We are based in the United States and are a domestically-focused, growth-oriented limited partnership engaged in the business of (i) gathering, compressing, treating, processing and transporting natural gas; fractionating and transporting natural gas liquids (“NGLs”); and marketing natural gas, condensate and NGLs, which collectively we call our “Midstream Business;” (ii) acquiring, developing and producing interests in oil and natural gas properties, which we call our “Upstream Business;” and (iii) acquiring and managing fee mineral, overriding royalty and royalty interests, either through direct ownership or through investment in other partnerships, which we call our “Minerals Business.” We have entered into an agreement to sell our Minerals Business, subject to unitholder approval of certain transactions described under “Recapitalization and Related Transactions” below. If the transactions are approved, we expect to complete the sale in the second quarter of 2010.
Our objective is to grow our business in a manner that increases our potential to distribute cash to our unitholders. To do so, we focus on achieving operational excellence in our businesses and executing accretive low-risk acquisitions and organic growth opportunities. We also may allocate a portion of our cash flows to fund growth-related capital expenditures that would otherwise be paid as distributions. In the first quarter of 2009, because of low commodity prices and decreases in volumes through our systems, we significantly reduced our distribution to preserve cash to pay down debt. Upon completion of the Recapitalization and Related Transactions, if approved by our unitholders, we believe our simplified capital structure and reduced debt levels will improve our potential to distribute cash to our unitholders.
We are uniquely positioned as a publicly-traded partnership, or master limited partnership (“MLP”), that is engaged in both the midstream and upstream sectors of the oil and natural gas value chain. We have an experienced management team with expertise in gathering and processing natural gas, operating oil and natural gas properties and assets, managing mineral interests, and evaluating and executing acquisition opportunities. Generally, our MLP structure gives us a lower cost of capital than a corporation through the avoidance of double taxation of our earnings. Our diversification across our three businesses was adopted to broaden the spectrum of potential acquisition opportunities, give us an advantage in acquiring asset packages that involve both midstream and upstream assets, provide us with a natural hedge on a portion of our natural gas volumes in our Upstream Business (to the extent of the volumes of natural gas purchased by us under our natural gas purchase agreements in our Midstream Business that is not offset by our long position in our Midstream Business), and exploit vertical integration synergies and market intelligence in selected regions of our operations.
Our Midstream Business is strategically located in five significant natural gas producing regions: (i) the Texas Panhandle; (ii) East Texas/Louisiana; (iii) South Texas; (iv) West Texas; and (v) the Gulf of Mexico. These five regions are productive, mature, natural gas producing basins that have historically experienced significant drilling activity. Eagle Rock’s natural gas gathering systems within these regions are comprised of approximately 5,200 miles of natural gas gathering pipelines with approximately 2,700 well connections, 19 natural gas processing plants with approximately 757 MMcf/d of plant processing capacity and 203,580 horsepower of compression. Our Midstream Business averaged 587 MMcf/d of gathered volumes and 348 MMcf/d of processed volumes during 2009.
Our Upstream Business has long-lived, high working interest properties located in four significant natural gas producing regions: (i) Southern Alabama (where we also operate the associated gathering and processing assets); (ii) East Texas; (iii) South Texas; and (iv) West Texas. As of December 31, 2009, these working interest properties included 260 operated productive wells and 149 non-operated wells with net production to us of approximately 5,300 Boe/d and proved reserves of approximately 33.8 Bcf of natural gas, 7.5 MMBbls of crude oil, and 6.1 MMBbls of natural gas liquids, of which 88% are proved developed.
Our Minerals Business, which is subject to a current sales agreement, is a diversified set of fee mineral, overriding royalty interests and royalty interests comprised of interests in multiple trends over 5.6 million gross mineral acres (430,000 net mineral acres) and interests in over 2,800 productive wells across 17 states in the United States. As of December 31, 2009, these interests had proved reserves of approximately 4.8 Bcf of natural gas and 2.9 MMBbls of crude oil (100% proved developed producing). These interests produced an average of approximately 1,048 Boe/d (net to our interest) during 2009.
