EV Energy Partners, (EVEP) is an upstream Master Limited Partnership (MLP) focused on acquiring and operating oil and gas properties within the continental United States. They have current properties which are located in the Barnett Shale, the Appalachian Basin, the Mid Continent area, the San Juan Basin, the Monroe field in Louisiana, the Permian Basin, Central and East Texas and Michigan.
EVEP was formed by EnerVest Ltd., one of the largest and most successful managers of oil and gas assets for institutional investors, and which has a proven 18 year track record of successfully acquiring and operating oil and gas properties in a variety of basins.
In 2010 and 2009, no customer accounted for greater than 10% of their consolidated oil, natural gas and natural gas liquids revenues. In 2008, Southern Union Gas Services, Enbridge Marketing and CMS Energy Corporation accounted for 11%, 10% and 10% respectively of their revenues.
EnerVest’s principal business is to act as general partner or manager of EnerVest partnerships that were formed to acquire, explore, develop and produce oil and natural gas properties. A primary investment objective of the EnerVest partnerships is to make periodic cash distributions. They have the experience and discipline from 18 year track record of demonstrated success.
Sizeable operating base and platform:
EVEP is an Master_Limited_Partnership_(MLP) and here is a review of how MLP's operate:
Master Limited Partnerships (MLPs) are unique investments that combine the tax benefits of a limited partnership (LP) with the liquidity of common stock. An MLP has a partnership structure but issues investment units that trade on an exchange like common stock. MLP's tend to have high dividend yields as they are required to return part of their operating cash flow to investors, without having the ability to reinvest the dividend into the company for more shares.
The main advantage of MLP's is to have the tax benefits. Tax implications for MLPs differ significantly from corporations for both the company and its investors. Like other limited partnerships, there is no tax at the company level. This effectively lowers an MLP's cost of capital, as it does not suffer the problem of double taxation on dividends. Companies that are eligible to become MLPs have a strong incentive to do so because it means a cost advantage over their incorporated peers.
While the MLP's income is passed through to its investors for tax purposes, the actual cash distributions made to unitholders have little to do with the firm's income. Instead, cash distributions are based on the MLP's distributable cash flow (DCF), similar to free cash flow (FCF). Unlike dividends, these distributions are not taxed when they are received; instead, they are considered reductions in the investment's cost basis and create a tax liability that is deferred until the MLP is sold.
Fortunately for investors, MLPs generally have much higher distributable cash flow than they have taxable income. This is a result of significant depreciation and other tax deductions, and is especially true of natural gas and oil pipeline and storage companies, which are the most common businesses to choose an MLP structure. Investors then receive higher cash payments than the amount upon which they are taxed, creating an efficient means of tax deferral.
Billions of Cubic Feet Equivalent (BCFE)
Millions of Cubic Feet Equivalent (MMcfe)
One million cubic feet equivalent, determined using a ratio of six Mcf of gas to one Bbl of oil, condensate or natural gas liquids.
EVEP operates in multiple properties throughout the United States, including:
Below explains each of their properties, divulging into when they were acquired, the estimated proven reserves, the working interest in the productive wells and what percentage of the fields contain natural gas reserves. This reveals, how diversified they are in their acreage and properties and where they have been expanding in recent years to gain some more market share in some of these assets.
EVEP along with certain institutional partnerships managed by EnerVest, acquired the Barnett Shale properties in December 2010. The portion of the estimated net proved reserves as of December 31, 2010 was 310.0 Bcfe, 70% of which is natural gas. During 2010, they drilled one well and are currently participating in the completion of three others. EnerVest operates wells representing 100% of EVEP's estimated net proved reserves in this area, and they own an average 30% working interest in 254 gross productive wells.
They acquired the Appalachian Basin properties at our formation, and also acquired additional properties in the Appalachian Basin, primarily in West Virginia, in December 2007, September 2008, November 2009, March 2010 and June 2010. The estimated net proved reserves as of December 31, 2010 was 123.5 Bcfe, 77% of which is natural gas. During 2010, they drilled nine wells, eight of which were successfully completed. EnerVest operates wells representing 96% of their estimated net proved reserves in this area, and EVEP owns an average 40% working interest in 8,260 gross productive wells.
