Harvest Oil & Gas Corp. - Quarter Report: 2013 September (Form 10-Q)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION  

Washington, D.C. 20549 

Form 10-Q 

For the quarterly period ended September 30, 2013

OR 

Commission File Number 

001-33024

EV Energy Partners, L.P. 

(Exact name of registrant as specified in its charter) 

Registrant’s telephone number, including area code: (713) 651-1144 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. 

YES þ NO o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

YES þ NO o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b–2 of the Exchange Act. Check one: 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b–2 of the Exchange Act).  

YES o NO þ

As of November 1, 2013, the registrant had 48,349,080 common units outstanding.

Table of Contents

PART I. FINANCIAL INFORMATION 

ITEM 1. FINANCIAL STATEMENTS 

EV Energy Partners, L.P. 

Condensed Consolidated Balance Sheets 

(In thousands, except number of units) 

(Unaudited) 

See accompanying notes to unaudited condensed consolidated financial statements.

EV Energy Partners, L.P. 

Condensed Consolidated Statements of Operations 

(In thousands, except per unit data) 

(Unaudited) 

See accompanying notes to unaudited condensed consolidated financial statements.

EV Energy Partners, L.P. 

Condensed Consolidated Statements of Changes in Owners’ Equity 

(In thousands, except number of units) 

(Unaudited) 

See accompanying notes to unaudited condensed consolidated financial statements.

EV Energy Partners, L.P. 

Condensed Consolidated Statements of Cash Flows 

(In thousands) 

(Unaudited) 

See accompanying notes to unaudited condensed consolidated financial statements.

EV Energy Partners, L.P. 

Notes to Unaudited Condensed Consolidated Financial Statements

NOTE 1. ORGANIZATION AND NATURE OF BUSINESS 

Nature of Operations 

EV Energy Partners, L.P. (the “Parent”) and its wholly owned subsidiaries (“we,” “our” or “us”) are a publicly held limited partnership that engages in the acquisition, development and production of oil and natural gas properties. Our general partner is EV Energy GP, L.P. (“EV Energy GP”), a Delaware limited partnership, and the general partner of our general partner is EV Management, LLC (“EV Management”), a Delaware limited liability company. EV Management is a wholly owned subsidiary of EnerVest, Ltd. (“EnerVest”), a Texas limited partnership. EnerVest and its affiliates also have a significant interest in us through their 71.25% ownership of EV Energy GP which, in turn, owns a 2% general partner interest in us and all of our incentive distribution rights.  

We operate in one reportable segment engaged in the exploration, development and production of oil and natural gas properties and all of our operations are located in the United States.

Basis of Presentation 

Our unaudited condensed consolidated financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, certain information and disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. We believe that the presentations and disclosures herein are adequate to make the information not misleading. The unaudited condensed consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the interim periods. The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the full year. These interim financial statements should be read in conjunction with our Annual Report on Form 10–K for the year ended December 31, 2012. 

All intercompany accounts and transactions have been eliminated in consolidation. In the Notes to Unaudited Condensed Consolidated Financial Statements, all dollar and unit amounts in tabulations are in thousands of dollars and units, respectively, unless otherwise indicated.

NOTE 2. EQUITY–BASED COMPENSATION  

We grant various forms of equity–based awards to employees, consultants and directors of EV Management and its affiliates who perform services for us. These equity–based awards consist primarily of phantom units and performance units.  

We accounted for the phantom units issued prior to 2009 as liability awards, and the fair value of these phantom units was remeasured at the end of each reporting period based on the current market price of our common units until settlement. Prior to settlement, compensation cost was recognized for these phantom units based on the proportionate amount of the requisite service period that has been rendered to date. The last of these phantom units vested in January 2013.

We account for the phantom units issued beginning in 2009 as equity awards, and we estimated the fair value of these phantom units using the Black–Scholes option pricing model. We account for the performance units as equity awards, and we estimated the fair value of these market condition performance units using the Monte Carlo simulation model.  

The following table presents the compensation costs recognized in our unaudited condensed consolidated statements of operations: 

EV Energy Partners, L.P. 

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

These costs are included in “General and administrative expenses” in our unaudited condensed consolidated statements of operations.  

As of September 30, 2013, there was $31.0 million of unrecognized compensation costs related to our unvested phantom units and performance units which are expected to be recognized over a weighted average period of 2.3 years.

NOTE 3. INVESTMENTS IN UNCONSOLIDATED AFFILIATES 

The most significant of our investments in unconsolidated affiliates are Cardinal Gas Services, LLC (“Cardinal”) and Utica East Ohio Midstream LLC (“UEO”). We own 9% of Cardinal and 21% of UEO, which are constructing and operating natural gas processing, natural gas liquids fractionation and connecting pipeline facilities to serve production in the Utica Shale in Ohio.

