EV Energy Partners' (EVEP) CEO Mike Mercer on Q2 2016 Results - Earnings Call Transcript

| About: EV Energy (EVEP)

EV Energy Partners, L.P. (NASDAQ:EVEP)

Q2 2016 Earnings Conference Call

August 09, 2016 09:00 AM ET

Executives

John Walker - Chairman

Nick Bobrowski - CFO and VP

Mike Mercer - President and CEO

Analysts

Kevin Smith - Raymond James

Brian Brungardt - Stifel

Operator

Welcome to the EV Energy Partners Second Quarter 2016 Earnings Conference Call on Tuesday, August 9, 2016.

Throughout today’s presentation, all participants will be in a listen-only mode. After the presentation, there will be an opportunity for analysts to ask questions.

This morning, EV Energy Partners issued a press release announcing quarterly results. That release along with additional financial and operational information and reconciliations for non-GAAP financial measures is available on EVEP's website at www.evenergypartners.com.

Please refer to the forward-looking statements in the earnings press release, which state that statements made during this call that refer to management expectations and/or future predictions are forward-looking statements intended to be covered by the Safe Harbor provision of the Securities Act, as there are many other factors, which could cause results to differ from management’s expectations.

I will now hand the conference over to John Walker, Executive Chairman; Mike Mercer, President and CEO; and Nick Bobrowski, Vice President and CFO. Please go ahead.

John Walker

Thank you, Cynthia. Good morning, everyone. Thank you for joining us. I'm pleased with the results this quarter. We’ve maintained production versus the first quarter and our operating expenses came in below guidance. The concentrated asset areas that EnerVest has built over the years were primarily to improve operating efficiency and to be the low cost operator in each area. And we believe that we have achieved that.

Our asset teams continues to find ways to perform in a difficult environment. We appreciate their hard work and dedication. We’ve also reduced leverage this quarter primarily by completing our senior notes, repurchase program, our total debt of $623 million as of the end of the second quarter is down 10% since the beginning of the year. We saw a rebound in realized prices this quarter, but there is still room for improvement and we continue to monitor the market closely.

The natural gas market has been more resilient than anyone expected coming out of the warmest winter in our history. Supply and demand are coming into balance in the worldwide oil market, but we need more evidence of oil and product inventory reductions to realize a sustainable rebound. The NGL markets have experienced the best prices and the fundamentals this year of the three product areas. So in three synopses I’ve summarized those three product areas.

We’re still focused on maintaining sufficient liquidity, reducing leverage levels and eventually when cash flows are sufficient to support it reinstating distributions. We continue to monitor the A&D market and EnerVest portfolio of dropdowns and we look forward to participating when we feel our cash flow and access to capital will support it.

This leaves me to the next topic. I’d like to address which is the suspension of our distribution and our plans for reinstituting our distribution. As we discussed on our last earnings call, we had the opportunity last bring to use a basket of up to $35 million of available capacity on our credit facility to repurchase our senior notes that were trading at a significant discounts to par. That basket of $35 billion was authorized by our bank group on the condition that it would be reduced on a dollar-for-dollar basis for any distributions paid out for the remainder of 2016.

We successfully deployed the entire basket during the second quarter. Repurchasing $82.7 million of senior notes at an average price of 42% of par. As such we cannot pay a distribution for the remainder of 2016. However, we are partnership structure to pay distributions, where structured to pay distributions and we look forward to reinstating them and growing them when commodity prices rebound to a level at which we have sufficient available cash flow to do so. We appreciate the continued support and patience from our unitholders.

In the near-term we continue to be focused on continuing the decrease in operating cost reducing leverage and maintaining liquidity. Long-term our goal continues to be to create value for our unitholders.

Now I will turn it over to Nick for an analysis of our financial results.

Nick Bobrowski

Thank you, John. For the first quarter, production was 13 bcf of natural gas, 313,000 barrels of crude oil and 585 barrels of NGLs or 201.5 Mmcfe per day. This is flat relative to the first quarter 2016 and a 24% increase over the second quarter of 2015. The increase over the second quarter of 2015 was due to the addition of producing properties acquired on October 1, 2015. Our second quarter net loss was $29 million or negative $0.58 per basic and diluted weighted average limited partner unit outstanding.

