I recently took a brief look at one of the more unique MLPs, Eagle Rock Energy Partners (NASDAQ: EROC). What makes this company unique is that it's a blend of both traditional midstream MLP assets and oil and gas production assets. Today, I want to take a closer look at those oil and gas production assets, which I think provide investors with a lot of upside potential.
Proven reserves = steady returns
Eagle Rock had 350 billion cubic feet equivalent (Bcfe) of oil and gas reserves as of the end of last year. Those reserves are spread across five main operating areas:
Two-thirds of the reserves are located in the midcontinent, which are well-known for holding great MLP-type assets that have long life and low decline. Peers like LINN Energy (NASDAQ: LINE) and Vanguard Natural Resources (NASDAQ: VNR) each has a substantial presence in the midcontinent region. Eagle Rock's reserves there have a heavy natural gas component; gas is 64% of these reserves. However, Eagle Rock has an exciting oil play in the region, which I'll get to in a moment.
The rest of its assets are spread around Texas, Alabama, and Mississippi. These assets are primarily oil assets, and combined produce about 27.5 million cubic feet equivalent per day (MMcfe/d) of Eagle Rock's overall average production of 75.1 MMcfe/d. One particular area of interest is Eagle Rock's Permian Basin assets. Both LINN and Vanguard have invested heavily in the Permian over the past year, as the formation is an excellent MLP asset with low decline rates and long-life, liquids-rich production. The bottom line is that Eagle Rock's oil and gas assets are focused in the same conventional areas as its peers because these are the type of low-decline, long-life assets that are critical to fueling the hefty distributions that these companies pay.
With a "SCOOP" of upside potential
The most interesting asset, and the one with the highest upside is Eagle Rock's position in the "SCOOP", or South Central Oklahoma Oil Province. Top Bakken producer Continental Resources (NYSE: CLR) calls it a "new, high-impact resource play" and Eagle Rock has 16,000 net acres right in the heart of this play. The potential is there for this to be a play with high returns and, therefore, high upside for Eagle Rock. In fact, it has seen a 31% jump in production growth as its interest in nine horizontal wells have come on line.
While Eagle Rock's acreage is dwarfed by Continental's 232,000 net acres, it is a substantial position for a company of its size. These acres could potentially be monetized, or Eagle Rock could earn high rates of return in the 25%-30% range by investing its own capital to drill. The issue here though is that the company doesn't have a whole lot of capital to work with, so selling the asset might be in its best interest.
In fact, a monetization of some sort seems fairly likely. On last quarter's conference call, the company's chairman, Joseph Mills, stated:
We've received several unsolicited inquiries, offers to purchase our position. And you can imagine, they come in all different forms, from outright trades to outright purchases of our acreage. ... Historically, I've talked about the reserve potential here or resource potential could be in the, call it, 35 million to 55 million barrels oil equivalent for our acreage. ... A lot of offers we're getting are kind of per dollar, per acre, which are probably not something that we're interested in. But we've had a few offers where they're interested in trading us potentially proven -- proved developed assets for this upside, and that's kind of interesting to us given, in particular, our MLP structure.
Selling its SCOOP assets could potentially bring in additional assets of value or provide much needed cash to shore ups its balance sheet, which would put the company's distribution on solid ground.
Final Foolish thoughts
Eagle Rock has built a solid reserve base from which it expects to produce for the next 13 years. In addition, there is compelling upside from its position in the SCOOP. Those ingredients are key for the company's ability to maintain and possibly grow its already generous distribution. There is more to Eagle Rock: I've not yet touched on its midstream operations. Stay tuned to Fool.com for more on this side of its business.
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