EV Energy Partners, L.P. (NASDAQ:EVEP) has joined a long list of dividend cutters in the oil and gas space. That should help preserve the company's ability to pay its now-reduced dividend in 2015, and allow it to invest in growth initiatives. However, if oil prices linger in the doldrums, EV Energy Partners could be forced to cut again.
Protecting the dividend
"In response to the speed and depth of the decline in commodity prices, we are significantly reducing our E&P capital budget for 2015 by approximately 40% versus 2014 and are lowering our common unit distribution," explained John Walker, EV Energy Partners' Executive Chairman in the press release announcing the partnership's roughly 33% distribution cut. The expected coverage ratio in 2015 is around 1.15 times.
During a conference call discussing the cut, he added that, "We need to make sure that we're in good standing. And we did cut [the distribution] enough that we feel like we're in good shape for this year." Having seen around half a dozen periods of commodity price volatility in his business life, Walker noted that prices often go down faster and farther than people expect. Thus, caution seems prudent.
2015 should be fine
At the end of the day, EV Energy Partners should be fine in 2015 despite weak oil prices. That's because part of the partnership's business model is to hedge its oil production to lock in prices. That helps to mitigate the impact of often-volatile energy markets. Right now, it has basically all of its expected oil production for 2015 locked in at around $90 a barrel. And with the capital spending cut, costs will be going down, too.
But that sets up a potentially difficult year in 2016. For example, during the conference call, the partnership admitted that it expected production to be flat to slightly lower in 2016. That makes sense, because new production needs to be added via additional drilling or acquisitions to offset production declines at existing wells, and the partnership is pulling back hard on capital spending.
Complicating things is the fact that EV Energy Partners only has about a third of its 2016 production locked in right now. The prices it's secured are high, at around $90 a barrel, but with so little production protected from commodity volatility, revenues next year could come under pressure if oil prices don't rebound. That's especially true since production is set to flat line.
Some good with the bad
So, clearly, low oil prices are a big headwind for EV Energy Partners. However, there are some positives to keep in mind. For example, EV Energy Partners is looking to sell some non-core midstream assets that will free up cash for new acquisitions without the need to issue units. Acquisitions would help boost production, though, according to Walker, the acquisition market is "unstable" right now. EV Energy Partners appears more likely to wait until prices stabilize. The question is how long can it wait if the hedging cliff gets steep next year...
Then there's EV Energy Partners' parent, EnerVest. This Canadian energy player has assets that it can drop down, or sell, to EV Energy Partners. In other words, EV has a pipeline of assets that it could acquire, helping to make this avenue of growth that much easier to achieve once the market calms down. Keep a close eye on the company's disposition and acquisition activities, keeping in mind that there is a ticking clock.
Lots of moving partsEV Energy Partners is also looking to partnerships to help fund future drilling. According to Walker, many of the energy driller's properties can turn a profit even at current oil prices. That should make it easier to find partners to help boost production while EV Energy Partners' ability to fund capital spending plans is stressed. It's already had conversations with multiple third parties about this. So if it gets a deal done, production could turn out better than currently expected.
It looks like EV Energy Partners will keep paying its dividend throughout 2015. However, if oil prices remain low, next year is much less certain. But there are a lot of moving parts here that could help offset weak energy prices and, perhaps, set the partnership up to return to distribution growth over the long term. So if you are looking at EV Energy Partners, you'll need to watch oil prices and the company's hedging, partnership moves, asset sales, acquisition activity, and drop down actions -- each will play an important role in determining if 2016 sees another dividend cut or not.
Reuben Brewer has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.