Several items to note that were included in the net loss are $54.8 million of non-cash losses on commodity and interest rate derivatives. A $47.7 million gain on the early extinguishments of debt related to our senior note repurchases, which were at a significant discount to par. $2 million of impairment charges, primarily related to the write down of certain oil and natural gas properties due to a change in development plans. $1.4 million of non-cash compensation related cost contained in G&A expense, and $800,000 of dry hole and exploration expense.

For the second quarter of 2015, EVEP reported net income of $164.1 million, or $3.25 per basic and diluted weighted average limited partner unit outstanding. Net income for the second quarter 2015 include a $246.7 million gain related to the sale of our interest in Utica East Ohio, which was partially offset by $48.3 million of impairment charges.

For the second quarter, adjusted EBITDAX was $26.5 million, which is a 31% increase over the first quarter 2016, and a 50% decrease from the second quarter 2015.

Distributable cash flow for the quarter was $5.5 million compared to negative $1.2 million for the first quarter 2016 and $26.2 million for the second quarter of 2015. The increases in adjusted EBITDAX and distributable cash flow over the first quarter 2016, which are described in the press release under non-GAAP measures were primarily attributable to lower operating cost and higher realized oil and natural gas liquids prices, partially offset by lower realized natural prices.

The decreases in adjusted EBITDAX and distributable cash flow from the second quarter 2015 were primarily attributable to lower realized oil and natural gas prices, lower realized hedge gains, and the sale of our Utica East Ohio interest, partially offset by the addition of producing properties acquired on October 1, 2015.

As mentioned in our first quarter earnings call, we completed the senior note repurchases authorized under our credit agreement during the second quarter. As John said, we retired almost $83 million of our senior notes at a cost of $0.42 on the dollar. The $47.7 million gain from the repurchase program will be treated as cancellation of debt income for limited partner unitholders and will be included on 2016 K-1s.

This works out to $0.95 per unit of taxable income to those unitholders, who held during the months we executed the repurchases. Over 85% of repurchases were done during the month of April. Let me reiterate, that is $0.95 of taxable income, not tax liability.

We would expect most unitholders depending on when they purchased their units to have some offset to this from ordinary losses from operations generated this year. However, I would like to note that each unitholder does have a unique cost basis and depletion amount for the calculation of their specific ordinary income or loss each year.

Finally, we currently have $170 million liquidity between the balance sheet cash and available borrowing base capacity. We believe that amount is sufficient to meet all of our near-term capital needs. Our borrowing base is $450 million with $280 million currently drawn and the par value of our remaining senior notes is $343 million.

Now, I’ll turn it over to Mike Mercer.

Mike Mercer

Thanks, Nick and good morning, everyone. Today, I will touch on operations and will provide details on the special meeting of unitholders coming up at the end of August.

We spent $5.2 million in capital during the second quarter and $13 million so far this year. The bulk of the capital was spent to finish completions on nine wells and our Barnett Shale, which were drilled in 2015. We brought all the wells online in the second quarter and the production rates were in line with expectations, as we’ve previously mentioned. I would remind everyone that we have an approximately 31% net interest in the Barnett Shale assets and our net working interest is equivalent to about 2.6 wells.

For the second half of the year, we expect minimal capital expenditures, as we currently do not have plans for any additional drilling this year. I’d also like to note that our team has done a very good job this quarter continuing to focus on reducing operating expenses and more efficiently and effectively managing our assets.

Now I would like to switch topics to discuss our upcoming special meeting on August 30th. Our long-term incentive plan or LTIP, which was put in place in 2006, is expiring at the end of September. So we’re asking unitholders to approve a new LTIP to replace it.

The new LTIP will have a maximum of $5 million issuable units and a term no longer than 10 years. The use of equity is an important component of our compensation philosophy, which emphasizes the alignment of compensation and incentives with unitholder interest. It provides us with the ability to continue to retain and attract talent.