NOTE 4. RISK MANAGEMENT 

Our business activities expose us to risks associated with changes in the market price of oil, natural gas and natural gas liquids. In addition, our floating rate credit facility exposes us to risks associated with changes in interest rates. As such, future earnings are subject to fluctuation due to changes in the market prices of oil, natural gas and natural gas liquids and interest rates. We use derivatives to reduce our risk of volatility in the prices of oil, natural gas and natural gas liquids and interest rates. Our policies do not permit the use of derivatives for speculative purposes.  

We have elected not to designate any of our derivatives as hedging instruments. Accordingly, changes in the fair value of our derivatives are recorded immediately to operations as “Unrealized losses on derivatives, net” in our unaudited condensed consolidated statements of operations.  

As of September 30, 2013, we had entered into commodity contracts with the following terms: 

As of September 30, 2013, we had entered into interest rate swaps with the following terms: 

EV Energy Partners, L.P. 

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

The following table sets forth the fair values and classification of our outstanding derivatives:

We have entered into master netting arrangements with our counterparties. The amounts above are presented on a net basis in our unaudited condensed consolidated balance sheets when such amounts are with the same counterparty. In addition, we have recorded accounts payable and receivable balances related to our settled derivatives that are subject to our master netting agreements. These amounts are not included in the above table; however, under our master netting agreements, we have the right to offset these positions against our forward exposure related to outstanding derivatives.

Should our credit facility become due and payable because of an event of default, our derivatives that are in a net liability position could also become due and payable. We could also be required to post cash collateral related to these derivatives under certain circumstances. As of September 30, 2013 and December 31, 2012, we were not required to post any collateral nor did we hold any collateral associated with our derivatives. 

EV Energy Partners, L.P. 

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

The following table presents the impact of derivatives and their location within the unaudited condensed consolidated statements of operations: 

NOTE 5. FAIR VALUE MEASUREMENTS 

Recurring Basis 

The following table presents the fair value hierarchy for our assets and liabilities that are required to be measured at fair value on a recurring basis: 

 Our derivatives consist of over–the–counter (“OTC”) contracts which are not traded on a public exchange.  As the fair value of these derivatives is based on inputs using market prices obtained from independent brokers or determined using quantitative models that use as their basis readily observable market parameters that are actively quoted and can be validated through external sources, including third party pricing services, brokers and market transactions, we have categorized these derivatives as Level 2. We value these derivatives based on observable market data for similar instruments. This observable data includes the forward curve for commodity prices based on quoted market prices and prospective volatility factors related to changes in the forward curves and yield curves based on money market rates and interest rate swap data, such as forward LIBOR curves. Our estimates of fair value have been determined at discrete points in time based on relevant market data. There were no changes in valuation techniques or related inputs in the nine months ended September 30, 2013. 

EV Energy Partners, L.P. 

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

Nonrecurring Basis 

In March 2012 and August 2012, in conjunction with the sale of assets held for sale at December 31, 2011, we incurred $0.5 million of additional impairment charges to write down these assets to their fair value of $6.0 million. The impairment charge was included in earnings for the nine months ended September 30, 2012. The fair value was determined using Level 2 inputs consisting of the mutually agreed upon selling price we received upon the sale of these oil and natural gas properties.  

In June 2012, oil and natural gas properties with a carrying amount of $29.3 million were written down to their fair value of $13.1 million, resulting in an impairment charge of $16.2 million. The impairment charge was included in earnings for the nine months ended September 30, 2012. Significant Level 3 assumptions associated with the calculation of discounted cash flows used in the impairment analysis included estimates of future oil and natural gas prices, production costs, development expenditures, anticipated production of proved reserves, appropriate risk–adjusted discount rates and other relevant data.  

Leasehold Impairments

We incurred leasehold impairment charges of $0.1 million and $0.9 million in the three months ended September 30, 2013 and 2012, respectively, and $8.1 million and $1.1 million in the nine months ended September 30, 2013 and 2012, respectively.

Financial Instruments 

The estimated fair values of our financial instruments have been determined at discrete points in time based on relevant market information. Our financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, derivatives and long–term debt. The carrying amounts of our financial instruments other than derivatives and long–term debt approximate fair value because of the short–term nature of the items. Derivatives are recorded at fair value (see above).  

The carrying value of debt outstanding under our credit facility approximates fair value because the credit facility’s variable interest rate resets frequently and approximates current market rates available to us. As of September 30, 2013 and December 31, 2012, the estimated fair value of our senior notes due 2019 was $501.3 million and $531.2 million, respectively, which differs from the carrying value of $499.3 million and $499.2 million, respectively. The fair value of the senior notes due 2019 was determined using Level 2 inputs.

