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Ohio Utica Shale

EV Energy Partners still working on selling Utica shale acreage

By Bob Downing Published: June 30, 2013

Texas-based EV Energy Partners is continuing to try to sell nearly 104,000 acres in Ohio's Utica shale.

The Houston-badsed company has decided to sell off the leased land rather than investing the money to drill natural gas wells istelf.

Such wells can cost $6 million.

One deal on that land fell through last spring. The company said in April talks with the unnamed buyer were continuing, but EV Energy Partners was seeking new buyers.

President and CEO Mark Houser said everyone is seeking small acreage deals, says the Marcellus Drilling News.

Houser gave a presentation last week at the Credit Suisse MLP and Energy Logistics Conference. In his speech and the following Q&A, he gave a comprehensive update on EVEP’s Utica Shale program.

His company is a partner with Chesapeake Energy and Total in eastern Ohio and is a key player in pipelines and processing plants in the Utica shale.

Here are some of Houser's comments on the Utica shale from a transcript:

For a minute I want to talk about kind of our evolution in Appalachia and specifically in the Utica. If you look at us, say four years ago pre-Utica EnerVest in EVEP had a conventional production position in the Appalachian basin including a small position in Ohio. But as technology as evolved, we realized that the Utica share was precedent to a lot of our acreage and what we’ve worked on over the last little while is trying to diversify that Utica Shale potential.

So if you look at us currently kind of in Appalachia in addition to our existing conventional production, we’ve got an opportunity in the midstream business in a couple of different ways, one through Utica East Ohio Midstream which is a fractionation and processing business. We’ve also got Cardinal Gas Services which is a low-pressure gathering in business. We’ve carved down over on royalty in all of our acreage in Ohio to participate an upside in the Utica, and we still have our Utica working interest acreage, so I’d like to point a little bit to some of that right now.

Let’s look at our Utica Shale position. The map on the right side of the screen here the purple box shows an area and which EnerVest participates with Chesapeake and Total in a joint venture of 660,000 acres. The red box shows the entire position of EnerVest and EVEP. Again we have one of the largest positions in Ohio over 8,000 wells that we operate. We’re the largest producer in the state. We control over 900,000 acres and again we have this joint venture participation, I mentioned with Chesapeake. If we rundown to EVEP, EVEP itself has 177,000 net working interest acres in the Utica, it also has an overriding royalty interest, and again the participation in the Midstream projects that I will speak of in a minute.

Let’s look a little bit of what’s going on in the Utica overall. Overall, there been almost 750 wells permitted, 350 or so drilled, there is a lot of activity right now. I think there is about 18 rigs running, there’s a 102 producing wells. I mentioned that Chesapeake joint venture earlier that EnerVest and EV are a part of, it takes the lion’s share of the wells that are drill to drilling and this is a moving target that approximately 235 wells have been drilled or are drilling in the Chesapeake joint venture, and EnerVest, including a small piece of EVEP is to participate.

Currently there’s 12 rigs running, there been 67 wells that are been brought online, I mean there’s 168 wells that are in various competition stages, anywhere from waiting on pipeline to still awaiting completion to time with the pipeline time. 75 of these 168 are simply waiting on pipeline capacity and that’s happening right now.

Chesapeake and partners are competing wells with more stages, their cluster spacing has been shortened, and we’re having fewer clusters stages per – clusters per stage. Again a lot of these are adjustment of frac technology that happened in every basin. But from what we can see in the results so far, these minor adjustments in completion technology are increasing some of these Utica wells dramatically some of the data we’ve seen from Chesapeake suggest as much as 30% to 50% increases over some of the early wells they drilled in the Utica. And again there is still that big financial commitment within this joint venture and a physical commitment to drill about 550 wells total through 2014 so lot of growth ahead.

I mentioned the Midstream a lot of wells waiting to be tied online, there is been a bottleneck in the Midstream business. Natrium has come online and additional stream in Natrium came online in May that added about 200 million a day of capacity, 100 million of that with Chesapeake, and so Chesapeake’s production including some of our net production went from about 85 million a day to 185 million a day almost over night.

