A question for either Jeff or Joe or both regarding the dividend. If possible, I'd like to get a little bit more clarity on the dividend going forward. I know this past quarter was the fourth quarter we paid the dividend at $0.22 per unit. But the coverage ratio is 0.9. Would you anticipate being able to maintain the dividend at $0.22 per quarter for the rest of the year?
Jeffrey P. Wood - Chief Financial Officer of Eagle Rock Energy G&P LLC, Principal Accounting Officer of Eagle Rock Energy G&P LLC, Senior Vice President of Eagle Rock Energy G&P LLC and Treasurer of Eagle Rock Energy G&P LLC
Yes. So this is Jeff. I'll take the first shot at that. I guess, well, I'll start it with this, that we don't really give forward guidance on our distribution. That is absolutely at the discretion of our board. What I can tell you is that obviously, we don't take dividend increases like we make in the past lightly. We always do that with an eye to the sustainability of those distributions. So we wouldn't have gone to the $0.22 per unit if we didn't feel comfortable that, that was sustainable. And as you may remember, or at least those of you that have been unitholders for a while, we had been talking about further increases in the distribution. And since that time, at least through '12, the board has decided to hold the $0.22 constant. And that, of course, is due to a number of factors. I mean, as I mentioned, NGL, ethane, in particular, fell 70% over the course of 2012. That's an important product that we produce, both in our Midstream and Upstream businesses. And then the second item that kind of weighs on the DCF, and it really was one of the major drivers to the coverage ratio of 0.9 in the quarter, was all of the spending that we're doing in that facility in Southern Alabama. As I mentioned in my remarks, we spent over $6 million -- well, well over $6 million around that project over the quarter. We've classified over $6 million of it as maintenance capital. And if you back that amount out, which while we certainly think it's appropriately classified as maintenance, not a growth capital, it is sort of onetime spending, you back that out and we were at 1.1x. And I guess all of that just to say that no one is more interested in distribution increases than the team sitting around the room here. And we realize how important that is to both you guys and all of our unitholders. So that's why we do things like the BP acquisition. It's why we do things like continue to drill attractive locations on the Upstream side is to generate higher cash flows that we can then pay out to you.
jdm this was the most important part of the response "So we wouldn't have gone to the $0.22 per unit if we didn't feel comfortable that, that was sustainable." That gives some comfort (never say never ) they do not intend to cut distribution. The part on the maintenance was not too relevant (except it was twice of third quarter but it was still necessary) as the midstream mlps generally deduct maintenance capital in determining distributable cash flow (dcf).
A few of the more relevant comments were:
"...Today, we are only moving our own equity barrels to receive this price uplift. So what we do is we have a -- we signed a long-term agreement with a trucking company that has dedicated trucks exclusive to Eagle Rock, and we're bringing barrels from our own processing facilities to this transloader, which is just outside of Tampa, and loading it on to rail cars and getting a much better price or a lower hauling price for our own commodity. Because of the success of this, our startup, we're getting a lot of inquiries from producers that would then do exactly what you're saying. They would then haul, we could either do it for them with our relationship with our trucking company or they could bring their own trucks from their batteries with condensate to our transloader, and then we would load it off of their trucks on to rail cars. So that's the business that we're building. We're getting a lot of interest from producers. But quite frankly, we've been approached by one of our competitors that can't move their condensate out. And so they've asked us to make them a proposal to do the same thing with their condensate. So we think this business is scalable. The next step would be to build this rack loading facility where, same question, trucks would bring condensate to our storage facility, 25,000 to 50,000 barrel a day storage facility. We would unload their trucks into our facility, and then using a rack loading, we would then move it onto rail cars. That's kind of Phase 2, and that's what we're evaluating right now....That's a great -- we actually think it's very scalable. We are working on several projects. The Panhandle is seeing the same both challenges as well as opportunities that we're seeing in the Permian regarding liquid productions. So clearly with the Hogshooter, in particular the Hogshooter, as well Linn, and others, Apache are certainly focused on some of these really liquids-rich plays. There's no pipelines, no crude or condensate pipelines coming out of the Panhandle today. So really, it all is being moved by truck. And so that's where we see the opportunity. We think this is scalable. Number one, in fact, like I said, we're getting approached by a lot of large producers to move these barrels. We could easily build additional transloaders. The truth is the next step rather than build transloaders, and we actually cited this next to one of our main processing plants, being our Gray facility, the next step for us would be rack loading, building a rack loading facility with storage, and we are evaluating that very potential right now. And that could be in the 25,000 to 50,000 barrel a day storage facility. So that's how we would scale this operation pretty quickly...."