NOTE 6. ASSET RETIREMENT OBLIGATIONS 

We record an asset retirement obligation (“ARO”) and capitalize the asset retirement cost in oil and natural gas properties in the period in which the retirement obligation is incurred based upon the fair value of an obligation to perform site reclamation, dismantle facilities or plug and abandon wells. After recording these amounts, the ARO is accreted to its future estimated value using an assumed cost of funds and the additional capitalized costs are depreciated on a unit–of–production basis. The changes in the aggregate ARO are as follows: 

As of both September 30, 2013 and December 31, 2012, $2.0 million of our ARO is classified as current and is included in “Accounts payable and accrued liabilities” in our unaudited condensed consolidated balance sheets.

EV Energy Partners, L.P. 

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

NOTE 7. LONG–TERM DEBT 

Credit Facility 

As of September 30, 2013, we have a $1.0 billion credit facility that expires in April 2016. Borrowings under the facility are secured by a first priority lien on substantially all of our oil and natural gas properties. We may use borrowings under the facility for acquiring and developing oil and natural gas properties, for working capital purposes, for general corporate purposes and for funding distributions to partners. We also may use up to $100.0 million of available borrowing capacity for letters of credit. The facility requires the maintenance of a current ratio (as defined in the facility) of greater than 1.0 and a ratio of senior secured debt to earnings plus interest expense, taxes, depreciation, depletion and amortization expense and exploration expense of no greater than 3.5 to 1.0. As of September 30, 2013, we were in compliance with these financial covenants. 

Borrowings under the facility bear interest at a floating rate based on, at our election, a base rate or the London Inter–Bank Offered Rate plus applicable premiums based on the percent of the borrowing base that we have outstanding (weighted average effective interest rate of 3.1% at September 30, 2013).  

Borrowings under the facility may not exceed a “borrowing base” determined by the lenders under the facility based on our oil and natural gas reserves. As of September 30, 2013, the borrowing base under the facility was $710.0 million. The borrowing base is subject to scheduled redeterminations as of April 1 and October 1 of each year with an additional redetermination once per calendar year at our request or at the request of the lenders and with one calculation that may be made at our request during each calendar year in connection with material acquisitions or divestitures of properties.

We had $585.0 million and $360.0 million outstanding under the facility at September 30, 2013 and December 31, 2012, respectively. 

8.0% Senior Notes due 2019 

Our senior notes due 2019 are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis, by all of our existing subsidiaries other than EV Energy Finance Corp. (“Finance”), which is a co–issuer of the Notes. Neither the Parent nor Finance has independent assets or operations apart from the assets and operations of its subsidiaries.  

The aggregate carrying amount of our senior notes due 2019 was $499.3 million and $499.2 million at September 30, 2013 and December 31, 2012, respectively.

NOTE 8. COMMITMENTS AND CONTINGENCIES 

We are involved in disputes or legal actions arising in the ordinary course of business. We do not believe the outcome of such disputes or legal actions will have a material effect on our unaudited condensed consolidated financial statements, and no amounts have been accrued at September 30, 2013 or December 31, 2012. 

NOTE 9. OWNERS’ EQUITY 

Units Outstanding 

At September 30, 2013, owners’ equity consists of 42,599,080 common units, representing a 98% limited partnership interest in us, and a 2% general partnership interest. 

Issuance of Units 

In January 2013, we issued 0.3 million common units related to the vesting of equity–based awards. Of this amount, 0.04 million were phantom units accounted for as liability awards, and these phantom units vested at a fair value of $2.4 million. In conjunction with the vesting of these units, we received a contribution of $0.3 million by our general partner to maintain its 2% interest in us.  

EV Energy Partners, L.P. 

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

Cash Distributions 

The following sets forth the distributions we paid during the nine months ended September 30, 2013:

On October 28, 2013, the board of directors of EV Management declared a $0.77 per unit distribution for the third quarter of 2013 on all common units. The distribution of $38.5 million is to be paid on November 14, 2013 to unitholders of record at the close of business on November 7, 2013.

NOTE 10. NET LOSS PER LIMITED PARTNER UNIT 

The following sets forth the calculation of net loss per limited partner unit: 

_____________ 

NOTE 11. RELATED PARTY TRANSACTIONS 

Pursuant to an omnibus agreement, we paid EnerVest $2.5 million and $3.2 million in the three months ended September 30, 2013 and 2012, respectively, and $7.5 million and $9.8 million in the nine months ended September 30, 2013 and 2012, respectively, in monthly administrative fees for providing us general and administrative services. These fees are based on an allocation of charges between EnerVest and us based on the estimated use of such services by each party, and we believe that the allocation method employed by EnerVest is reasonable and reflective of the estimated level of costs we would have incurred on a standalone basis. These fees are included in general and administrative expenses in our unaudited condensed consolidated statements of operations.  

EV Energy Partners, L.P. 