Our Three Lines of Business and Our Seven Reporting Segments
Midstream Business Overview
We own strategically-positioned natural gas gathering and processing assets in five significant natural gas producing regions: the Texas Panhandle, East Texas/Louisiana, West Texas, South Texas and the Gulf of Mexico. Our gathering and processing assets are located in basins that have experienced consistent growth in natural gas land leases, drilling and production. These core basins are known as the Anadarko basin, East Texas basin, Permian and South Texas basin and the Outer Continental Shelf. While the reduction in oil, natural gas and natural gas liquids prices from their historic highs during 2008 to their current levels has resulted in a significant reduction in current drilling activity behind a number of our gathering systems particularly in the East Texas/Louisiana segment and South Texas segment, we continue to believe our strategically-positioned assets will benefit us when the drilling activity resumes in these areas. During 2009 we remained focused on contracting new gas to our systems and continuing our cost reduction efforts. We did execute on a number of smaller organic growth projects during the 2009 calendar year which included laying additional gathering lines in East Texas and adding compressors where drilling activity was occurring in the Texas Panhandle. Given the significant dislocations in the equity and capital markets throughout 2009 and the rise and fall of oil prices and the deterioration of natural gas prices, we did not execute on any acquisitions.
Within our geographic areas of operation, we want to be competitive and low cost natural gas gatherer and processor. To achieve this end, we have structured the operations and commercial activities of our gathering and processing assets to work closely together to provide better service to our customers. From an operations perspective, our key strategy is to provide our customers safe and reliable service at reasonable costs and to improve our competitiveness through more efficient operations to assist in securing new customers. From a commercial perspective, our focus is to assist our customers in maximizing the value of their production by adding additional options and capacity for the movement and marketing of their natural gas and natural gas liquids. The growth prospects in our core areas are driven primarily by strong commodity prices and improvements in technology to produce natural gas from tight sand and shale formations. We are well positioned in the Texas Panhandle Granite Wash play and in East Texas for the Haynesville, James Lime and Petit plays in Angelina and Nacogdoches counties and the Austin Chalk play in Tyler, Polk, Newton and Jasper counties. These will continue to require expansions to our systems in order to meet the producers’ needs and are a part of our continuing strategy to be the gatherer and processor of choice. We gather and process natural gas pursuant to a variety of arrangements generally categorized (by the nature of the commodity price risk) as fee-based, percent-of-proceeds, fixed recovery or keep-whole, as described more fully under “Midstream Industry Overview” above. As of December 31, 2009, the percentage of natural gas throughput volumes under various contractual arrangements were 12% fixed recovery, 37% fee-based, 43% percent-of-proceeds and 8% keep-whole. The following is a summary of the contracts that are significant to our operations.
Texas Panhandle Segment
Our Texas Panhandle Segment covers ten counties in Texas and one county in Oklahoma and consists of our East Panhandle System and our West Panhandle System. The facilities are primarily located in Wheeler, Hemphill, Roberts, Moore, Potter, Hutchinson, Carson, Gray and Collingsworth Counties. Through these systems, we offer producers a complete set of midstream wellhead-to-market services, including gathering, compressing, treating, processing and selling of natural gas and fractionating and selling of NGLs. The Texas Panhandle Segment averaged gathered volumes for the fourth quarter of 2009 of approximately 131.6 MMcf/d. As of December 2009, Chesapeake Energy and Prize represented 22% and 15%, respectively, of the total volumes of our Texas Panhandle Segment. The following is a map of our Texas Panhandle Segment.
Our Texas Panhandle Systems are located in the Texas Railroad Commission (the “TRRC”) District 10, which has experienced significant growth activity since 2002. According to the EIA, total proved natural gas reserves have grown from 6.3 Tcf at year-end 2007 to 6.9 Tcf at year-end 2008 in District 10. This area has experienced significant drilling activity during the last three years; however, with the current price environment we have seen a reduction in drilling activity in the near term.