They acquired the Mid–Continent area properties in December 2006, August 2008, September 2008 and September 2010. The estimated net proved reserves as of December 31, 2010 were 79.7 Bcfe, 73% of which is natural gas. During 2010, they drilled 21 wells, all of which were successfully completed. EnerVest operates wells representing 43% of EVEP's estimated net proved reserves in this area, and they own an average 21% working interest in 1,647 gross productive wells.
San Juan Basin
EVEP acquired the San Juan Basin properties in September 2008, July 2010 and December 2010. The estimated net proved reserves as of December 31, 2010 were 73.8 Bcfe, 58% of which is natural gas. During 2010, they drilled two wells, both of which were successfully completed. EnerVest operates wells representing 95% of the estimated net proved reserves in this area, and EVEP owns an average 75% working interest in 224 gross productive wells.
We acquired our Monroe Field properties at our formation, and we acquired additional properties in the Monroe Field in March 2007. The properties are located in three parishes in Northeast Louisiana. Our estimated net proved reserves as of December 31, 2010 were 64.7 Bcfe, 100% of which is natural gas. During 2010, we drilled two wells, one of which was successfully completed. EnerVest operates wells representing 100% of our estimated net proved reserves in this area, and we own an average 100% working interest in 3,939 gross productive wells.
The acquired the Permian Basin properties in October 2007, with estimated net proved reserves as of December 31, 2010 were 63.4 Bcfe, 38% of which is natural gas. During 2010, they did not drill any wells. EnerVest operates wells representing 99% of our estimated net proved reserves in this area, and EVEP owns an average 93% working interest in 160 gross productive wells.
Central and East Texas
EVEP, along with certain institutional partnerships managed by EnerVest, acquired the Central and East Texas properties in June 2007, May 2008, August 2008, July 2009, September 2009 and October 2010. The portion of the estimated net proved reserves as of December 31, 2010 was 54.3 Bcfe, 43% of which is natural gas. During 2010, they drilled 20 wells, 19 of which were successfully completed. EnerVest operates wells representing 96% of EVEP's estimated net proved reserves in this area, and EVEP owns an average 17% working interest in 1,897 gross productive wells.
They acquired the Michigan properties in January 2007, and also acquired additional properties in Michigan in August 2008. The estimated net proved reserves as of December 31, 2010 were 47.9 Bcfe, 100% of which is natural gas. During 2010, they did not drill any wells. EnerVest operates wells representing 99% of the estimated net proved reserves in this area, and EVEP has an average 86% working interest in 368 gross productive wells.
All these assets and properties indicate how diverse EVEP is and they elaborate on what type of capital expenditures they have recently had when they have had to drill into new wells.
Here are a few of the acquisitions/interests during 2010 with main one being the Barnett Shale acquisition which closed at year end.
In March 2010 followed by a second closing in June 2010, EVEP, along with certain institutional partnerships managed by EnerVest, acquired oil and natural gas properties in the Appalachian Basin. They acquired a 46.15% proportional interest in these properties for $145.8 million.
In September 2010, they acquired oil and natural gas properties in the Mid–Continent area for $119.9 million, subject to customary closing conditions and purchase price adjustments.
Barnett Shale Acquisition
At the end of 2010, EV Energy Partners acquired a new interest in the Barnett Shale natural gas basin in northern Texas. The Barnett Shale natural gas basin is one of North America's most prolific basins with high Natural Gas Liquids(NGL) content. This acquisition was in a joint purchase with EnerVest, here are some reasons why its good for EVEP and some key facts:
Total purchase price: ~ $954 million
Proved Reserves: 310 Bcfe
Natural Gas has many factors which affect its production, prices, and supply & demand levels.
Natural gas prices are a function of market supply and demand. Due to limited alternatives for natural gas consumption or production in the short run, changes in supply or demand over a short period often result in large price movements to bring supply and demand back into balance.
Factors on the supply side that may affect prices include variations in natural gas production, net imports, or storage levels. Increases in supply tend to pull prices down, while decreases in supply tend to push prices up.
Factors on the demand side include economic growth, winter and summer weather, and oil prices. Higher demand tends to lead to higher prices, while lower demand can lead to lower prices.
