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Adding It All Up: Why EV Energy Partners' Reserves Matter

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Oil and gas MLPs are a great place to invest in if you're looking for outsized income. The average yield across the top 10 is just over 8.5%, so the group, as a whole, offers an attractive income option for investors. The key, though, is to understand that there's more to a company than just its current income yield.

One area investors really need to drill deeper into is the company's reserve base, which will give you a better idea of how it's producing the income needed to support the large distribution. Today, we're going to drill down into the reserves of EV Energy Partners (NASDAQ: EVEP  ) to get a better idea of what an investor is actually buying when adding units to their portfolio.

Overview of reserves
Like its peers, EV Energy has built an asset base of long-life reserves and, at last count, the company had 905-billion cubic-feet equivalent, or Bcfe, of oil and gas reserves. Those reserves have an estimated reserve life of about 15 years, and are 67% natural gas. Finally, as you can see from the map below, the company has reserves spread across several states:

Source: EV Energy Partners Investor Presentation (Opens in a PDF)

Let's take a look at its biggest reserve basins to see if we can gain some insight into both its operations, and its future potential.

The Barnett Shale
EV Energy's reserves are really concentrated in the Barnett Shale in Texas. In total, 523.5 Bcfe, or nearly 59% of its reserves, are in that one shale play. The company has built its position in the play by investing alongside its sponsor EnerVest. EV Energy has a 31% net interest in the play and, when combined with EnerVest, it vaults the pair to become a top-five producer in the Barnett.

There are plenty of growth opportunities in the Barnett, and the company plans to spend about $60 million to drill 70 total gross wells this year. Just for some perspective of the Barnett's future growth, Devon Energy (NYSE: DVN  ) is planning to drill 150 wells this year, and it has a liquids-rich drilling inventory of about 2,500 future locations. Even though EV Energy's Barnett reserves are 69% natural gas, it, like Devon, has upside to the wet gas portion of the play, which is where both companies are currently devoting capital these days.

The next most important basin for EV Energy is its position in the Appalachian Basin, which includes its Utica Shale acreage. Overall, about 100.9 Bcfe, or 11% of its reserves, are in Appalachia, and the company plans to spend about 9% of its $100 million upstream capital budget to develop that acreage this year.

It's the company's position in the Utica that offers both opportunities and challenges. EV Energy has about 177,000 net working-interest acres, as well as overriding royalty interests in the play. There are two areas to watch. First, it's participating in a joint venture with Chesapeake Energy (NYSE: CHK  ) and Total, which gives it upside as the venture grows production. In addition to that, the company is in the process of unloading more than half of its net acres in the play, which could unlock value if it gets a great price.

The problem here is that there are too many unknowns at the moment. The Chesapeake venture has been hampered by midstream bottlenecking, which has 75 wells still waiting on pipeline capacity. It's also unclear how good the play will ultimately be, and if it can provide the solid economic returns the company seeks. Meanwhile, its acreage sale has hit a major snag, as potential buyers wouldn't meet its terms. Now, EV Energy is trying to break its acreage into smaller packages to appeal to a broader audience. There's a real risk that it won't be able to cash in on its Utica acres for favorable terms, which is causing a lot of investor concern. 

The last large area of reserves for EV Energy is in the Mid-Continent, which holds 7% of its reserves at 70 Bcfe. What's important about these reserves is it provides EV Energy with production growth opportunities, as evidenced by the plan to spend 12% of its upstream capital budget on the play this year. The other important aspect of these reserves is that it has a lot of oil in place, as it's estimated that EV Energy has net proved oil reserves of about 3-million barrels. That's second only to its position in the Appalachian basin, which holds an estimated 4.8 million barrels of oil.

The Mid-Continent could be an important area to watch if the company plans to diversify its reserve base through additional acquisitions. Fellow oil and gas MLP LINN Energy (NASDAQOTH: LINEQ  ) has been very active in acquiring mature assets in the region. In fact, more than half of its current reserves are located in the region, as it's known to hold long-lived, low-decline, and liquids-rich assets that fit in very well in an MLP structure.

Final Foolish thoughts
While EV Energy does have additional reserves in Michigan, Texas, Louisiana, and the San Juan Basin, when you add it all up, those reserves are less than a quarter of its overall reserve base. As an investor, what you need to realize is that the story at EV Energy is that it has substantial natural gas reserves in the Barnett Shale, and potential upside to the Utica. Those are two potentially high-impact plays for the company; however, it also means that the company's risk is very concentrated, which could lead to volatility for investors. 

We've already seen the negative effects of concentrated assets after Chesapeake Energy bet big on natural gas. More recently, the company has been investing heavily into liquids to diversify its asset base, which is something EV Energy investors might want to see it do over time. To learn more about how Chesapeake is pursuing liquids growth, as well as learn more about its enormous potential, you're invited to check out The Motley Fool's brand-new premium report on the company. Simply click here now to access your copy.

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