144

Oil (Mbbls)

1,440

$55.00

$79

NGLs (Mbbls)

2,670

$16.00

$43

Net Transportation

$1

Total

$267

Click to enlarge

Total cash expenses would be approximately $267 million, with production taxes increasing by $4 million over the previous scenario due to higher oil and gas prices.

$ Million

LOE and Other

$120

Production Taxes

$12

Cash G&A

$25

Cash Interest

$45

Maintenance CapEx

$65

Total

$267

Click to enlarge

EV Energy Partners would generate zero distributable cash flow with $3.15 natural gas and $60 oil. It would generate around $0.70 per unit in distributable cash flow with $3.50 natural gas and $70 oil, while $80 oil and $4 natural gas would raise distributable cash flow to approximately $1.60 per unit.

Conclusion

With natural gas prices continuing to stagnate in the $2 to $2.50 range and oil prices going below $30, it is increasingly likely that EV Energy Partners will eliminate its distribution in late January. A distribution elimination is probably partly priced into EV Energy Partners already, but there are still some who likely expect at least a limited distribution going forward. Therefore, if EV Energy Partners eliminates its distribution, it will probably take a hit the way other MLPs have reacted to distribution cuts, although perhaps to a lesser extent.

If EV Energy Partners maintains some distribution, its units may rise in price. However, I'd consider that a negative for the long-term future of the company given that it will likely have negative cash flow in 2016 even with its hedges and no distribution. EV Energy Partners will also need to deal with potential negative distributable flow in 2017 based on current pricing expectations.

EV Energy Partners is currently priced for long-term prices of around $65 to $70 oil and $3.25 to $3.50 natural gas.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a short position in EVEP over the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Considering a short position ahead of the distribution announcement.