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

 We have entered into operating agreements with EnerVest whereby a wholly owned subsidiary of EnerVest acts as contract operator of the oil and natural gas wells and related gathering systems and production facilities in which we own an interest. We reimbursed EnerVest approximately $4.2 million and $4.0 million in the three months ended September 30, 2013 and 2012, respectively, and $12.0 million and $12.1 million in the nine months ended September 30, 2013 and 2012, respectively, for direct expenses incurred in the operation of our wells and related gathering systems and production facilities and for the allocable share of the costs of EnerVest employees who performed services on our properties. As the vast majority of such expenses are charged to us on an actual basis (i.e., no mark–up or subsidy is charged or received by EnerVest), we believe that the aforementioned services were provided to us at fair and reasonable rates relative to the prevailing market and are representative of the costs that would have been incurred on a standalone basis. These costs are included in lease operating expenses in our unaudited condensed consolidated statements of operations. Additionally, in its role as contract operator, this EnerVest subsidiary also collects proceeds from oil and natural gas sales and distributes them to us and other working interest owners.

NOTE 12. OTHER SUPPLEMENTAL INFORMATION  

Supplemental cash flows and noncash transactions were as follows: 

Accounts payable and accrued liabilities consisted of the following:

NOTE 13. NEW ACCOUNTING STANDARDS  

In December 2011, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) No. 2011–11, Disclosures about Offsetting Assets and Liabilities. This ASU affects all entities that have financial instruments and derivative instruments that are either offset or subject to an enforceable master netting arrangement or similar agreement. ASU 2011–11 requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. In January 2013, the FASB issued ASU 2013–01, Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities, to clarify the scope of ASU 2011–11. The provisions of both ASU 2011–11 and ASU 2013–01 are applicable to annual reporting periods beginning on or after January 1, 2013 and interim periods within those annual periods. We adopted ASU 2011–11 and 2013–01 on January 1, 2013, and the adoption did not impact our operating results, financial position or cash flows, but did impact our disclosures on offsetting arrangements (see Note 4).

EV Energy Partners, L.P. 

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

No other new accounting pronouncements issued or effective during the nine months ended September 30, 2013 have had or are expected to have a material impact on our unaudited condensed consolidated financial statements.

NOTE 14. SUBSEQUENT EVENTS  

In August 2013, we, along with certain institutional partnerships managed by EnerVest, signed an agreement to divest certain Utica shale acreage in Ohio for $56 million, net to us, subject to customary purchase price adjustments. In October 2013, we closed on the sale of $41.2 million of these acres, and we expect additional closings on the remaining acreage prior to year end.

In October 2013, we closed a public offering of 5.75 million common units at an offering price of $36.86 per common unit. We received proceeds of $208.7 million, including a contribution of $4.2 million by our general partner to maintain its 2% interest in us, and we expect to incur offering expenses of approximately $0.3 million. We used the proceeds to repay indebtedness outstanding under our credit facility. As of October 31, 2013, we had $442.0 million outstanding under our credit facility.

In October 2013, the borrowing base under the facility was increased to $730.0 million.

In November 2013, we, along with certain institutional partnerships managed by EnerVest, acquired natural gas properties in the Barnett Shale. We acquired a 31% proportional interest in these assets for $58.6 million, subject to customary purchase price adjustments.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS  

Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes thereto, as well as our Annual Report on Form 10–K for the year ended December 31, 2012. 

OVERVIEW  

We are a Delaware limited partnership formed in April 2006 by EnerVest to acquire, produce and develop oil and natural gas properties. Our general partner is EV Energy GP, a Delaware limited partnership, and the general partner of our general partner is EV Management, a Delaware limited liability company. 

As of December 31, 2012, our properties were located in the Barnett Shale, the Appalachian Basin (which includes the Utica Shale), the Mid-Continent area in Oklahoma, Texas, Arkansas, Kansas and Louisiana, the San Juan Basin, Central and East Texas (which includes the Austin Chalk area), the Permian Basin, the Monroe Field in Louisiana, and Michigan. As of December 31, 2012, we had estimated net proved reserves of 13.5 MMBbls of oil, 609.5 Bcf of natural gas and 35.7 MMBbls of natural gas liquids, or 904.7 Bcfe, and a standardized measure of $866.9 million.

CURRENT DEVELOPMENTS 

In the nine months ended September 30, 2013, we invested $172.0 million in our unconsolidated affiliates, which included $33.3 million to increase our ownership in UEO from 8% to 21%.

In August 2013, we, along with certain institutional partnerships managed by EnerVest, signed an agreement to divest certain Utica shale acreage in Ohio for $56 million, net to us, subject to customary purchase price adjustments. In October 2013, we closed on the sale of $41.2 million of these acres, and we expect additional closings on the remaining acreage prior to year end.

In October 2013, we closed a public offering of 5.75 million common units at an offering price of $36.86 per common unit. We received proceeds of $208.7 million, including a contribution of $4.2 million by our general partner to maintain its 2% interest in us, and we expect to incur offering expenses of approximately $0.3 million. We used the proceeds to repay indebtedness outstanding under our credit facility. As of October 31, 2013, we had $442.0 million outstanding under our credit facility.