Utica East Ohio the venture that we participate in will be coming on at the end of June that will add another 200 million a day capacity over the next couple of months, and there is other Midstream capacity forthcoming.

So, let’s speak a little bit about some of the acreage and the activity within the acreage. The map here shows essentially the EVEP acreage in the various windows from the green which is – really the Black Oil window, through the blue which is the Volatile Oil window, the yellow is the Wet Gas window, and in the red is the Dry Gas. You see the box where [the Total IMI] with Chesapeake and EnerVest is and you see the ellipse that’s been drawn on the page. The ellipse is really were most of the activity has been going on.

Initially if started out mostly with Chesapeake in a little bit with Gulfport in kind of the Central area of Ohio including Harrison and Carroll counties. That activity is now expanded down in the Noble and even Northern Washington County, and as far north is up into Trumbull and Mercer County with folks like BP, Hilcorp in the north and Chevron and Shell and folks like Gulfport, PDC, Magnum Hunter and others in the south, and there is starting to be more and more activity. Most of this activity has been in the Wet Gas window again it’s shown by the ellipse. The play is expanding as I mentioned, and everything looks really pretty encouraging in terms of Wet Gas.

Now on the Volatile Oil side the calculations that we’ve done based on about 600 wells that EnerVest has drilled overtime to penetrate the whole Utica, suggest that out in this Volatile Oil window there’s about 20 million to 30 million barrels of oil per section. However, there’s been very limited drilling activity. Only about six wells have really tested the Volatile Oil window so far. The lion share of the work has been in the Wet Gas window. And those – the results so far have been somewhat marginal.

Couple of the wells that EnerVest operates have both IP at around 400 barrels a day, which is not a bad rate for an IP out there plus some liquids and gas. However, they just have a maintain production very long, although they maintain reservoir pressure. So the question we have is what do we do about kind of helping improve the flow capacity of these wells, and we believe the answer is going to come through enhance fracturing, and so we’re looking and working with some folks to do something about that.

So getting back to our overall strategy really there is two components to it. We started off. Last year EnerVest and EVEP combined began a marketing process and it was focusing on sale, the sale of most of our operating acreage in a big package. We actually put in to market over 330,000 acres, which would have been about 100,000 in the EVEP.

As the market evolve we found out that really buyers who more interested in buying pieces of that and not larger pieces. So in the second quarter of this year we revised our marketing strategy to put it in the smaller packages that really to better align our sales with our potential customers, really the customers changed.

This time last year we had a lot of the majors telling us they really wanted huge large acreage positions, but as the year unfolded I think it was the economy, I think it was elections and other things, the market changed. And a lot of those same majors said look, we’re not interested in big pieces anymore, but we would like some small pieces. And also they’ve said, in some of these areas that are less mature, we want somebody to prove these up, and once they’re proved up, we’ll put our resources into these larger blocks and we’ll pay up [for them].

So really we’ve got two different more or less projects going on. We’ve got our Wet Gas Window project where we repackaged with a lot of the recent technical data, and we’ve reopened the data room to smaller players and smaller packages. We’re having significant interest in that, and we’re hopeful to get few deals signed up over the next little while, frankly about a year ago, we really targeted on year end, and we weren’t able to meet that and so we’ve kind of backed off and said look lets once work really hard, and once announce something when it gets announced, and not predict, that be in the case we are generally pleased with the activity there.

The other thing we’re doing is in the Volatile Oil window, of course the market, the acreage is still for sale, if somebody comes in, who really has an attractive offer for us, but in the mean time, we’re working with service companies and some of the established producers in other basins, the folks who have de-risked the Eagle Ford, the folks who have de-risked the Bakken, and coming up with a joint venture plan to take a small amount of our acreage, put into an AMI and have them help us to do some drilling, that will be, we’re not going to put capital to work on it, and we’re going to contribute acres, but we figure it’s a way that we can de-risk some of our acreage and make it more attractive and kind of prove it up and then still leaves us a lot of open acreage.

