Description

I was doing an equity screen, looking for insider buys & discount to book value.  I found EVEP MLP trading at $.60.  They suspended distribution in 2016 and 2017.   I’m not interested in this equity (ticker: EVEP).  However, I like the senior secured debt trading at .58, maturing in 4/2019 with an 8% coupon.   I believe it is a 50 cent dollar.

Assets:  They have 2016 PV-10 of $373 million.  They have net PPE of $1.4 billion.

Liabilities: $342 million in outstanding debt at face value (what I bought) and $275 million drawn out on ABL senior to me. 

Liquidity:  They have another $100 million in liquidity available on ABL as of most recent quarter, probably less right now.

ISSUE:  They are in compliant with covenants right now.  Covenants tighten in March 2018 at which time they will TRIP COVENANTS unless they can make divestures to lower debt load, or they can’t renegotiate covenants/debt.   

My thesis is that equity holders won’t give these assets up to bond holders or bank.   Significant insider buys have been occurring over last couple of weeks.  The PV-10 calc is too low  (commodity prices were low).  Owners of the company will see these assets as valuable in any other market climate and will willingly kick in capital to protect them.    Let’s look at reserves & assets over time with different PV-10 calcs from that time period:

Notice gas reserves are pretty stable, ppe is stable but PV10 calc goes up and down depending on future price assumption.  PV10 is quite low now.

From filing:  “As specified by the SEC, the prices for oil, natural gas and natural gas liquids used to calculate our reserves were the average prices during the year determined using the price on the first day of each month. The prices utilized in calculating our total estimated proved reserves at December 31, 2016 were $42.75 per Bbl of oil and $2.481 per MMBtu of natural gas, which was significantly lower than forward strip prices. Had we used the forward strip prices at December 31, 2016 through December 31, 2029, we estimate that the present value (discounted at 10% per annum) of estimated future net revenues of our proved reserves would have been approximately 111% higher and that our reserves on an Mcfe basis would have been approximately 50% higher than our reserves calculated using SEC prices.”

The downside is bankruptcy in early 2018.   I don’t see much downside in that event:

Back of the envelope:

Let’s say the bk estate starts with $1.5 billion in assets (GAAP b/s).

- $375 million of the best assets goes to payoff ABL/bank (the good stuff, hard reserves)

- $683 million assets evaporate, get written down, given to lawyers, fees, people like Richard, etc. (the fluff)

LEAVING…

~$342 million in some pretty decent assets for senior secured bondholders (me).  These assets are likely drilling opportunities & land, some reserves, etc.

Again, face value of debt is $342 million… so that’s a full recovery (albeit in equity in a new entity trading at book value).

If you assume new entity trades at .5x book you still do fine as a bond investor (what you’re paying now for the bond).

To lose money on this deal you need what’s left of the GAAP b/s to be written down by 90%.  In other words, after you paid the bank for the ABL, settled the other liabilities (ARO, a/p, etc.) and the lawyers, you’d have to write down the remaining assets by 90%... before you start to lose money (assuming you pay $.58 for debt and new entity trades at book value).

Upside: you get $1.16 in principal & coupons.  So this is literally a 50 cent dollar ($.58 for $1.16).

This guy is too smart to buy the equity and then give it to the bank/bondholders!  "Mark A. Houser joined privately-held EnerVest in 1999 as the executive vice president and chief operating officer. EnerVest is one of the 25 largest oil and gas companies in the United States and has more than 1,300 employees, 5.5 million acres under lease and $10 billion in assets. EnerVest created EVEP in 2006 through an initial public offering.  Since its formation, Houser has served as president of EVEP and was named CEO in 2012. Prior to his tenure at EnerVest, Houser held executive leadership positions with Occidental Petroleum Corporation and Canadian Occidental Petroleum”

Mark Houser owns about 2% of the company and the CEO, John Walker, owns another 5.6%.    I don’t see how they can walk away from company.    Even if they do get a sweet heart management deal in restructured company…

Pros:

.58 for $1 plus 8% coupon, due in April 2019

Reserves worth more than debt.

Insiders buying equity (units)…

Cons:

Covenants change March 30, 2018 such that they will not be in compliant (why this is on sale)

Equity is an MLP that is a dumping ground for parent’s assets

After restructuring, will bond holders get equity in another MLP, messy process at best?

Borrowing base lowered to $375 million from $450 million (why this is on sale).

Management doesn’t sound too good on recent conference call.

EVEP is part of a bigger, private oil company that could be using the public market for its various mlp-related securities to it’s own advantage.   It does appear in the past that the MLP EVEP is used as a dumping ground for the private company (which holds more assets and partners with MLP in various ways).  I believe the unit holders will be the losers not the bond holders.

Catalyst

bankruptcy