Most of the Natural Gas consumed in the United States comes from domestic production and as we progress, more of our energy use will be from natural gas rather than oil. Thus, even as Obama has mentioned, U.S. oil imports are on track to be but by a third by 2025, just as the graph on the right illustrates.
In regards to the second graph on the right, U.S. shale gas production more than tripled between 2007 and 2010, and its share of total domestic natural gas consumption increased from about 5% to over 20%.
This just gives some notes on the natural gas industry as a whole, but further analysis in the porters five forces and swot analysis, further down in the Wiki will help explain how the points above affect EVEP.
There are many natural gas & oil drilling companies which closely relate to EV Energy Partners, but it is mainly other MLP's which are directly comparable to EVEP.
Here is a list of a few Upstream MLP's:
There are a few advantages in investing into MLP's, One main fact is that the tax benefits are considerable, with 50% to 100% of partnership distributions tax deferred. Furthermore, individuals look to MLP's for cash flow, tax advantages, and even potential capital appreciation. Also, the industry seems to be under-covered in the financial press thus giving investors with knowledge of this sector an advantage.
To be more specific, I have compared EVEP to only two of its direct competitors to get a good understanding of the competitive nature of MLP's.
BreitBurn Energy Partners
BreitBurn Energy Partners L.P is an independent oil and gas limited partnership, focused on the acquisition, exploitation and development of oil and gas properties for the purpose of generating cash flow to make distributions to their shareholders. Their assets consist primarily of producing and non-producing crude oil and natural gas reserves located in the Los Angeles Basin in California, the Wind River and Big Horn Basins in central Wyoming, the Sunniland Trend in Florida, the Antrim Shale in Michigan and the New Albany Shale in Indiana and Kentucky.
Vanguard Natural Resources
Vanguard Natural Resources, LLC is focused on the acquisition and development of natural gas and oil properties in the United States. The Company’s properties are located in the southern portion of the Appalachian Basin, primarily in southeast Kentucky and northeast Tennessee, the Permian Basin, primarily in west Texas and southeastern New Mexico, and in south Texas.
Both BBEP and VNR are again, upstream MLP's, thus only focused on the exploration and production of natural gas and oil properties in the United States. The revenues from upstream MLP's come from contracts with various midstream oil and natural gas companies which are focused on the transportation (pipelines), storage, and processing of these resources.
First off, the main difference in investing in MLP's and the key metric used by investors to decide which one out of the many to invest into, is the dividend. The tables below, compare the dividend payouts each quarter by BBEP, VNR, and EVEP, since 2007.
The average dividend yield for upstream partnerships is about 7.4%, while its at about 5.6% for midstream partnerships.
Since MLP's have to focus on returning investments to shareholders, a key financial metric which needs to be evaluated is of course their return on investment. An MLP, will typically raise their dividend yield, if they start reaping stronger benefits from their recent acquisitions into new properties. Furthermore, since these MLP's generate revenues based upon natural gas prices, if prices are weak then distribution growth will slow down in response to those prices.
Below is a chart comparing the return on investment and dividend yield of EVEP.
As you can deduct from the chart above, from 2007 till about early 2009, they had a strong growth in dividends but as their return on investment fell dramatically they haven't been able to increase the yield, as the 1 year dividend growth rate is currently at about 0.53% while the 3 year growth rate is 12.64%. If they are not generating strong returns from their invested and acquired properties, then the cash flow distributable to shareholders either falls or does not continue to grow at steady rates.
The table below compares BreitBurn Energy Partners, Vanguard Natural Resources and EV Energy Partners based on financial ratios, efficiency metrics and operating metrics.
The business rivalry among firms is high because of the commodity based nature of this business. Furthermore, there is competition with other industries that supply coal and energy to industrial and individual customers. (Substitutes). In addition, since the oil & natural gas industry is a commodities market, the competitive advantage is primarily derived from the ability to produce products at a lower cost via operational efficiencies.
There are thousands of oil and oil services companies throughout the world, but the barriers to enter this industry are enough to scare away all but the serious companies. Barriers can vary depending on the area of the market in which the company is situated.The threat of new entrants is low because barriers to entry include high capital cost, economies of scale, distribution channels, proprietary technology, environmental regulation, geopolitical factors, and high levels of industry expertise needed to be competitive in the areas of exploration and extraction. Furthermore, in regards to industry expertise, a strong management team which has been in the industry long enough has to be formed to compete for new assets, engage in new contracts and midstream companies.