The second proposal to be voted on is to ratify the appointment of Deloitte & Touche as our independent registered public accounting firm for the fiscal year ending December 31, 2016.

The third proposal ask unitholders to approve the adjournment of the special meeting to a later date or dates if it’s deemed necessary in order to solicited additional proxy if there is not a quorum or sufficient votes at the time of the special meeting to approve the LTIP.

Common unitholders as of the record date of July 7, 2016 are entitled to vote. Those common unitholders of record should have received notice from their brokerage firms by now. The way you have been notified depends on how you have instructed your brokerage firm to contact you, regarding this type of notification. You may participate in the vote by mail, phone or internet using your unique code provided to you in this notification.

Additional information can be found in definitive proxy statement and the definitive additional proxy materials filed July 20, 2016 with the securities and exchange commission at www.sec.gov or through the investor relations SEC filing section of the EVEP website at www.evenergypartners.com.

I’ll now turn it back over to the operator to open it up for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions]. Thank you. Our first question will come from Kevin Smith with Raymond James.

Kevin Smith

Hi, good morning gentlemen.

Mike Mercer

Good morning, Kevin.

Kevin Smith

And congrats on the solid quarter. I appreciate your prepared remarks on this, but what's the outlook for you to repurchase more unsecured debt. I mean with your bonds still trading well below par I think that’s something you have to look at.

Mike Mercer

To do so we’d have to get approval from our bank group for an additional basket of note repurchases and I think that would depend on most likely having us sold some assets where we had -- could use some of that cash to repurchase notes.

Kevin Smith

You don’t think with just the free cash flow that you are going to generate in the second half you could channel...

Nick Bobrowski

Hey Kevin this is Nick. When we went and got the basket earlier in the year we were kind of using the free cash flow that we plan to generate for all of 2016. They just let us drawn it early. So to go back we’d have to be able to show them that there is incremental free cash flow that we are going to have or there is another source of cash that we can use to repurchase the notes.

Kevin Smith

Got you. Okay. So you don’t think that’s going to be something you didn’t talk about your -- in your fall borrowing base, it looks like we have to be further on than that?

Mike Mercer

I mean it would depend, I mean, we’ll have to see where prices are at that time.

Kevin Smith

Okay, fair enough. And then I guess a nicer question EOG and some others have been talking of some of their joined results in the Austin Chalk. Any reason to believe your acreages been I guess increased in value because of some of those results. Is that something you have looked at?

John Walker

Kevin this is John. It does have a direct impact on EnerVest in [indiscernible] County because we are in some of those wells and we’ve had that some kind of experience. So it is very exciting, in what’s called the East Texas Eagle Ford up more in the gettings area. Really there is not any drilling right now. But it’s conceivable that in the lower chalk and you do have more branches of the chalk in the gettings area than you do down in what’s traditionally the Eagle Ford, Karnes and DeWitt County County.

I suspect that we would not have the same quality of results because I don’t think in the East Texas Eagle Ford we’ve been able to achieve anything on the order of 2,000 to 5,000 barrels a day, which EOG has been able to achieve. You just don’t have the same rock quality.

Now we do think it’s good and we do think that drilling will resume again in that area as we get somewhat higher prices. But it probably have to be $65-$70 a barrel and we are still extremely pleased with our Unger well in Lee County. It is one of the highest EUR wells in the East Texas Eagle Ford.

Kevin Smith

Appreciate that. And then lastly and I’ll jump off, where I guess incrementally capital spending. I know you said you’re not drilling anymore wells for this year but do you have any guide post if you see $3 gas or start putting money to work here. Kind of how should we think about that?

Mike Mercer

Well we’ll be starting our budget process here for next year pretty soon Kevin. And looking at under various price scenarios what we might end up doing on the drilling side next year. But I think it's little too early to discuss that yet. We’ll have -- I think we’ll have more on that in the next call.

John Walker

Also Kevin I would like for you pass on to Marshall that I was able in three sentence is to summarize natural gas, NGLs and oil.

Kevin Smith

We’ll do. Thanks, Both.

Operator

And our next question will come from Brian Brungardt with Stifel.

Brian Brungardt

Good morning, guys and congrats on the quarter.