East Panhandle System
The East Panhandle System gathers and processes natural gas produced in the Morrow and Granite Wash reservoirs of the Anadarko basin in Wheeler, Hemphill and Roberts Counties, an area in the eastern portion of the Texas Panhandle. This area has experienced substantial drilling and reserve growth since 2002; however, with the current price environment, this area has seen a reduction in drilling activity particularly in the Granite Wash play. We anticipate producers will increase their drilling activity once either an increase in natural gas prices occurs or the cost to drill the wells declines to a point to support the producer’s drilling economics. Producers are increasing their use of horizontal drilling in the Granite Wash play due to the belief that the economics of the Granite Wash play will be significantly enhanced due to the fewer number of wells and lower capital required to develop the same amount of acreage versus conventional vertical drilling results. During 2009 42% of the drilling permits were for horizontal wells. This is an increase of 16% from 2008. We anticipate that this trend will continue, resulting in higher initial production rates but steeper decline curves during the first year.
West Panhandle System
The West Panhandle System gathers and processes natural gas produced from the Anadarko basin in Moore, Potter, Hutchinson, Carson, Roberts, Gray, Wheeler and Collingsworth Counties located in the western part of the Texas Panhandle.
East Texas/Louisiana Segment
Our East Texas/Louisiana operations are located primarily in Angelina, Nacogdoches, Rusk, Cherokee, Smith, Harris, Waller, Montgomery, Austin, Colorado, Robertson, Grimes, Washington, Polk, Tyler, Jasper, Newton, Upshur, Gregg, Wood and Panola Counties, Texas and Vernon, DeSoto, Lincoln, Jackson, Bienville, Caldwell and Bossier Parishes, Louisiana. Through our East Texas/Louisiana Segment, we offer producers natural gas gathering, treating, processing and transportation and NGL transportation. Our East Texas/Louisiana systems are located in the Texas Railroad Commission (the “TRRC”) District 3, 5 and 6, which has experienced significant growth activity since 2002. According to the EIA, total proved natural gas reserves have grown from 31.4 Tcf at year-end 2007 to 35.2 Tcf at year-end 2008.
South Texas Segment
As a result of the Millennium Acquisition on October 1, 2008, we expanded the footprint of our South Texas segment. The South Texas Segment systems primarily gather natural gas and recovers NGLs and condensate from natural gas produced in the Frio, Vicksburg, Miocene, Canyon Sands and Wilcox formations in Hidalgo, Willacy, Brooks, Zapata, Starr, Cameron, Crockett and Colorado Counties in South Texas and in the Permian Basin. The South Texas Segment also provides producer services by purchasing natural gas at the wellhead for sale into third-party pipeline systems. Our South Texas systems are located in the Texas Railroad Commission (the “TRRC”) District 4 and 8, which has experienced significant growth activity since 2002; however, due to the decline in natural gas prices drilling activity has been significantly reduced in the South Texas segment. According to the EIA, total proved natural gas reserves have declined from 14.5 TCF at year-end 2007 to 14.4 TCF at year-end 2008.
Gulf of Mexico Segment
As a result of the Millennium Acquisition, which closed October 1, 2008, we expanded the footprint of our Midstream Business into the Gulf of Mexico. Our Gulf of Mexico Segment’s operations are non-operated ownership interests in a number of pipelines and onshore plants which are all located in southern Louisiana. The Gulf of Mexico Segment’s systems primarily process natural gas from the Transco, Gulf South and Tennessee interstate pipelines and recover NGLs and condensate from natural gas produced in the Outer Continental Shelf of the Gulf of Mexico. The Gulf of Mexico Segment’s operations also provide producer services by arranging for the processing of producers’ natural gas into third-party processing plants, which we describe as our Mezzanine Processing Services in the Gulf of Mexico Segment. Our Gulf of Mexico Segment’s systems have experienced decreased activity since 2002. According to the EIA, total proved natural gas reserves have decreased from 11.1 TCF at year-end 2007 to 10.5 TCF at year-end 2008.
Upstream Business Overview
Our Upstream Business has long-lived, high working interest properties located primarily in Southern Alabama (where we also operate the associated gathering and processing assets), East Texas, South Texas and West Texas regions. As of December 31, 2009, these working interest properties included 260 operated productive wells and 147 non-operated wells with net production of approximately 5,300 Boe/d and proved reserves of approximately 33.8 Bcf of natural gas, 7.5 MMBbls of crude oil, and 6.1 MMBbls of natural gas liquids, of which 88% are proved developed. The reserve life index is approximately 10 years.
