MLPs have played a now-familiar role in consolidating the midstream, where it’s all about yield in a low-interest-rate environment. The easiest way to generate growth for a yield-based vehicle is via acquisitions, hence Kinder Morgan’s $37.8-billion run (cash, stock and debt) at El Paso Corp., which would create the nation’s largest midstream company.
But MLPs are now also roiling the waves in the sea of publicly held oil and gas independents.
E&P MLPs focus on cost and operational expertise, coupled with disciplined acquisition metrics. They emphasize low-risk mature properties while employing the most conservative operating economics in conventional oil and gas. Traditionally they were consolidators of stripper wells in mature conventional basins that made money—and provided a quarterly yield to unit-holders—based on economies of scale.
Not anymore. In recent weeks, E&P MLPs were parties in more than $4.2 billion in transactions in tight formation oil and gas plays.
First, Linn Energy Inc. scooped up Granite Wash properties from cash-strapped Plains Exploration & Production Inc. The $600-million move doubles Linn’s Granite Wash exposure to more than 400 horizontal locations and increases Linn’s Granite Wash production by 75% to 80 million cubic feet equivalent (MMcfe) of liquids-rich gas from 20,000 acres of neighboring leases, and another 75,000 acres outside the Granite Wash.
Second, EV Energy Partners LP and its institutional investment corporate cousin, Enervest Ltd., expanded its Barnett shale exposure via two purchases from Encana Oil & Gas and from an undisclosed private seller. The deals topped $1.2 billion in aggregate, including $975 million for the Encana properties. EV Energy Partners (and Enervest) entered the Barnett shale about a year ago via the $970-million purchase of 212 wells in Parker County, Texas, from Talon Oil & Gas LLC.
Both the Granite Wash and Barnett shale are tight formation oil and gas basins, not the place you’d expect to find an MLP, because of high well costs and a higher risk profile. The EV Energy Partners/Enervest acquisition brings holdings in the original Barnett shale core of Montague, Wise, Denton, Parker and Tarrant counties, suggesting the Barnett has evolved into a mature natural gas basin with a predictable investment and production profile. It is now a mirror reflection of the trends that previously drove MLPs to acquire mature conventional properties in the Permian Basin and Midcontinent.
EV Energy and Enervest were also silent partners with Chesapeake Energy Corp. in its recent $2.4-billion Utica shale joint venture. They had entered into a prior JV arrangement with Chesapeake in August 2011. Notably, the MLP combined the mature conventional model with an unconventional play when the two Houston firms picked up legacy Ohio oil and gas properties that later proved prospective for Utica shale from Range Resources Inc. in March 2010.
Though a minority partner in Chesapeake’s latest JV, EV Energy Partners and Enervest will rely on Chesapeake’s operational expertise to generate value out of the nation’s latest hot shale play.
Chesapeake’s Utica JV with an undisclosed international major includes a $1.2-billion drilling carry for the liquids-rich portion of the Utica. However, Chesapeake is attempting to raise another $1.2 billion for Utica drilling via Chesapeake Utica LLC, a newly created preferred stock subsidiary. Chesapeake may have recouped its leasing costs in the Utica, but it is scrambling to raise additional funds to develop the nascent play.
Couple this with Devon Energy Corp.’s recent announcement that it is seeking a single long-term JV partner for five unconventional plays, including the Utica shale. Devon sold $9 billion in offshore and international properties in early 2010 to avoid future financial commitments and focus on core North American unconventional oil and gas. Now, the company is seeking a financial partner to spread risk and underwrite a portion of those ongoing development costs.
Chesapeake, Devon and Plains underscore the reality that publicly held independent shale players have been outspending cash flow for some time and now need deep-pocketed partners to help them through the cash-burning development phase. Who has that cash? The majors for one. And what the majors don’t buy may well find its way into an E&P MLP portfolio.
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