Mike Mercer

Thanks, Brian.

Brian Brungardt

I guess last quarter you guys provided some insight into the D&C and LOE environment you’re seeing out there. Just curious if you have any update to what you’re seeing out there in terms of sustainability?

Mike Mercer

Yeah let me talk about that. As I stated in my remarks, as you are aware we operate more wells than any other company in the United States EnerVest does. And so we’ve build big concentrations in a lot of areas and EV benefits from that. As a result of being a large concentrated operator, we were the lowest cost operator in 2014. And we’ve been able because of our size and scale to even impact the things that are hard to impact, and that’s your compression we have a national contract of compression. We know there our compression cost in the Barnett for example are 50% to 70% lower than some of our smaller competitors on gathering and on processing.

And the other big cost as you’re aware is labor and we have unfortunately had to lay off some folks that probably didn’t deserve to lose their job, but we just had to do that. But reducing cost is not something that also and we just came up with when prices started declining. It’s always been an objective of ours it was the priority in building those concentrations.

But right now we’re actually encouraging our divisional managers to tell us every week what they’ve done in lowering cost. And so as part of our weekly meeting for each of the division managers to identify what they’ve done in lowering cost every week. And so it’s a big emphasis and it’s one of the reasons that we can feel very good about having a quarter that our cost continue to go down despite the fact that we had low cost to begin with.

Brian Brungardt

Appreciate all the color there. I guess in light of your prior comments with drilling activity in the back half of this year. Can you just remind us kind of ballpark where the corporate decline rate stands?

Nick Bobrowski

Just a straight PDP decline rate with no drilling and blow down on the PDP in the near-term, of course this was flatten out overtime. But in the near-term it would be in the ballpark of 10%.

Mike Mercer

Yeah and that’s impacted a little bit by the nine wells that came on the stream, all of them came on stream above 3 million cubic feet a day and of course declined at a pretty good rate. Terminal decline is probably something that were 6% or 7%.

Brian Brungardt

Got you. And then lastly here to expand I guess on Kevin’s earlier question, when we look out over the next kind of 18 months and obviously barring any changes to the current covenants. At what point would you feel more comfortable with restating the distribution? Is there a certain liquidity level or utilization on the revolver or is it more of a leverage metric, what’s your thoughts around that?

Mike Mercer

I think that it’s a mix of a lot of factors Brian. It’s going to be our liquidity position at the time. Our debt-to-EBITDA position and what that looks like relative to covenants. What our hedging position looks like what the forward strip looks like at that point directionally a lot of things like that. So it’s -- there will be a pretty dynamic process and decision making process with regard to that.

John Walker

And let me add to what Mike said, as I said in my remarks this is very important to us. But we’re still in a difficult depressed situation. And we like our position relative to any of the others in our particular group, but other people in oil and gas business, because we do have a good balance and good liquidity. But we go into looking at distributions in 2017 wanting to increase them. But Mike outlined the things that we have to consider to make sure that we stay within our bank covenants when we do that.

Brian Brungardt

Got you. And just one last question if I may here, doesn’t look like you guys add any incremental hedges there particularly on oil for 2017. I guess kind of at what price deck would you feel more comfortable locking in some pricing?

Mike Mercer

I would say on a very near-term basis somewhere in the 50 to 60 range.

Brian Brungardt

That’s all I had, thank you.

Mike Mercer

That only be in near-term because as I’ve said on these calls before there is a lack of liquidity in the commodities market and just as that pendulum swung down further than anyone anticipated. We believe that based upon meaningfully improving supply demand fundamentals in the oil sector that it will probably swing up faster than people expect.

Brian Brungardt

Got it, thanks very much guys.

Operator

And that concludes today’s question-and-answer session. Mr. Walker at this time I'll turn the conference back to you for any additional or closing remarks.

John Walker

Well thank you Cynthia and thank all of you for being on our call. If you do have questions that you’d like to just discuss with us individually, please call Mike, Nick or myself and we’d be happy to visit with you. Have a good day.

Operator

That concludes today’s call. Thank you for your participation. You may now disconnect.

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