EV Energy Partners, L.P. (EVEP)
Q2 2011 Earnings Call
August 10, 2011 10:00 AM ET
John Walker – Chairman and CEO
Mike Mercer – CFO
Mark Houser – COO
Kevin Smith – Raymond James
Ethan Bellamy – Robert W. Baird
Praneeth Satish – Wells Fargo
Bob Sohaney – RBC Capital Markets
Richard Roy – Citi
Kathryn Smith – Upstream Newspaper
Previous Statements by EVEP
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Thank you, Douglas. Good morning everyone. I have with me the young 50 year-old Mark Houser, it’s his birthday today, who is our Chief Operating Officer; Mike Mercer, our Chief Financial Officer; and Ron Gajdica, who is in-charge of Engineering and Acquisitions.
The second quarter was a good one for EV Energy Partners as you can see based upon strong liquid prices and good cost control, our EBITDA was above the midpoint of guidance and distribution coverage continues to strengthen. Production fell within 2% of our guidance midpoint. Our Barnett production has grown albeit at a slightly slower pace due to the timing of bringing wells online, and Mark Houser is going to address that.
We slowed capital activity in our Knox area partly to respond the softening crisis and partly to reserve some capital for taking off some Utica drilling. Our big concern for quite a while about both gas prices and liquids prices for the remainder of the year. This is exasperated with the slowdown in the US economy. As I’ve stated before, we care much more about rates of return than production growth. So we’ll watch and adjust as we move forward this year and early next year.
And again as I’ve said before, we do not drill wells without a risk adjusted 20% rate of return. I remain optimistic that EVEP will participate in some very accretive acquisitions before year-end. The deal pipeline has not been a strong through the first half of this year but its strengthened recently, and we’re looking at several deals. As we always do, we will be patient in our acquisition efforts to reduce our risk of overpaying.
We have almost a 20 year history at EnerVest in the acquisition business. Our 37% compounded rate of return to our investors is based upon disciplined buying, building concentrated core positions such as in Ohio, exporting more reserves than in the original acquisition economics and driving down costs in all assets of development and production. The philosophy is the same for EVEP in the acquisition market as well.
While we have a stated goal in EVEP of $500 million of acquisitions this year, we’ll buy only if we buy right. This brings me to the Utica Shale. The EnerVest Group including EVEP has over 780,000 net acres and in excess of 1.2 million growth acres in Ohio. Our position was to establish primarily through a series of acquisitions over many years. Some of you if not most of you might be first time listeners and only are interested in my comments about the Utica and the aftermath of Aubrey McClendon’s Chesapeake earnings call and subsequent statements from the week before last.
Chesapeake has been our partner and a large part of the Utica play for over a year. Aubrey has been a friend of mine for a long time and I respect and admire his many accomplishments, particularly his focused and dominant players in all US major shale plays. In Utica, EnerVest has a large swath of acreage in which we are partners with Chesapeake. And Chesapeake operates that acreage. 40% of the EnerVest family’s acreage is in that joint venture.
Chesapeake has a data rim [ph] open currently to bring another partner into our joint venture. It also has considerable acreages, broker team has a symbol and we’re not a participant in that acreage. In addition, EnerVest has retained 414,000 net acres, their held-by-production which has very high working interest and are operated by EnerVest. Specifically EVEP has a 7.5% override and 240,000 net acres. And let me try to explain that because I understand I was out of town yesterday, moving my daughter to college and I understand we got several calls on that.
Our leases have been in place for many years, in fact decades and in some instances with a 12.5% royalty. In our first deal with Chesapeake that we closed July 1st of last year, we’ve already carved out a 7.5% override in that acreage and EVEP has a 7.5% override in 80,000 net acres. In the 414,000 acres, we carved out an override for EVEP and our Institutional Fund XI. And so EVEP has a 7.5% override and approximately 160,000 net acres.
Now we’re doing this as a result of having very high net leases. If you look at the Haynesville or the Eagle Ford, their royalty burden is 20% to 25% and more in many instances. Our royalty burden was 12.5%. So we’re delivering an 80% net lease which is much higher than the other plays in the major shale plays. And the reason that we wanted to do this is there are buyers of royalties and they pay two to three times more for overriding royalty interest than they do for working interest.