In October 2013, the borrowing base under the facility was increased to $730.0 million.

In November 2013, we, along with certain institutional partnerships managed by EnerVest, acquired natural gas properties in the Barnett Shale. We acquired a 31% proportional interest in these assets for $58.6 million, subject to customary purchase price adjustments.

BUSINESS ENVIRONMENT

Our primary business objective is to provide stability and growth in cash distributions per unit over time. The amount of cash we can distribute on our units principally depends upon the amount of cash generated from our operations, which will fluctuate from quarter to quarter based on, among other things:

Oil, natural gas and natural gas liquids prices have been and are expected to continue to be volatile in the future. Factors affecting the price of oil include worldwide economic conditions, geopolitical activities, worldwide supply disruptions, weather conditions, actions taken by the Organization of Petroleum Exporting Countries and the value of the U.S. dollar in international currency markets. Factors affecting the price of natural gas and natural gas liquids include the discovery of substantial accumulations of natural gas in unconventional reservoirs due to technological advancements necessary to commercially produce these unconventional reserves, North American weather conditions, industrial and consumer demand for natural gas and natural gas liquids, storage levels of natural gas and natural gas liquids and the availability and accessibility of natural gas deposits in North America.

In order to mitigate the impact of changes in prices on our cash flows, we are a party to derivatives, and we intend to enter into derivatives in the future to reduce the impact of price volatility on our cash flows. By removing a significant portion of this price volatility on our future production through December 2015, we have mitigated, but not eliminated, the potential effects of changing prices on our cash flows from operations for those periods. If commodity prices are depressed for an extended period of time, it could alter our acquisition and development plans, and adversely affect our growth strategy and ability to access additional capital in the capital markets.

The primary factors affecting our production levels are capital availability, our ability to make accretive acquisitions, the success of our drilling program and our inventory of drilling prospects. In addition, as initial reservoir pressures are depleted, production from our wells decreases. We attempt to overcome this natural decline through a combination of drilling and acquisitions. Our future growth will depend on our ability to continue to add reserves through drilling and acquisitions in excess of production. We will maintain our focus on the costs to add reserves through drilling and acquisitions as well as the costs necessary to produce such reserves. Our ability to add reserves through drilling is dependent on our capital resources and can be limited by many factors, including our ability to timely obtain drilling permits and regulatory approvals. Any delays in drilling, completion or connection to gathering lines of our new wells will negatively impact our production, which may have an adverse effect on our revenues and, as a result, cash available for distribution.

We focus our efforts on increasing our reserves and production while controlling costs at a level that is appropriate for long–term operations. Our future cash flows from operations are dependent upon our ability to manage our overall cost structure.

Utica Shale

Primarily through acquisitions completed in 2009 and 2010, we hold over 170,000 net working interest acres in Pennsylvania and Ohio and an approximate 2% average overriding royalty interest in 880,000 gross acres in Ohio which we believe may be prospective for the Utica Shale. In addition, partnerships managed by EnerVest own acreage which may be prospective for the Utica Shale. At September 30, 2013, our estimated net proved reserves in the Utica Shale were not material to us. Exploration and development activities targeting the Utica Shale are in the early stages, and it is possible that our estimates of the acreage in Ohio that we believe is prospective for the Utica Shale may change, perhaps materially, as additional exploration and development activities are conducted in the area. We do not expect to fully develop our Utica Shale properties for our account.

In mid–2012, we initiated the process for the monetization of a majority of our working interest acres related to the Utica Shale, and in August 2013, we, along with certain institutional partnerships managed by EnerVest, signed an agreement to divest certain Utica shale acreage in Ohio for $56 million, net to us, subject to customary purchase price adjustments. In October 2013, we closed on the sale of $41.2 million of these acres, and we expect additional closings on the remaining acreage prior to year end. Additional monetizations could take many forms, and we cannot at this time predict the type of transactions we may enter into or the type or amount of consideration we may receive. We may not be successful in our additional efforts to monetize the Utica Shale properties, it may take longer to complete the divestiture process than we expect, or we may decide to delay the monetization of all or a portion of the Utica Shale properties.

RESULTS OF OPERATIONS 

Three Months Ended September 30, 2013 Compared with the Three Months Ended September 30, 2012

Net loss for the three months ended September 30, 2013 was $(12.3) million compared with $(50.0) million for the three months ended September 30, 2012. This change reflects a $12.7 million increase in total revenues and a $49.3 million noncash reduction in the fair value of our derivatives partially offset by a $25.0 million reduction in realized gains on our derivatives.  

Oil, natural gas and natural gas liquids revenues for the three months ended September 30, 2013 totaled $80.3 million, an increase of $12.6 million compared with the three months ended September 30, 2012. This was the result of increases of $9.6 million related to higher prices for oil and natural gas and $4.3 million related to increased oil and natural gas liquids production offset by decreases of $0.6 million related to lower prices for natural gas liquids and $0.7 million related to decreased natural gas production. 