Real quickly if you look at EVEP’s position, this is something a lot of our investors have appreciated is that we’ve broken out our acreage by the various windows the Wet Gas, Volatile Oil and other. And you can see at the bottom of the slide about a little over 50,000 of our acres is in the Wet Gas window, about 80,000 acres is in Volatile Oil window, and then about 44,000 acres is in different areas.

Again, when we started the marketing process last year, we really weren’t even paying attention to our southern acreage such as Noble or Washington and we weren’t focused on our Pennsylvania acreage as well. So the overall acreage that we feel is exposed to the Utica is actually higher than it was.

So if you’re looking at is realistically the 54,000 or so acres and majority of that we have a good lineup side in terms of sales over the next while. The 80,000 wells of all acreage will take a little bit longer, but again we remain optimistic about the opportunities there. Our override; as we got into this process, we realized that an MLP would love to have overrides, because basically it’s expense less, capital less income overtime. And so we carved on and override on many of these leases, many of these leases were 87.5% net revenue leases, and we carved lot of them down to an 80% interest.

And then that’s divided among some of our partner companies, so you can see that on average we have about interest at about 880,000 acres. We average about a 2.7% override on 400,000 acres, and 1.3% override 460,000 acres, and again those numbers are tied to EVEPs ownership and some bigger properties. But again this is really significant future cash flow that will be unlocked as these wells are developed more and more, as the Utica has developed more and more.

Shipping for bids for the midstream. There is about 2.6 Bcf a day of proposed processing projects. You see a big blue line through the middle of this page that has Dominion East Ohio line, essentially the only sales line for liquids going down in the whole state of Ohio. What I’ve got on here are the announced kind of moving different midstream projects, the gold represents Utica East Ohio, and Utica East Ohio is a project being led by Momentum which is a very successful private equity firm, actually EVEP has a 21% interest in this project, so let me go that little bit more.

The slide here on the left shows the Utica, basically EnerVest, I’m sorry EVEP’s midstream investment. Primarily it’s driven by our Utica East Ohio investment. Utica East Ohio as about, we have a 21% interest in it, and that project is together process and fractionates wet gas primarily from the Chesapeake total EnerVest joint-venture. In four stages it’s going to bring on 800 million a day of gas capacity and about 135,000 barrels a day of fractionation, thus going to have some on-site working storage. This is funded or essentially backed by about a million acres that have been committed through Chesapeake and EnerVest. So it’s got a very strong backing in terms of acreage development.

And as I mentioned, Chesapeake is planning on drilling over 540 wells on their acreage alone. The first try of this will be online at the end of June, an upside potential exist as this drilling expands, again this is right kind of in the four of the play around Harrison and Carroll County, and again you got a couple of big acreage holders who had committed to it and there’s others that they are working on.

The other investment we have is in Cardinal Gas Services, EVEP owns a 9% interest in that and it is a low pressure gathering and compression of wet gas from the JV production in the Chesapeake joint-venture. So imagine Chesapeake drill their wells, they need to tie those wells into Utica East Ohio, so the need some pipeline run from those wells to the main lines. Cardinal does all that and so an EVEP has an interest in that. Again, it’s backed by a firm drilling commitment from Chesapeake, there’s plans for over 4,600 wells, over an 18 year period and within five years they are expecting over a Bcf a day coming through that and again there’s upside as the development expands.

This is just a picture of one of the aspects of the Utica East Ohio, this is our Harrison Hub. Again, up the top is the 45,000 barrels per day of NGL fractionation that’s the first train, there’ll be two other trains to come on line with that. You see some of the other components and right down the middle of it, you see ten tracks that have the capacity, I think to handle over 300 railcars. So again, as an upstream oil and gas guy I never I’d learn as much about railcars, but I actually was sitting in part of the railcar discussion here a minute ago, and which is fine the things you learn that in North America over my career if I go way back when I never would have thought, we’ve been talking railcars to transfer North American oil to North American markets, it’s beyond what we ever thought would happen.