Substitutes for the oil and natural gas industry in general include alternative fuels such as coal, gas, solar power, wind power, hydroelectricity and even nuclear energy. Remember, oil is used for more than just running our cars, it is also used in plastics and other materials. The threat of substitutes are both high and low in this type of industry. For example, many power plants are able to switch from natural gas to coal or vice versa depending on the price of each commodity, allowing utility companies to substitute whenever they see necessary to generate heat and power. Thus, coal is a high threat to oil and natural gas consumption as a energy source due to the large abundance of domestic coal reserves globally. Additionally,even with government subsidies and grants for the development of clean energy there are high barriers to entry in that space, and even lots of other aspects which need to be solved before it can be a major threat.
The buyer power for oil is high since most of the world's oil is located in the OPEC countries, they control the oil prices and the market. In the natural gas space, the buyer power is controlled by both the customer and supplier. It all depends on the demand and supply for the commodity, and with coal and other energy sources gaining support from the government it is getting harder for natural gas producers to gain any pricing power. Natural gas prices in 2011 have even reached all time lows.
While there are plenty of oil companies in the world, much of the oil and gas business is dominated by a small handful of powerful companies. The large amounts of capital investment tend to weed out a lot of the suppliers of rigs, pipeline, refining, etc. There isn't a lot of cut-throat competition between them, but they do have significant power over smaller drilling and support companies. Smaller companies, hence some MLP's, encounter competition from major oil and natural gas companies, due to the fact that those large companies have a greater advantage into supplying more and have better economies to scale.
EVEP has many strengths compared to other independent oil and natural gas companies, but when it comes to MLP's there are a very limited number of strengths. In regards to independent companies, EVEP can take advantage of tax breaks and because of its structure, EVEP gets to pass its depreciation of assets and expenses through to investors, who may be able to use the pass-through expenses to reduce or eliminate the tax on the income received from that particular investment. Furthermore, EVEP is positioned heavily in the Barnett Shale, which is the second largest producing on-shore domestic natural gas field in the United States.
Also, as shown in the chart to the right, EVEP has been able to purchase new properties/assets a significant discount compared to its competitors in the MLP sector. Note that this chart was presented by management, so take it in to your own accord as it can sometimes be a bit aggressive. At the same time though, historically they have been able to purchase assets with gas and oil reserves much higher than projected at time of purchase.
Finally, EVEP of course operates in the commodity business which means that there is no such thing as product differentiation, thus its hard to then differentiate and gain advantages over competitors. There is a struggle for economic survival as sellers offer identical products to price-sensitive customers thus have to accept a lower than average level of profitability. Hence, efficiency is key into drawing investors to take positions in these types of businesses, and EVEP does a good job compared to its competitors as we can note from the comparison chart above, where the stock has risen over 55% in the last 6 months with the closest competitor only up about 27%. Investors have felt more confidence in EVEP then other MLP's in the space, and investors are even enjoying a strong dividend yield as well.
EVEP and its revenue is directly correlated with the price of natural gas and oil. Thus the prices it receives for oil and natural gas production are volatile and a drop in prices can affect the profitability and cash flow, which hence affects the distribution paid out to investors. Furthermore, the low prices results in EVEP having to make downward adjustments to the estimated reserves, which can significantly affect the cash flows due to accounting rules requiring them to write down the assets, as non-cash charge to earnings. Finally, EVEP operates in a highly capital intensive industry and they are required to continue to make substantial capital expenditures for the development and production of natural gas reserves. The capital expenditures are deducted from the revenues which then determines how much cash is distributable to shareholders.
EVEP always has opportunity to acquire and increase their current interests in natural gas and oil basins all over the United States. They also have the opportunity to increase the yield of their dividend as they start to reap the benefits of their recent Barnett Shale asset, which is supposed to generate revenue in the coming months. In addition, the rise in oil and natural gas prices will increase their revenues thus a stronger cash flow, which in turn can be distributed to shareholders. Furthermore, as Obama calls for a third of a cut in natural gas imports by 2025, EVEP has a strong opportunity to gain some new contracts with midstream firms, which of course can increase revenues. Also, with these new propositions, the value of their current reserves can potentially rise.