Lease operating expenses for the three months ended September 30, 2013 increased $1.4 million compared with the three months ended September 30, 2012 primarily due to costs associated with the increased oil and natural gas liquids production. Lease operating expenses per Mcfe were $1.69 in the three months ended September 30, 2013 compared with $1.65 in the three months ended September 30, 2012.  

Dry hole and exploration costs for the three months ended September 30, 2013 decreased $0.7 million compared with the three months ended September 30, 2012 primarily as a result of lower seismic costs at certain of our oil and natural gas properties in the Appalachian Basin. 

Production taxes, which are generally based on a percentage of our oil, natural gas and natural gas liquids revenues, for the three months ended September 30, 2013 increased $0.3 million compared with the three months ended September 30, 2012 primarily due to increased oil, natural gas and natural gas liquids revenues. Production taxes for the three months ended September 30, 2013 were $0.19 per Mcfe compared with $0.17 per Mcfe for the three months ended September 30, 2012.  

Depreciation, depletion and amortization (“DD&A”) for the three months ended September 30, 2013 decreased $0.2 million compared with the three months ended September 30, 2012 due to $1.0 million from a lower DD&A rate offset by $0.8 million from increased production. The lower average DD&A rate per unit reflects the impact prices had on our reserves estimates and increased reserves from our Barnett Shale drilling program. DD&A for the three months ended September 30, 2013 was $1.81 per Mcfe compared with $1.88 per Mcfe for the three months ended September 30, 2012.   

General and administrative expenses for the three months ended September 30, 2013 totaled $8.9 million, a decrease of $1.4 million compared with the three months ended September 30, 2012. This decrease is primarily the result of $0.8 million of lower fees paid to EnerVest under the omnibus agreement and $0.5 million of decreased equity compensation costs. General and administrative expenses were $0.58 per Mcfe in the three months ended September 30, 2013 compared with $0.69 per Mcfe in the three months ended September 30, 2012.  

In the three months ended September 30, 2013, we incurred leasehold impairment charges of $0.1 million compared with $0.8 million of leasehold impairment charges in the three months ended September 30, 2012.

Realized gains on derivatives, net consisted of the following for the three months ended September 30:

The $25.8 million decrease in cash settlements is due to the impact of derivative contracts with more favorable terms that expired as of December 31, 2012 and, to a lesser extent, higher oil and natural gas prices.

Unrealized losses on derivatives, net consisted of the following for the three months ended September 30:

Interest expense for the three months ended September 30, 2013 increased $0.1 million compared with the three months ended September 30, 2012 due to an increase of $3.9 million from a higher weighted average long–term debt balance offset by an increase of $1.8 million in capitalized interest and a decrease of $2.0 million from a lower weighted average interest rate.

Nine Months Ended September 30, 2013 Compared with the Nine Months Ended September 30, 2012

Net loss for the nine months ended September 30, 2013 was $(26.0) million compared with $(6.5) million for the nine months ended September 30, 2012. This change reflects (i) a $68.5 million reduction in realized gains on our derivatives and (ii) a $5.3 million increase in DD&A expense, partially offset by (iii) a $26.7 million increase in total revenues, (iv) a $14.2 million favorable noncash change in the fair value of our derivatives, and (v) a $9.6 million decrease in impairments of our oil and natural gas properties.

Oil, natural gas and natural gas liquids revenues for the nine months ended September 30, 2013 totaled $233.3 million, an increase of $26.0 million compared with the nine months ended September 30, 2012. This was the result of increases of $30.6 million related to higher prices for oil and natural gas and $9.4 million related to increased natural gas and natural gas liquids production offset by decreases of $9.6 million related to lower prices for natural gas liquids and $4.4 million related to decreased oil production. 

Lease operating expenses for the nine months ended September 30, 2013 increased $0.2 million compared with the nine months ended September 30, 2012 as the result of $1.7 million ($0.04 per Mcfe) of costs in the nine months ended September 30, 2012 associated with the sales of oil in tanks acquired in certain of our 2011 acquisitions, partially offset by costs associated with the increased natural gas and natural gas liquids production. Lease operating expenses per Mcfe were $1.71 in the nine months ended September 30, 2013 compared with $1.76 in the nine months ended September 30, 2012.  

Dry hole and exploration costs for the nine months ended September 30, 2013 decreased $3.2 million compared with the nine months ended September 30, 2012 primarily as a result of decreased seismic costs at certain of our oil and natural gas properties in the Appalachian Basin. 

DD&A for the nine months ended September 30, 2013 increased $5.3 million compared with the nine months ended September 30, 2012 due to $2.2 million from a higher DD&A rate and $3.1 million from increased production. The higher DD&A rate per unit reflects the impact that changes in prices had on our reserves estimates. DD&A for the nine months ended September 30, 2013 was $1.88 per Mcfe compared with $1.83 per Mcfe for the nine months ended September 30, 2012.  

