EV Energy Partners, L.P. EVEP: Q1 Results Below Forecast--Lowering 2010 Estimates Operational Issues Weigh On Q1 Production, But Impact Temporary
• Key Takeaways. Q1 results were below our forecast. EVEP experienced a number of weather and operational issues during Q1 that negatively impacted production. While the majority of these issues have been resolved, production over the balance of the year is likely to be below our previous expectations. Consequently, we are lowering our 2010 DCF per unit estimate to $3.42 from $3.55. EVEP sold $5MM of unproved acreage during Q1. Management expects to monetize additional higher-risk acreage over the course of the year (e.g. Marcellus and Utica-Collingwood Shales). We are maintaining our Market Perform rating on EVEP as the partnership's growth outlook (i.e. 2-3% estimated distribution CAGR) appears fairly reflected in the current unit price. Notwithstanding, our growth outlook could prove conservative if EVEP is able to acquire assets at a faster rate (i.e. above $150MM/year) and/or lower multiple (i.e. below 5.0x EBITDA) than our forecast.
• Q1 Results Below Forecast. Q1 EBITDA of $32.2MM was below our forecast of $35.9MM primarily due to lower production and higher lease operating expenses. DCF per unit of $0.68 was also below our estimate of $0.86. EVEP increased its quarterly distribution by $0.001 to $0.756, which was in line with our expectations. Distribution coverage in Q1 was 0.87x, or a cash flow deficit of $3.0MM. To note, EVEP was burdened by distribution payments on new units issued in conjunction with its previously announced Appalachia acquisition in Q1, but will not receive the cash flow benefit of the new acquisition until Q2.
• EVEP Likely To Monetize Noncore, Unproved Average. On March 31, 2010, EVEP entered into an agreement to sell unproved acreage for $4.8MM. Management indicated that the partnership is likely to monetize additional acreage over the course of the year through farm-outs, JVs, and direct sales. To note, EVEP holds 4,000 net Marcellus Shale acres in West Virginia. We estimate the partnership could monetize its interest for $12-20MM based on comparable transaction multiples in the region. In addition, EVEP has a sizeable position in Michigan (i.e. fourth-largest producer in the state), which has received increased industry attention of late due to successful horizontal drilling results by EnCana Corp. to the Utica-Collingwood Shale (underlies EVEP’s Antrim Shale).
Valuation Range: $32.00 to $35.00
Investment Thesis: EVEP's growth will likely be fueled by drop-downs of mature oil and gas properties from GP sponsor EnerVest, which currently owns an estimated $1.5-2.0 billion of reserves. While EVEP's visible long-term growth profile, conservative business model, and relatively strong balance sheet are competitive advantages, these factors are fairly reflected in EVEP's current valuation, in our view. About 65% of EVEP's distribution is tax deferred.
I wouldn't say this is the MOABO just yet, but the MLP sector looks better to me today than a few months ago, that's for sure. Everything has dropped 10-25% in price and people turning bearish on energy commodities in general. The contrarian in me likes that.
So if this is the beginning of a swoon like we had in late 2008 / early 2009, is it safe to be buying as much as we can if oil goes to $50 and MLP yields start hitting 15-20%? What about hedge counter-party risk, is that a concern?