EV Energy Partners LP (EVEP) will acquire oil and natural gas properties in the Appalachian and San Juan basins, Michigan and Austin Chalk in a dropdown acquisition from its general partner owners EnerVest.

EVEP will acquire estimated net proved reserves of 302 billion cubic feet equivalent (Bcfe) in the assets for combined cash consideration of $259 million through four agreements.

Upon completion of the dropdown, EVEP’s daily production will increase by 33% and proved reserves by 30%. The company’s reserve mix will consist mainly of gas (71%), NGL (20%) and oil (9%).

At close, the deal will add more than 9,400 producing wells, about 83% operated.

EVEP plans to fund the acquisitions with available cash and borrowings under its revolving credit facility. The company expects its total capitalization to increase to $1.1 billion from $928 million following the acquisition.

In June 2015, Ethan H. Bellamy, analyst, Robert W. Baird & Co. said the company would likely acquire assets in deals of about $300 million each in fourth-quarter 2015 and first-quarter 2016.

Bellamy and fellow analyst Fischer Van Handel viewed the company as “incrementally negative,” questioning the company’s ability to make distributions into 2016 despite selling 21% interest in the Utica East Ohio Midstream LLC (UEO) for $575 million.

“EVEP has yet to fill the cash flow gap,” Bellamy and Van Handel said.

“With an onerous cost of equity, EVEP will be hard pressed to win an auction, in our view, and buying assets even at size may not do enough to hold off another distribution cut,” they said. EVEP has a 14% weighted average cost of capital—essentially all the money it must pay out to finance acquisitions.

An Enervest dropdown would “beg the question of EVEP as the highest and best bidder.” Enervest owns a number of assets that it can drop down for EVEP.

Enervest says its deals with EV Energy are reviewed and approved by board members and a conflicts committee.

Michael E. Mercer, EVEP president and CEO, told Hart in July that EVEP used the UEO proceeds to repay its credit facility, which was $530.4 million as of December 2014. Mercer said EVEP was considering a combination of third-party deals and potential dropdowns among other opportunities.

As part of its Sept. 3 deal, EVEP will purchase 100% ownership interest in the Appalachian’s Belden & Blake Corp. as well as other assets.

Belden owns oil and natural gas properties in the Appalachian Basin and Michigan near EVEP's existing properties and holds estimated net proved reserves of 120 Bcfe. The company merged with Enervest in about 10 years ago.

Belden will become a wholly-owned indirect subsidiary of EVEP and will remain a C corp, subject to state and federal taxation. At recent strip prices, EVEP estimates that corporate taxes at Belden will be negligible for the remainder of 2015 and less than $1 million annually for 2016 and 2017.

The remaining properties combine an estimated net proved reserve of 182 Bcfe, including additional working interests in EVEP’s existing Austin Chalk and Appalachian Basin properties and additional properties located near EVEP’s existing San Juan Basin position. The acquisitions do not include Utica Shale or Eagle Ford formation rights.

Acquisitions highlights include:

  • Current production of 55 MMcfe/d;
  • Proved reserves-to-production ratio of 15 years; and
  • Proved developed decline rate of 8%.

“We are pleased with the opportunity to build on our existing positions in Appalachia, Michigan, San Juan and the Austin Chalk,” Mercer said. “Our operating company has a long, successful track record with these assets. The transactions will increase EVEP's percentage of proved developed reserves, reduce our annual production decline and provide a greater amount of basin diversification.”

The acquisitions are expected to close on Oct. 1 and are subject to customary closing conditions and purchase price adjustments.

Darren Barbee can be reached at dbarbee@hartenergy.com.