Short EVEP: New "Best Idea"

We are adding short EV Energy Partners (EVEP) to our "Best Ideas List."  We will give a presentation/conference call on Thursday, May 2nd, at 1pm EST, to walk through the thesis in depth.  Clients will receive the materials and dial-in information shortly before the call.  

THESIS:

  • EV Energy Partners (EVEP) is an upstream MLP that most analysts value using an arbitrary yield target, rather than considering the intrinsic value of the assets (present value of future free cash flows).  As we have found with LINN Energy (LINE, LNCO), this can create a severe mispricing of the security.
  • EVEP has overpromised and under-delivered with respect to a monetization of its Utica acreage package.  We expect that the sale will continue to disappoint expectations with respect to price and timing.
  • While analysts and investors have been laser-focused on EVEP’s Utica sale for the last 24 months, the value of the core asset base (Barnett Shale and conventional fields) has eroded to the point where the latest after-tax PV-10 of $867MM barely exceeds EVEP’s net debt of $852MM.
  • Financially, EVEP is in bad shape, and it’s set to get worse.  We believe that EVEP will have to do at least one of the following in 2013: raise equity; take on additional debt (despite being over-levered at 5x 2013 open EBITDA); use any Utica proceeds to fund capex and/or the distribution (instead of acquiring additional assets); cut the distribution.
  • We believe that fair value for EVEP is ~$18 - 27/unit (40 - 60% downside from the current price).

ABOUT EVEP:

EV Energy Partners (EVEP) is a $2.0B market cap upstream MLP with producing assets in the Barnett Shale (59% of 1P reserves); multiple legacy, conventional plays like the Austin Chalk and Knox; undeveloped acreage in the Utica Shale (for sale); and a nascent midstream business. 

E&P private equity firms EnerVest and EnCap created EVEP in 2006 shortly after LINN Energy (LINE, LNCO) went public.  EnerVest (71.25%), EnCap (23.75%), and EV Investors (5%) own 100% of EVEP’s General Partner (GP), “EV Energy GP,”   and all incentive distribution rights (IDRs).  All EVEP board members are either directly affiliated with EnerVest or were appointed by EnerVest or EnCap.

EnerVest’s operating base includes ~3 Tcfe of 1P reserves and ~550 Mmcfe/d of production; EnerVest operates 93% of EVEP’s assets.

In typical E&P MLP form, EVEP acquires low decline assets with a high percentage of PDP reserves; since 2006 the Company has completed $1.9B of acquisitions - the two largest coming in 4Q10 and 4Q11 in the Barnett Shale ($700MM combined).  EVEP often acquires assets from EnerVest and/or EnCap-sponsored companies (“drop downs”), or from unaffiliated parties (Encana, Petrohawk, Range Resources, EXCO, Anadarko) alongside EnerVest.

At YE12, EVEP had 905 Bcfe of 1P reserves (76% developed, 67% gas, 24% NGLs, and 9% oil) with an after-tax PV-10 of $867MM.  In 2012 EVEP produced 163 Mmcfe/d (71% gas, 18% NGLs, 11% oil), and has guided 2013 production to -1% y/y on E&P spending of ~$100MM.  

EVEP has ~170,000 net acres prospective for the Utica Shale, and has been trying to monetize ~104,000 of them since 1Q12; so far, it’s been an unsuccessful effort.  EVEP has now broken that package into 13 separate packages (by county) to attract more interest.  We believe that the majority of EVEP’s Utica acreage that is for sale is in the “oil window,” (or west of it) where Chesapeake, Anadarko, Consol, and Devon have had limited success to date.  Monetizing this acreage and then completing a 10-31 exchange with EnerVest for producing assets is EVEP’s main priority.

EVEP owns minority stakes in two Utica midstream companies, “Utica East Ohio” and “Cardinal Gas Services.”  EVEP is set to invest $335 - $395MM into these companies over the next 5 years, with $230 - $250MM in 2013 alone.  These assets are expected to generate ~$65MM of annual EBITDA net to EVEP by 2016/2017.

Kevin Kaiser

Senior Analyst