Kind of getting back to the Midstream overall, this chart shows kind of the progression of capital and EBITDA we expect for EVEP out of the Midstream investments. We are talking about capital of around $360 million over a five-year period. Again, (inaudible) is driven by a fee structure, we get fees on gathering, compression, processing, transport, et cetera like most conventional kind of processing agreements are. And then Cardinal Gas Services actually has a cost of service arrangement with the fixed internal rate of return. And that’s adjusted annually as you look at the overall returns, so it’s really kind of a return on capital.

But if you combine the two it’s projected by 2016 we will be generating somewhere around $60 million to $70 million of EBITDA from this. We’re developing this for less than six times EBITDA overall and from what a lot of you all know and what we know of what projects like this trade for in the market. We’re hopeful that overtime we’ll get either multiple expansions or more realistically we’ll sell this to someone who wants to operate the position overtime, Momentum our general partner in this had a great record for doing this and combined with us and Momentum we own 51% in this investment.*

And then, during the question and answer session which followed his prepared remarks, we get these further comments:

Okay. The question was how has the Utica process, sales process changed? well if we go back to October, really the market was to sell a large package or up 330,000 acres or maybe three or four components of that, pretty big chunky packages, but as the market evolved really there was interest for a lot of our places, but not at that size.

We actually went down the road, with one party who is interested in buying probably two-thirds of acreage, went pretty far down the road, the price was good, but some of the terms and conditions just weren’t what we wanted, we were going to have to assume some liabilities that we normally wouldn’t in any other agreement we had ever been in and didn’t feel comfortable. Those are related to environmental, and title and just some, because again EnerVest is not selling its interests in 8000 wells that hold production, that hold these leases by production.

So as we went through that, we started realizing there’s a lot of folks interested in buying smaller pieces, 20,000 acres, and 30,000 acre pieces and forks were really starting to get production information back and hone in on areas they like. As an example, there’s different folks testing the Utica in the south versus the north, versus the central. As an example Rex just recently announced a well in Carroll County along with, which is really a strong well.

Of course, Gulfport has been downtown south announcing things, so there’s different players in the process. We realize we’d probably have more interest from larger group of companies if we shrunk the size down. So for the last two months we’ve been talking to a lot of different companies about buying small pieces. And again the interest is very strong, we’ve got a several offers, we’re in various profit stages of negotiating on those offers, but again really encouraged with the response.*

He continued with a response to a follow-up question:

You know we’re not real active in the acquisition side of that, I can say looking at benchmarks I know that there’ve been transactions completed in parts of it for 10,000 an acre lately, there has been transactions completed up in the northern end for 4,000 to 6,500 we’ve seen various different levels. And so really in the Wet Gas window, if anything results have gotten better.

And so there is obviously the big benchmark that Chesapeake hit on Total, which on a PV basis is about $12,000 something per acre mode, that I haven’t seen hit again, but with existing continuing results and especially with the Midstream coming online there being more, I guess granularity around production, to me that should help. I can’t comment a lot on specific and certainly I’m not going to comment on the biz we are getting, but hopefully we’ll be able to talk to you guys before too long about some of those numbers.*

On the question of what kind of deal EVEP expects to do in selling Utica acreage:

The question was, are we considering asset swaps as we sell smaller blocks of acreage? Actually that’s in terms of swaps with the buyer, that’s become a bit more problematic. Actually when we’re doing the big deal part of the idea was initially a big swap which looked very interesting, we just couldn’t come to an agreement on price on borrowing that, we moved that to a cash deal. On the smaller deals, to us we as selling maybe one month a certain amount, the next month a certain amount, the next month a certain amount, and that’s going to be difficult to manage trades with that many transactions, but that being the case EnerVest the funds have several assets that they are interested in liquidating over the next year or two.

And we’ve already have some discussions with kind of their Boards around the idea of doing kind of the step-by-step drop-down or some really drop-down of some of their acquisitions. So look for us to do that sort of thing where we reduced some drop-downs out of EnerVest that time with the sales of the assets so that we still have the tax effective nature.*

*Seeking Alpha (Jun 26, 2013) - EV Energy Partners’ CEO Presents at Credit Suisse MLP and Energy Logistics Conference (Transcript).

   Here is a key slide from Houser's presentation:.

 

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