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EVEP Lands First Utica Sale For $284M; 2Q Net Income Jumps 120%

Nearly one year after it started looking for buyers for some of its acreage in Ohio's Utica Shale, EV Energy Partners LP (EVEP) and its partnerships have made their first sale, agreeing to part with 22,535 net acres in the wet gas window for $284.3 million, the company said Friday.

Meanwhile, Houston-based EVEP said it had partnered with an undisclosed company to try to de-risk the Utica's volatile oil window, and they plan to begin drilling in at least one area by the end of 2013. EVEP also announced net income of $32.9 million for the second quarter.

During an earnings call with industry analysts, Executive Chairman John Walker, whose privately held EnerVest Ltd. controls the publicly traded partnership, said the $56 million deal with an undisclosed buyer includes 4,345 net acres in Guernsey, Harrison and Noble counties. EVEP would retain overriding royalty interest in the areas being sold.

"With our more focused sales effort on a county-by-county basis in the wet gas window fully underway and with increased production visibility across the play, we're very pleased with the amount of interest and the offers we are receiving," Walker said. "We will continue to work for finding the right buyers for the different areas of the Utica and expect to announce more deals."

EnerVest, the second biggest leaseholder in the Utica after Chesapeake Energy Corp., announced last September that it was looking to sell the majority of its leasehold in the play -- 539,000 net acres (see Shale DailySept. 18, 2012). The company said then it hoped to receive as much as $6 billion for the acres.

But a deal proved elusive, and EVEP's stock took a hit in March (see Shale Daily,March 6Dec. 27, 2012Nov. 12, 2012). During a 4Q2012 earnings conference call, Walker said there had been one bid for EVEP's overall core position in the Utica, plus multiple bids on four packages and several individual bids for acreage in some Ohio counties.

"This last year, we've rejected many offers for our valuable Utica acreage," Walker said last Friday. "By being patient and determined to get the right price for our assets, the first sale, while not a large one for EVEP, establishes a value marker in the heart of the play. As I've told you many times, our acreage keeps getting more valuable as EURs [estimated ultimate recoveries] keep rising and the cost to develop keeps declining."

EVEP's Ronald Gajdica, senior vice president for acquisitions, added that after the deal closes the company would still have some acreage for sale in Guernsey County in the wet gas window.

"We sold all but one township in Noble County that we believe is equally attractive, and we expect to sell that," Gajdica said. "Clearly, the most attractive county -- Carroll County -- we haven't sold. And then we have Columbiana County and the northern counties of Mahoning and Trumbull, OH, and over into Pennsylvania.

"So we've got a lot of acreage, and we've got a lot of activity going down."

Although Walker did not disclose the potential buyers in the March call, a rig count analysis at the time showed Chesapeake, Antero Resources, CNX Gas Co., Gulfport Energy and Hess Corp. were the most active in the play.

EVEP said it figures to receive an average price of $12,900/acre in the transaction, which is subject to closing conditions and price adjustments. The deal is expected to close by the end of September.

During EVEP's 1Q2013 earnings call in May, Walker said the company was looking to forge an agreement with one or more joint venture (JV) partners to de-risk the Utica's volatile oil window, where EVEP holds more than 78,000 acres (see Shale DailyMay 15). On Friday, Walker said EVEP has "partnered with a privately held company with acreage near ours.

"Our two companies are currently in negotiations with both service companies and technically confident oil shale experience producing companies with the intent of forming a JV on a limited amount of volatile oil acreage. The intent is to form two small JVs to get twin wells drilled in both Tuscarawas [County] as well as Stark County. We are limiting EVEP's capital exposure to de-risk the volatile oil window."

During Friday's question and answer session, EVEP CEO Mark Houser said the company has plans to begin drilling activity in the volatile oil window by the end of the year.

"We're actually targeting three small areas to have kind of a window of acreage that can be drilled and de-risked, and...we're targeting drilling about 10 wells per day to help de-risk the plot," Houser said. EVEP got a "good response [and] we went to the service area first.

"We were already in pretty serious negotiations with one [company] and the others have been through the data realm and are coming back to this right now. And then the next path was the more experienced oil producing E&P [exploration and production] companies, and we're in that process right now."

EVEP currently has two JV partners in the Utica: Chesapeake and France's Total SA (see Shale DailyJan. 4, 2012).

Net income for the quarter jumped 120% year/year to $32.9 million (74 cents/share) from $15 million (34 cents). Adjusted earnings were $52.6 million, down 20% from a year earlier when adjusted profits were $66.1 million.

Most of the increase in net income, $30.3 million, was attributed to net unrealized gains on commodity and interest rate derivatives, which CFO Michael Mercer said were "primarily due to changes in future commodity prices used on our future, the remaining balance of our portfolio of hedges that will settle in the future." Net income was also affected by $4.5 million in net realized gains on derivatives.

 Production during 2Q2013 totaled 11.1 Bcf of natural gas, 245,000 bbl of crude oil and 526,000 bbl of natural gas liquids, averaging 172.3 MMcfe/d for the quarter. The daily production average for 2Q2013 was 4% higher sequentially and 6% higher from a year-ago output of 162.9 MMcfe/d.

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