General and administrative expenses for the nine months ended September 30, 2013 totaled $30.7 million, a decrease of $1.9 million compared with the nine months ended September 30, 2012. This decrease is primarily the result of $2.3 million of lower fees paid to EnerVest under the omnibus agreement and $0.8 million of decreased due diligence costs partially offset by $0.9 million of higher compensation costs primarily related to our equity–based compensation plans. General and administrative expenses were $0.67 per Mcfe in the nine months ended September 30, 2013 compared with $0.73 per Mcfe in the nine months ended September 30, 2012.  

In the nine months ended September 30, 2013, we incurred leasehold impairment charges of $8.1 million. In the nine months ended September 30, 2012, we incurred $1.1 million of leasehold impairment charges, $0.5 million of additional impairment charges to write down assets held for sale to their fair value and a $16.2 million impairment charge to write down oil and natural gas properties to their fair value as determined based on the expected present value of the future net cash flows from proved reserves. Significant assumptions associated with the calculation of discounted cash flows used in the impairment analysis included estimates of future oil and natural gas prices, production costs, development expenditures, anticipated production of proved reserves, appropriate risk–adjusted discount rates and other relevant data.

Realized gains on derivatives, net consisted of the following for the nine months ended September 30:

The $69.6 million decrease in cash settlements is due to the impact of derivative contracts with more favorable terms that expired as of December 31, 2012 and, to a lesser extent, higher oil and natural gas prices.

Unrealized losses on derivatives, net consisted of the following for the nine months ended September 30:

Interest expense for the nine months ended September 30, 2013 increased $0.8 million compared with the nine months ended September 30, 2012 due to an increase of $8.8 million from a higher weighted average long–term debt balance offset by a decrease of $3.0 million due to a lower weighted average effective interest rate and an increase in capitalized interest in the nine months ended September 30, 2013 of $5.0 million.

LIQUIDITY AND CAPITAL RESOURCES

Historically, our primary sources of liquidity and capital have been issuances of equity and debt securities, borrowings under our credit facility and cash flows from operations. Our primary uses of cash have been acquisitions of oil and natural gas properties and related assets, development of our oil and natural gas properties, distributions to our unitholders and general partner and working capital needs. For 2013, we believe that cash on hand, proceeds from sales of assets, proceeds from our October 2013 public equity offering, net cash flows generated from operations and borrowings under our credit facility will be adequate to fund our capital budget, pay distributions to our unitholders and general partner and satisfy our short–term liquidity needs. We may also utilize borrowings under our credit facility and various financing sources available to us, including the issuance of equity or debt securities through public offerings or private placements, to fund our acquisitions and long–term liquidity needs. Our ability to complete future offerings of equity or debt securities and the timing of these offerings will depend upon various factors including prevailing market conditions and our financial condition.

Long–term Debt

As of September 30, 2013, we have a $1.0 billion credit facility that expires in April 2016. Borrowings under the facility may not exceed a “borrowing base” determined by the lenders based on our oil and natural gas reserves. As of September 30, 2013, the borrowing base was $710.0 million, and we had $585.0 million outstanding. In October 2013, the borrowing base was increased to $730.0 million.

As of September 30, 2013, we have $500.0 million in aggregate principal amount outstanding of 8.0% senior notes due 2019, and the aggregate carrying amount of the senior notes due 2019 was $499.3 million. 

For additional information about our long–term debt, such as interest rates and covenants, please see “Item 1. Condensed Consolidated Financial Statements (unaudited)” contained herein.

Cash and Short–term Investments

At September 30, 2013, we had $10.6 million of cash and short–term investments, which included $7.3 million of short–term investments.  With regard to our short–term investments, we invest in money market accounts with a major financial institution.  

Counterparty Exposure

All of our derivative contracts are with major financial institutions who are also lenders under our credit facility.  Should one of these financial counterparties not perform, we may not realize the benefit of some of our derivative contracts and we could incur a loss. As of September 30, 2013, all of our counterparties have performed pursuant to their derivative contracts.

Cash Flows

Cash flows provided by (used in) type of activity were as follows:

Operating Activities

Cash flows from operating activities provided $119.2 million and $175.0 million in the nine months ended September 30, 2013 and 2012, respectively. The significant factor in the decrease was $69.6 million of decreased cash settlements from our derivatives.

Investing Activities

During the nine months ended September 30, 2013, we spent $75.8 million for additions to our oil and natural gas properties and increased our investment in unconsolidated affiliates by $172.0 million. In addition, we received $8.0 million in final purchase price settlements related to our August 2012 acquisition of additional working interests in acreage in Ohio.

During the nine months ended September 30, 2012, we spent $118.9 million for acquisitions of oil and natural gas properties and $100.4 million for additions to our oil and natural gas properties. We also increased our investment in unconsolidated affiliates by $19.0 million. In addition, we received $5.5 million from the sale of oil and natural gas properties and $4.2 million from the settlements of acquired derivatives.

