This week’s review takes us to the oil and gas sector where this midstream player has been actively managing its portfolio of properties while reducing debt, increasing production and increasing revenues. EV Energy Partners (EVEP) is engaged in acquiring and developing oil and natural gas properties. Here are some recent newsworthy items regarding EVEP.
- For the full year 2016, EVEP increased production by 10% and increased revenues by 4.3%.
- Since October 2015, the company has reduced its leverage by opportunistically repurchasing $157 million of its notes (face value) on the open market for only $85 million.
- To even out the effect of commodity price swings, EVEP has hedged 100% of its 2017 natural gas production.
- The company recently acquired assets in the prolific Eagle Ford basin looking to increase margins and profitability.
EVEP has taken vital steps to remain viable over the past few years’ low price oil and gas environment. With new wells coming online, this midstream player appears to be turning the corner to increased profitability. The company’s 2019 bonds, which mature in a short 24 months, are currently selling at a significant discount of around 76. With the yield-to-maturity of over 23%, these will make a sweet addition to both our FX1 and FX2 income portfolios.
Full Year 2016 and Q4 Highlights
EV Energy Partners recently reported its Q4 2016 and full year 2016 results. Among these results, there are indications that this midstream player is coming out of the mire of low commodity prices that have characterized the oil and gas sector for the past few years.
- EVEP increased its production in 2016 by 10% over 2015 levels, even with significantly less capital expenditures.
- 2016 full-year revenues also increased. The company registered $182.7 million in revenues as compared to 2015 revenues of $175.1 million, an increase of 4.3%.
- Q4 results showed encouraging consecutive growth over Q3 2016. Revenues grew 9.3% in Q4 over Q3 levels ($51.8 million versus $47.4 million).
- Adjusted EBITDAX also registered consecutive growth between Q3 and Q4 2016, growing from $26.0 million to$28.5 million.
In 2016, EVEP took advantage of low prices on its 2019 notes by repurchasing a large portion of them on the open market. The company was able to repurchase $82.7 million of its outstanding 2019 notes for $35 million. This is not the first time EVEP has used this method to help reduce leverage. Since October 2015, the company has repurchased a total of $157 million of its outstanding notes for a total of $85 million.
About the Issuer
EV Energy Partners specializes in the acquisition and efficient operation and development of onshore oil and gas properties in the continental United States. Currently, the company operates in the Barnett Shale, the San Juan Basin, the Appalachian Basin (which includes the Utica Shale), Michigan, Central Texas (which includes the Austin Chalk area), the Monroe Field in Northern Louisiana, the Mid-Continent areas in Oklahoma, Texas, Arkansas, Kansas and Louisiana and the Permian Basin. The majority of the company’s production is natural gas, accounting for nearly 70% of its 2016 production.
EV Energy Partners is a master limited partnership (MLP) with EnerVest as the controlling member of its general partner. The EnerVest family of institutional partnerships and EVEP are together, one of the top-25 oil and gas companies in the nation. Whereas EV Energy’s strategy is to buy and manage long-term assets, EnerVest’s main focus is on acquiring, enhancing, then selling productive assets three to five years out. On occasion, EVEP will participate with EnerVest in joint acquisitions, which allows for much larger deals. EVEP may also purchase assets directly from EnerVest, pending recommendations and approval from EVEP’s board and conflicts committee. This arrangement has allowed both companies to leverage their individual strengths and have access to greater technical expertise.
New Eagle Ford Acquisition
Earlier this year, EV Energy Partners closed on an acquisition of Eagle Ford oil and natural gas properties in Karnes County, Texas. Karnes County is the largest oil producing county in Texas. As part of the acquisition, EVEP acquired a 5.8% working interest in 9,151 gross acres. EnerVest (the controlling member of EVEP’s general partner) owns an 87% working interest in this acreage and also acts as operator of the properties. In fact, since November of last year, EnerVest has more than doubled gross production on this acreage, from 11,000 barrels a day to 28,000 per day. The wells drilled in this area pay out in less than a year at current commodity prices. Also, the properties have over 200 drilling locations that are scalable, repeatable and economic based on current oil and gas pricing. This new acquisition is 80% oil and liquids. EVEP expects this acquisition will generate significantly higher cash flow and margins, as well as increase its crude production by 25% in 2017. EVEP management has indicated that it would like to add more acreage in this area to its portfolio over time.
The Eagle Ford is one of the most prolific oil and gas producing basins in the country. And with the modest price recoveries experienced by both oil and natural gas, production in the Eagle Ford is on the rise.
(Source: United States EIA)
EV Energy has recently added to its hedging portfolio resulting in 100% of its projected natural gas production being hedged for 2017. These hedges will help even out revenues when natural gas prices are volatile. Here is EVEP’s current hedge portfolio.
|EVEP Total Current Hedge Position|
|Period||Index||Swap Volume||Swap Price||Collar Volume||Collar Floor||Collar Ceiling|
|Natural Gas (Mmmbtus)|
Interest Coverage and Liquidity
In its latest quarterly results (Q4 2016), EVEP had operating income of $17.1 million (calculated without the effect of non-cash impairment and depreciation expense), along with interest expense of $9.9 million for an interest coverage ratio of 1.7x.
As of December 31, 2016, EVEP had ample liquidity, with over $175 million available by combining the company’s cash and available borrowing base.
The default risk is EV Energy Partners ability to perform. While the company, like many in the oil and gas industries, has endured prolonged low commodity prices, the increases in production and revenues in 2016 is encouraging. In addition, management is being ever watchful regarding opportunities to buy back outstanding notes on the open market at a discount (which they have successfully done in the past 18 months). EVEP’s recent Eagle Ford acquisition should enhance cash flow and margins and the company also employs a healthy hedging portfolio to even out some of the commodity price swings. In light of these considerations, the current yield-to-maturity of 22% on the company’s 2019 notes does appear to outweigh the risks identified here.
EVEP’s revenues are tied directly to the price of natural gas, natural gas liquids (NGLS) and to a lesser extent, crude oil. Since 2014, the prices of these commodities have dropped precipitously. While 2016 did bring some relief to the oil and gas industries in terms of commodity price increases, prices are still at historically low levels. If these low prices continue for an extended period of time, this could affect EVEP’s revenues, profits and production. The company does hold stakes in some of the most lucrative shale plays in the nation and has, in the past, sold portions of these assets in order to raise capital. These properties are listed on the company’s latest balance sheet valued at $1.5 billion.
Summary and Conclusion
EV Energy Partners hasn’t been just sitting on the sidelines waiting for the commodity price environment to improve. It has actively employed cost reduction programs, it has opportunistically repurchased debt at a discount, all while effectively repositioning and improving its oil and gas portfolio, increasing production and increasing revenues. The company has an outstanding hedging portfolio to buffer the price volatility of its main commodity, natural gas. And it has a valuable portfolio of properties in some of the most prolific basins in the country. The company’s 2019 notes, which currently sell at a discount of about 76%, offer a yield-to-maturity of over 23%, providing investors with an excellent opportunity to increase portfolio return. Therefore, we are targeting them for addition to both our Fixed-Income1.com and Fixed-Income2.com high yield global income portfolios.
Issuer: EV Energy Partners LP
Yield to Maturity: ~23.3%
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Disclosure: Durig Capital and certain clients may have positions in EV Energy Partners 2019 bonds.
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