EVEP faces threats from larger oil and natural gas companies, such as Exxon, Andarko, and BP, which dominate the market in the U.S. The larger companies have the financial and technical resources and staff substantially larger than EVEP. They even have the ability to pay more for leases, or to evaluate, bid for and purchase a greater number of properties or prospects. Furthermore, EVEP also faces the challenge of keeping customers as their contracts are short-term, usually one year or less in duration. Even though they state that a loss of a customer will only temporary affect their revenues, with a very competitive industry landscape, they face an even stronger threat of other MLP's picking up their current customers.
The table below evaluates EVEP since their IPO in 2006 till end of 2010, on a profitability, liquidity and efficiency scale. There are a few key things that are highlighted which reflect how the company has performed over the past few years. The first thing to note is how liquid they have been, especially while taking a look at their quick ratio, which evaluates the short-term liquidity. They did hit a low point in 2007 but quickly recovered in 2008 and have steadily kept themselves liquid in recent years.
The table above shows that EVEP's profitability in 2006 was lower than in 2007. Why a different story in the chart?
Economic Value Added (EVA) assesses the creation of shareholder value as it calculates the profits which remain after the costs of capital (Debt & Equity) are both deducted from the operating profit. All three company's (BBEP, EVEP, & VNR), over the past two years have had negative EVA spreads, thus the firm's have destroyed value during the last couple of years of operation. To generate positive EVA spreads, these MLP's need to generate IRR's of newly acquired assets which satisfy the rate of return required by equity shareholders. A declining EVA just reflects that the management cannot effectively operate the company to generate returns for its shareholders.
The senior management has had extensive experience in the oil and natural gas industry. Many of them coming from prestigious universities and focusing their studies on engineering tailored to the energy industry. Both Mr.Mercer and Mr.Gajdica have had experience in completing mergers & acquisitions which is a strong positive when EVEP is looking to continue acquiring new properties and assets.
John B. Walker: He is Chairman and CEO of EVEP and President and CEO of EnerVest. Prior to founding EnerVest, John was President and Chief Operating Officer of Torch Energy. During his tenure, Torch’s assets grew from $200 million to $1 billion. Prior to that, John created Walker Energy Partners, an American Stock Exchange Company, which raised $136 million and participated in more than 1,000 wells. John was selected by Institutional Investor as an “all American” energy analyst for six years in a row. He holds a BBA (with honors) from Texas Tech University and a MBA (with distinction) from New York University.
Mark A. Houser: He serves as President, COO and Director of EVEP, and Executive Vice President and Chief Operating Officer of EnerVest. He has been with EnerVest since May 1999. Prior to joining EnerVest, Mark was Vice President, United States Exploration and Production, for Occidental Petroleum Corporation (“Oxy”), where he helped lead Oxy’s reorganization of its domestic reserve base, including the successful $3.65 billion acquisition of the Elk Hills Naval Petroleum Reserve. Mark began his career as an engineer with Kerr-McGee Corporation. He holds a petroleum engineering degree from Texas A&M University and a MBA from Southern Methodist University.
Michael E. Mercer: He is Senior Vice President and Chief Financial Officer. He has been a consultant to EnerVest Management Partners from 2001 to 2006. Prior to that, Mike was an investment banker for 12 years. He was a Director in the Energy Group at Credit Suisse First Boston in Houston and a Director in the Energy Group at Salomon Smith Barney in New York and London. He holds a BBA in Petroleum Land Management from the University of Texas at Austin and a MBA from the University of Chicago Graduate School of Business.
Ronald J Gajdica: He is Senior Vice President Acquisitions. Prior to joining EV Energy Partners, Ron served as Managing Director of Scotia Waterous in Houston where he was responsible for the Mergers, Acquisitions and Divestment technical advisory team for the U.S. and Latin America. Ron was at BHP Billiton Petroleum from 1999-2007 where he held the positions of Petroleum Engineering Manager, Americas Production Manager, Atlantis Deepwater Project Director and VP Global Planning and Evaluation. He began his career at Tenneco Oil Company in 1983 spending 5 years as a reservoir and production engineer.
Competition Demystified by Bruce Greenwald, Copyright 2005, Paperback edition 2007