IS EVEP STILL A SHORT?

Takeaway: Here's our assessment of EV Energy Partners (EVEP), following the company's earnings report last Friday.

This note was originally published May 10, 2013 at 13:09 in Energy

EV Energy Partners (EVEP) remains a high conviction short idea for us.  Today’s result changes little, except for that it seems as if we gave the Company too much value for its Utica package, and EVEP’s funding situation is now even more precarious given that it will JV the oil window acreage instead of sell it outright.  We would be adding to short positions today on the back of the poor 1Q13 result and outlook.


On the Quarter


Open EBITDA (before hedges) was $31.4MM, down from $36.7MM in 4Q12 due to a 1% decline in production and higher operating costs.  Excluding a 1Q-only G&A expense of $3.2MM, open EBITDA was $34.6MM (this is not a one-time item, but a recurring 1Q-only item).

 

On EVEP’s management metrics – which are pretty meaningless to us even though everyone else uses them – “adjusted EBITDA” was $48.5MM vs. $56.7MM expected and $69.6MM in 4Q12.  “Distributable cash flow (DCF)” was $21.8MM ($0.51/unit) vs. $37.9MM ($0.89/unit) in 4Q12, for a distribution coverage ratio of 0.67.

 

The main reason for the miss was the hedge book rolling off, especially on the NGL side.  Realized cash gains from commodity derivatives were $12.3MM vs. $28.4MM in 4Q12.

 

Discounted cash flow (DCF) would have been lower had it not been for the generous (and inexplicable)  approximately $5MM haircut to “maintenance CapEx” in the quarter.  Production fell 1% q/q and EVEP invested $21.1MM into its E&P operations in the quarter, though deducted only $13.6MM ($0.91/Mcfe) of maintenance CapEx from DCF vs. a consistent run-rate of $18 - $19MM ($1.25/Mcfe) over the prior four quarters.   

 

EVEP defines maintenance CapEx as “expenditures necessary to maintain the production of our oil and gas properties over the long term.”  But, EVEP could not manage to keep production flat on $21.1MM of total E&P spending.  In our view, EVEP slashed maintenance CapEx this quarter to make the already poor coverage ratio look a little better, and that a realistic maintenance CapEx number is  approximately $20MM per quarter.  If maintenance capex were $20MM in 1Q13, the coverage ratio would have been 0.47.

 

IS EVEP STILL A SHORT? - evep1

 

On the Utica Shale Sale Process


EVEP is no longer looking to sell its acreage in the oil window of the play, which it once boasted would fetch more than $15,000/acre.  It will now attempt to find a joint venture partner for the majority (~82%) of its marketed acreage, which is in the oil window.  If any deal gets done, it will likely be for a drilling carry (and maybe a small cash bonus); we won’t be holding our breath – CEO John Walker said on the call,

 

“There are not enough wells drilled there yet and through one or more joint ventures we intend to find the completion technique that will solve this problem. It could take one to two years for us to find these solutions and maximize the value of our position in the supply.”

 

That leaves EVEP with 18,200 net acres (18% of marketed acreage) to sell in the wet gas window (majority in NW Carroll county).  Timing and price remains uncertain.

 

On Valuation

 

EVEP is still trading above a price that would reflect anything close to the intrinsic value of the assets.  We’ve updated our NAV analysis taking into account the change in plans for the Utica acreage, the decrease in FV of the hedge book, and the increase in net debt.  Our NAV is $22/unit.

 

IS EVEP STILL A SHORT? - evep2

 

On conventional E&P valuation metrics, the story is the same: EVEP trades at 40x 2013e earnings, 16x Adjusted EV/2013e Open EBITDA, 1.9x book value (despite having acquired the majority of its assets), and 3.1x standardized measure.  The Company is over-levered with net debt of $925MM exceeding the value of its proven reserves (YE12 PV-10 $867MM), and adjusted net debt/2013 open EBITDA at 5.0x.  Leverage ratios will tick higher this year without meaningful asset sales or equity-funded acquisitions as the Company invests heavily in its nascent midstream businesses.

 

IS EVEP STILL A SHORT? - evep3

 


Cartoon of the Day: Hard-Headed Bears

How's this for "hard data"? So far, 107 of 497 S&P 500 companies have reported aggregate sales and earnings growth of 4.4% and 13.2% respectively.

read more

Premium insight

McCullough [Uncensored]: When People Say ‘Everyone is Bullish, That’s Bulls@#t’

“You wonder why the performance of the hedge fund indices is so horrendous,” says Hedgeye CEO Keith McCullough, “they’re all doing the same thing, after the market moves. You shouldn’t be paid for that.”

read more

SECTOR SPOTLIGHT Replay | Healthcare Analyst Tom Tobin Today at 2:30PM ET

Tune in to this edition of Sector Spotlight with Healthcare analyst Tom Tobin and Healthcare Policy analyst Emily Evans.

read more

Ouchy!! Wall Street Consensus Hit By Epic Short Squeeze

In the latest example of what not to do with your portfolio, we have Wall Street consensus positioning...

read more

Cartoon of the Day: Bulls Leading the People

Investors rejoiced as centrist Emmanuel Macron edged out far-right Marine Le Pen in France's election day voting. European equities were up as much as 4.7% on the news.

read more

McCullough: ‘This Crazy Stat Drives Stock Market Bears Nuts’

If you’re short the stock market today, and your boss asks why is the Nasdaq at an all-time high, here’s the only honest answer: So far, Nasdaq company earnings are up 46% year-over-year.

read more

Who's Right? The Stock Market or the Bond Market?

"As I see it, bonds look like they have further to fall, while stocks look tenuous at these levels," writes Peter Atwater, founder of Financial Insyghts.

read more

Poll of the Day: If You Could Have Lunch with One Fed Chair...

What do you think? Cast your vote. Let us know.

read more

Are Millennials Actually Lazy, Narcissists? An Interview with Neil Howe (Part 2)

An interview with Neil Howe on why Boomers and Xers get it all wrong.

read more

6 Charts: The French Election, Nasdaq All-Time Highs & An Earnings Scorecard

We've been telling investors for some time that global growth is picking up, get long stocks.

read more

Another French Revolution?

"Don't be complacent," writes Hedgeye Managing Director Neil Howe. "Tectonic shifts are underway in France. Is there the prospect of the new Sixth Republic? C'est vraiment possible."

read more

Cartoon of the Day: The Trend is Your Friend

"All of the key trending macro data suggests the U.S. economy is accelerating," Hedgeye CEO Keith McCullough says.

read more