Eagle Rock Energy Partners LP chairman and chief executive officer Joseph Mills gave a company update in Houston recently. The master limited partnership recently announced the acquisition of Crow Creek Energy II LLC, an oil and gas company based in Tulsa, Oklahoma for $530 million.

Mills told a TIPRO and IPAA audience that the deal was a big step following the restructuring of the company in the summer of 2010. During the recapitalization, Eagle Rock sold its mineral interests, raised $225 million to pay debt, and eliminated its incentive distribution rights, in response to struggles many MLPs suffered subsequent to the economic crash and intractability of the credit markets.

"Two years ago we were 70% debt and 30% equity. We flipped that, and now we are 70% equity," said Mills. The Crow Creek acquisition reweights the company’s assets towards oil and gas and gives it a position in the Granite Wash basin, where its midstream unit operates several processing plants and pipeline infrastructure. The company has already announced it will expand one of these, the Phoenix cryogenic plant in the Texas Panhandle.

Eagle Rock grew its proved reserves by around three times to just under 400 billion cubic feet of gas equivalent through the acquisition, and moved from a 30% gas weighting to a 64% gas weighting. Mills is bullish on gas longer-term. Shorter-term, the position of the reserves in the condensate window and the price of natural gas liquids appears positive.

"We think gas prices may be at a floor, and that there is more upside to gas prices than downside," he said. The company is producing 75-to 80 million cubic feet of gas per day, and Mills believes the nature of the gas production and the midstream processing and transport are complementary.

The $530-million transaction was largely funded with equity in Eagle Rock, transferred primarily to Natural Gas Partners who, upon completion, holds around 40% interest in the company. Crow Creek, an NGP portfolio company, had $213 million in debt that was assumed by Eagle Rock in the process.

"We intend to recommend to our board raising our distribution to $0.75 on an annualized basis this quarter, with a target of $1.00 by the end of next year," he said. "This transaction enables us to really grow our distribution going forward."

Mills said Eagle Rock will focus on organic growth for the next few years, but it will, in the short-term, face high drilling costs for wells in the Cana-Woodford play in Oklahoma, where most of the value of the newly acquired reserves is. Currently, the cost to drill and complete those wells is about $8.5 million per well. Mills was hopeful that it would be able to reduce that cost over time.

The company just completed its first well in the Cana-Woodford and fracing is to commence presently. Some 60% of the cost of the well is drilling, which is of a single leg, four-to-five thousand foot lateral design. The company estimates 6 billion cubic feet of gas reserves per well, producing 6 million cubic feet per of gas per day and 50 barrels of NGLs per thousand cubic feet of gas, on average. Developing a midstream presence in the Cana-Woodford as a possible growth opportunity is a move the company may consider.

He indicated there have been rumblings from Congress about changing the tax treatment of pass-through entities such as MLPs, but in his view, the risk of that was very low.

Contact the author, Brian K. Tully, at btully@hartenergy.com.