We entered the Upstream Business in August 2007 through the Redman and EAC acquisitions that included operated properties in East Texas, South Texas, Mississippi and Alabama, as well as non-operated properties in East Texas and Louisiana. In April 2008 we closed on the Stanolind Acquisition, which provided our entry to the prolific Permian Basin of West Texas. Each of these acquisitions is consistent with our focus to acquire assets with a relatively high percentage of proved developed producing reserves, characterized by low production decline rates, and located in areas providing low risk infill drilling and recompletion opportunities. We pursue operated assets with generally high working interests to better control the development of our reserves and maximize the efficiency of our cost structure. The average working interest of our producing operated properties is 92%. Our properties are diversified in multiple fields and producing basins. Our largest fields, comprising 75% of net production, are the Big Escambia Creek field in Escambia County, Alabama, the Jourdanton field in Atascosa County, Texas, the Ward Estes field in Ward County, Texas, the Ginger/Ginger S.E. fields in Rains County, Texas and the Flomaton and Fanny Church fields in Escambia County, Alabama. The remaining 25% of our fields are located in East Texas, West Texas and Mississippi.
Minerals Business Overview
The Minerals Business is comprised almost entirely of mineral, royalty and overriding royalty interests. These interests represent ownership in over 430,000 net mineral acres and royalties and overriding royalties in over 2,800 producing wells in 17 states in the United States and the Gulf of Mexico. Our ownership in our minerals or royalties is a direct ownership of the mineral estate and ownership of partnership interests in other limited partnerships that were created to own and manage mineral and royalty interests. Our minerals and royalty holdings are very well diversified and span multiple geological basins and geographical areas. We have limited concentration of operators or wellbores in a single play type or exploration activity. Successful management of minerals entails actively leasing and promoting the mineral estate to active oil and gas producers to entice them to lease and develop the oil and gas potential. The majority of our mineral interests are managed by Black Stone, which has the sole authority to negotiate and execute mineral leases on those properties. We do not operate the substantial majority of the production on our minerals properties, but we do have small mineral interests underlying our Big Escambia Creek, Flomaton and Fanny Church Upstream assets.
Brea Olinda Royalty
Our most significant royalty interest is a 12.5% non-participating royalty interest in the oil production from three units of the Brea Olinda Field (Stearns, West Brea, and East Naranjal) and a 3.75% non-participating royalty interest in a fourth unit (Columbia). The field is located in Orange County, California and all of the units are operated by Linn Western Energy.
Production from the field is medium gravity crude oil and has a very low decline rate due to ongoing secondary recovery, infill drilling and workover operations. Our net production is approximately 213 Bbl/d, which represents about half of the crude oil and condensate production in the Minerals Business.
The surface lands are currently undergoing residential development which has the potential for limited, temporary impact on the field’s operations and production rate.
Fruitland Coal Bed Methane (CBM) Overriding Royalty, New Mexico
Another significant asset in the Minerals Business is overriding royalty interests in certain wells in two units in the Fruitland CBM Field: the Northeast Blanco and San Juan 30 6 Units. Our net production of natural gas is approximately 305 Mcf/d, which represents approximately 9% of the gas production in the Minerals Business.
Ivory Acquisitions Partners, L.P. and Ivory Working Interests, L.P.
We hold the majority of our mineral interests (all but approximately 10,000 net mineral acres) as a co-investor in an acquisition agreement signed in 2004 with respect to a set of mineral interests sold by the Pure Resources Company. These interests were previously owned by International Paper, and are often referred to as the “Pure Minerals” or the “IP Minerals.” The transaction was led by Black Stone Minerals Corporation (“Black Stone”), a private company, who serves as the manager of the mineral interests. We acquired these interests through the Montierra Acquisition in 2007. As discussed in Recapitalization and Related Transactions above, we have entered into an agreement to sell our entire Minerals Business including the Pure Minerals, to Black Stone, subject to unitholder approval of the Global Transaction Agreement and certain amendments to our partnership agreement.