"...In terms of the physical integration (bp assets), as you may recall from our dialogue when we first bought these assets, there are several very important interconnects that we are working on. One on the west side that would integrate our Stinnett system with Sunray where we can move very valuable rich gas that also has helium and nitrogen up to Sunray, which has the capability of extracting both the nitrogen and the helium. That is well underway. We are looking at purchasing a pipeline that is in the area that will allow us to do that interconnect. That's going to take a little bit of time. We have a deal with the current operator. Unfortunately, it's a FERC-regulated line, so it's going to have to be spun down, but that'll take call it, 4 to 5 months. So we think by midyear, that project will be done, and there'll be significant cost, as well as production enhancements there. On the east side, in fact on March 1, this Friday, the first of our interconnects is being tied in along with some compression that allows us now to start moving gas from the east side, the BP's east side of the newly-acquired assets east side down toward our Phoenix and Woodall Plants. And that's the first of 3 interconnects that we'll be doing this year. So we feel like we are on schedule, quite frankly probably a little ahead of schedule on the integration, the physical integration. The truth is we see a lot of opportunities. I've mentioned there are 15 rigs running on the combined systems today. So we're getting a lot of interest from producers in terms of the capacity. It's clearly bringing on Wheeler. Our Wheeler Plant later this year in May is going to be important as we continue to see growing, gathering production. I mentioned the OpEx savings. I think there's some real opportunities there, actually even more than we thought...."
"...Our Upstream business is focused on delineating our reserve potential in the SCOOP area. We estimate the resource potential assuming 160-acre spacing would total almost 35 million barrels of oil equivalent. And at an 80-acre spacing, we could have over 55 million barrels of oil equivalent net to our interest. This is only for the Woodford resource potential. We estimate the resource potential for each of these Woodford wells, depending on the depth, to be between 800,000 barrels of oil equivalent up to 1.6 million barrels of oil equivalent per well.... first off, we have been approached by numerous parties, very interested in either partnering with us or outright purchasing our position in the SCOOP area. I'll be honest with you, it's kind of all across the board. Some have approached us about just buying the Woodford rights and allowing us to keep certainly all of the up-hole rights, where obviously we produce a lot of oil and gas today. We've also received inquiries by just outright monetizing our entire position in the SCOOP play. I'll be honest, it's too early to say. We are currently evaluating.
My conclusion on these comments are
-on transloader racks would be a value added endeavor that would be positive to dcf it they work out
-on integration of bp assets it is telling me they have more opportunities than in original economics with minimal additional capital which is a positive but we will not likely see any distribution increases until integrated in 2014
-if they monetize scoop, then why not just sale the entire e&p and focus on midstream which is were I would speculate the longer term sustainable value is in eroc as their bp acquisition was a brilliant strategic move. However I can tell they struggle internally about who they are and who they want to be. You can tell this as they indicated the cash flow comes faster from e&p than midstream, but the longer term cash flow comes from midstream; so I know the timing of E&P cash flow is important from their view; but I would suggest running two diverse asset sets, for their size, is more distracting in human and capital resource allocation than focusing on one asset base. They could monetize the e&p assets move the money into say the midstream in Woodbine/Tuscaloosa or up into the Niobrara or building out the gathering/transport in the scoop area for who ever buy the assets or even somewhere else and grow the midstream business without needing more equity or debt. The majors originally entered the midstream business because they started out as e&p's and needed a way to get the product to market so they added the midstream as there was no one else to move the product. Independent midstream businesses are on a recent phenomenon of the last 15 to 20 years. I was a division strategic planning manager for one of the top three E&P's and have been co-published in how value is created in E&P companies. Again just my view I have expressed on this board before, but I think the market would reward them for that move with the great panhandle bases they have developed and could grow from over the long run in the midstream arena
Someone does not like my idea, but let me tell you the churning of capital it takes to replace non conventional and some conventional E&P assets never subsides. Some of erocs E&P assets are in plays were the decline rate is steep so they have to churn and churn and churn E&P capital. If they were an E&P company with many many long lived conventional reserves and they had invested in midstream assets to service their own E&P assets that would be a value added opportunity as they would pick up the opportunity cost, but they are not. Their E&P assets are primarily separated from their midstream assets so they do not get full advantage of the opportunity cost of the value equation along with the organization and executives must constantly deal with resource allocations which is distracting and non productive. aGain I am invested in eroc so I like their potential but I believe they have greater potential they could unlock as a midstream company.
But again just my 25 years of E&P experience in finance, strategic planning and business development for one of the three majors