EnerVest Ltd., the second biggest leaseholder in the Utica Shale after Chesapeake Energy Corp., should complete the sale of a big chunk of its leasehold by the end of the year, CEO John Walker said Friday. The property sale could fetch as much as $6 billion for the privately held Houston operator and publicly traded arm EV Energy Partners (EVEP).
Walker and his management team talked with analysts during a conference call to discuss earnings and operational performance in 3Q2012. A big topic of discussion was the Utica sale, announced in September, which would cast off 539,000 net acres (see Shale Daily, Sept. 18). EVEP is holding onto its Clinton and Knox formation leasehold.
The buyer would become a partner with EVEP’s frequent collaborator Chesapeake on some of the Utica leasehold for sale. Jefferies & Co. is handling the sale and bids were due in October.
“This is a very large and sizable transaction, and we’ve had several bids and I feel very comfortable that we are going to reach agreement,” Walker said. “I still believe that our purchase and sale agreement is down the fairway, so we’re not trying to create a difficult negotiating process. It’s a fairly simple transaction, the complexity is because we’ve had so many different bids. It’s sort of like putting a quilt together to maximize what we’re getting out of it.
“As Jefferies told us, there’s more interest in our Utica package than any shale deal they’ve ever done, and they’ve done 80-85% of all the deals.”
The data room “had excellent attendance, and we’ve already had several offers,” said Walker. “In some instances we’ve had people offer cash, and some have offered properties in addition to cash.” Some potential buyers offered bids before the bid date in October. “In some instances we’re having to negotiate one transaction where they are buying land and we’re picking up property.” This is “primarily a land transaction,” which is different from a “gas transaction” in that a land deal is “much easier to complete, with due diligence allowed post closing.”
The Utica sale would free up cash to spend on assets that are now producing, including the Barnett Shale, which has seen business pick up in the northern part of the play, which is liquids-rich.
“Like everyone else, weak natural gas and natural gas liquids [NGL] prices continue to affect revenue, but our large position in NGLs helped” in 3Q2012. “Production targets for us are really not as important as achieving acceptable returns on capital,” said the former Wall Street analyst. “That said, production is up and cost results are particularly pleasing because we have slowed down spending on upstream activity to achieve our 20% rate of return.”
EVEP has “not drilled a gas well in quite a while,” said Walker. “Therefore, it’s likely that we will only spend $35 million in capital spending, versus our original goal [set in March of $60 million]…because in many instances, we’ve not been able to achieve a 20% rate of return…We anticipate fourth quarter production to increase only slightly from the third quarter.”
Having “dominant positions” in several basins has “helped a lot. We’re establishing new production records weekly in the Barnett, led by our exposure in the oil combo play.”
EVEP CEO Mark Hauser told analysts that across the board, the base business performed well, with the Barnett “performing particularly well.” The Barnett “is starting to really develop momentum. In the last two weeks we achieved the highest production ever, with about 82 MMcfe net to EVEP’s interest…We’re seeing continual reductions in costs for water hauling” and other services, as well as in drilling.
EVEP drilled 20 gross wells in the Barnett in the latest quarter and turned inline 11; it now has 57 wells drilled to date this year in the play. By the end of the year, 86 wells are expected to be completed, down from an original estimate of 90, but the “rates of return are 90% better” than in the dry gas area.
Overall drilling plans have been reduced, mostly in the dry gas portfolio, with production slowing in the Midcontinent and Appalachian areas. “From our perspective, we plan to drill about 112 wells this year, versus 192 that we’d planned for, excluding nonoperated activity,” Hauser said.
Asked when EVEP would consider drilling dry gas wells again, Walker said it was a “simple” yet “complex” question. “You have to look at the cost of recovery basin-by-basin and well-by-well,” he told analysts. “When we do an individual analysis…we have a price that we are using at that point in time” and hedges are not considered.
“In some basins, it will take $6.50 to hit our 20% risk-adjusted rate of return. In some basins $4.50 would do it. I’m more optimistic about gas prices than I’ve been in a long time,” he said.
“You can talk about a lot of things” that affect gas prices, such as future liquefied natural gas exports and using compressed natural gas for transportation, “but they hold very little importance if we have a warm winter…or we’ll enter 2013 with too much gas, which will have an impact on 2014, in my opinion.”
EVEP has “only slowed dry gas in the Barnett, but that’s all held by production,” said Hauser. “At a $3.50, $4.00 gas price, we’ll look at that again.”
In 3Q2012 EVEP reported a net loss of $50 million (minus $1.15/unit), including a net loss of $65.9 million on hedging. A year ago net income was $87.8 million ($2.42/unit). Adjusting for one-time items, EVEP earned $67.3 million in 3Q2012, a 29% increase over 3Q2011 and a 2% hike sequentially. Production in the latest quarter was 10.8 Bcf of natural gas, 266,000 bbl of oil and 440,000 bbl of NGLs, or 15 Bcfe, which represented a 49% jump from year-ago output of 10 Bcfe. The production increase was attributed mostly to Barnett properties acquired in late 2011. Output also rose 1% sequentially.
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