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EVEP's Barnett Punched by Freeze-Outs in December

EV Energy Partners LP (EVEP), whose primary proved natural gas and liquids reserves are in the Barnett Shale, took a big hit from wintry weather in the final period of 2013, which contributed to poorer-than-expected performance for the quarter.

EVEP exploration arm EnerVest Ltd. pushed production higher in 4Q2013 by 3% year/year and 2% sequentially to 170.5 MMcf/d, composed of 10.8 Bcf/d of natural gas and 240,000 b/d of liquids. Proved reserves also rose by almost one-third (32%) from 4Q2012 at a price-neutral reserve replacement cost of $1.01/Mcfe.

While the Houston operator has been shifting more of its capital to Appalachia, it can't get away from legacy operations in the Barnett in North Texas, which holds most of the proved natural gas reserves -- 529.6 Bcf of 819.7 Bcf total. The Barnett also has the most proved natural gas liquids at 40,200 bbl of a total of 48,900 bbl.

How important the Barnett remains to the provider is evident in the numbers. In Appalachia, proved reserves are 80 Bcf/4,000 bbl, the second-highest reserves area.

Some "small short-term oil and gas production and midstream throughput disruptions due to the cold weather this winter" were traced mostly to the Barnett, said CEO Mark Houser. He and other executives discussed the quarterly and year-end performance during a conference call Monday.

EVEP already had planned to drop to two rigs from three in the Barnett, but the storms chased away any gains on drilling efficiencies and cost management, he told analysts.

"The winter has been from late December through January…really challenging," in the Barnett. "It's more due to ice and compression than it has been due to the wells themselves. "We're starting to manage through that and production has been ramping up," moving the operator "toward our budgeted level.

"But a lot of the challenges we face are not being able to haul off water that has caused these wells to have a lot of water in the tubing," Houser said. "And we're having to unload that and get it back on, get it back off. This has been a little bit of a longer drop than we thought. But we're making good progress."

The U.S. Energy Information Administration in the new 914 report said Texas led the production declines on the widespread freeze-offs within the state (see related story). Analyst Teri Viswanath, who directs natural gas commodity strategy for BNP Paribas, told NGI's Shale Daily on Monday that the amount of shut-in wells in Texas "might seem surprising, especially given the rise in wells in more northern locations of the country.

"However, operators in this region typically do not take the same level of precautions to prevent winter-time supply disruption given the low odds of sustained freezing weather in this region of the country." According to the National Oceanic Atmospheric Administration, Texas recorded the 18th coldest December in 119 years, which was "rather exceptional," she said.

Despite the issues in the Barnett, EVEP overall "had strong growth in proved reserves through our capital programs, and we continue to see potential growth opportunities in the Barnett Shale and the Eagle Ford Shale within our existing assets," said Houser. The "evolution of the Utica Shale and our participation in both upstream and midstream activities" is advancing operations. We expect significant  growth in our Utica midstream cash flow as these facilities continue to come online."

In the fourth quarter, EVEP added 400 MMcf/d of processing and 45,000 b/d of fractionation (frac) capacity to its Appalachian operations. Another 400 MMcf/d and 90,000 b/d of frac capacity is expected to begin in the second and third quarters.

Net losses in 4Q2013 totaled $50.2 million (minus $1.06/unit), mostly on a one-time impairment of $77.2 million for a writedown in Permian Basin properties regarding commodity prices on expected net cash flows. Other one-time charges included $41.3 million on the gain from selling some properties; $21.2 million of derivatives losses; and $4.4 million for general/administrative expenses. Adjusted earnings in the period were $53.7 million, 23% more than in 4Q2012 and flat from 3Q2013. Distributable cash flow in 4Q2013 was $26.7 million, a 30% decrease year/year and 3% lower sequentially.

Production for 2013 was 42.7 Bcf of natural gas, 1.3 million bbl of oil and 2.15 bbl of liquids, or 169 MMcfe/d, a 3% increase from 2012.

Net losses for 2013 came in at $76.2 million (minus $1.76/unit), including one-time charges on impairments for Permian operations ($85.3 million) and $47.3 million on derivative losses. For 2012, EVEP reported a net loss of $16.3 million (minus 38 cents/unit). Adjusted 2013 earnings were $209 million, down 22% year/year, on cash flow of $100.6 million, which was 29% lower than in 2012.

EVEP's net proved reserves at the end of 2013 were 69% weighted to natural gas, 25% to  liquids and 6% to oil. The reserve replacement rate for 2013 was 565% at a cost of 48 cents/Mcfe.

Prices used in determining year-end 2013 estimated proved reserves were higher than at year-end 2012. Without the positive price revision effects, the reserve replacement rate would have been 268% at a cost of $1.01/Mcfe including acquisitions, and 156% at a cost of $1.06/Mcfe excluding acquisitions.

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