Financing Activities

During the nine months ended September 30, 2013, we received $225.0 million from borrowings under our credit facility and paid distributions of $101.6 million to holders of our common units and our general partner.

During the nine months ended September 30, 2012, we received proceeds of $262.5 million, after payment of offering costs of $0.3 million, from our public equity offering in February 2012 and $201.9 million, after payment of offering costs of $4.1 million, from our debt offering in March 2012. We used the proceeds to repay $460.0 million of indebtedness outstanding under our credit facility. We also received $120.0 million from borrowings under our credit facility and contributions of $5.7 million from our general partner in order to maintain its 2% interest in us. In addition, we paid distributions of $95.8 million to holders of our common units, Class B units and our general partner.

FORWARD–LOOKING STATEMENTS

This Form 10–Q contains forward–looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act (each a “forward–looking statement”). These forward–looking statements relate to, among other things, the following:

We have based these forward–looking statements on our current assumptions, expectations and projections about future events.

The words “anticipate,” “believe,” “ensure,” “expect,” “if,” “intend,” “estimate,” “project,” “forecasts,” “predict,” “outlook,” “aim,” “will,” “could,” “should,” “would,” “may,” “likely” and similar expressions, and the negative thereof, are intended to identify forward–looking statements. These statements discuss future expectations, contain projections of results of operations or of financial condition or state other “forward–looking” information. We do not undertake any obligation to update or revise publicly any forward–looking statements, except as required by law. These statements also involve risks and uncertainties that could cause our actual results or financial condition to materially differ from our expectations in this Form 10–Q including, but not limited to:

All of our forward–looking information is subject to risks and uncertainties that could cause actual results to differ materially from the results expected. Although it is not possible to identify all factors, these risks and uncertainties include the risk factors and the timing of any of those risk factors identified in the “Risk Factors” section included in Item 1A of our Annual Report of Form 10–K for the year ended December 31, 2012. This document is available through our website or through the SEC’s Electronic Data Gathering and Analysis Retrieval System at http://www.sec.gov.

Our revenues, operating results, financial condition and ability to borrow funds or obtain additional capital depend substantially on prevailing prices for oil, natural gas and natural gas liquids. Declines in prices may materially adversely affect our financial condition, liquidity, ability to obtain financing and operating results. Lower prices also may reduce the amount of oil, natural gas or natural gas liquids that we can produce economically. A decline in prices could have a material adverse effect on the estimated value and estimated quantities of our reserves, our ability to fund our operations and our financial condition, cash flows, results of operations and access to capital. Historically, prices and markets have been volatile, with prices fluctuating widely, and they are likely to continue to be volatile.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to certain market risks that are inherent in our financial statements that arise in the normal course of business. We may enter into derivative instruments to manage or reduce market risk, but do not enter into derivative agreements for speculative purposes.

We do not designate these or plan to designate future derivative instruments as hedges for accounting purposes. Accordingly, the changes in the fair value of these instruments are recognized currently in earnings.

Commodity Price Risk

Our major market risk exposure is to prices for oil, natural gas and natural gas liquids. These prices have historically been volatile. As such, future earnings are subject to change due to changes in these prices. Realized prices are primarily driven by the prevailing worldwide price for oil and regional spot prices for natural gas production. We have used, and expect to continue to use, oil, natural gas and natural gas liquids commodity contracts to reduce our risk of changes in the prices of oil, natural gas and natural gas liquids. Pursuant to our risk management policy, we engage in these activities as a hedging mechanism against price volatility associated with pre–existing or anticipated sales of oil, natural gas and natural gas liquids.

We have entered into commodity contracts to hedge a portion of our anticipated oil and natural gas production through December 2015. As of September 30, 2013, we have commodity contracts covering approximately 71% of our production attributable to our estimated net proved reserves from October 2013 through December 2015, as estimated in our reserve report prepared by third party engineers using prices, costs and other assumptions required by SEC rules. Our actual production will vary from the amounts estimated in our reserve reports, perhaps materially.

The fair value of our commodity contracts at September 30, 2013 was a net asset of $66.2 million. A 10% change in oil and natural gas prices with all other factors held constant would result in a change in the fair value (generally correlated to our estimated future net cash flows from such instruments) of our oil and natural gas commodity contracts of approximately $52.9 million. Please see “Item 1. Condensed Consolidated Financial Statements (unaudited)” contained herein for additional information.

Interest Rate Risk

Our floating rate credit facility and interest rate swaps also expose us to risks associated with changes in interest rates and as such, future earnings are subject to change due to changes in these interest rates. If interest rates on our facility increased by 1%, interest expense for the nine months ended September 30, 2013 would have increased by approximately $3.8 million. The fair value of our interest rate swaps at September 30, 2013 was a liability of $5.8 million. A 1% change in interest rates with all other factors held constant would result in a change in the fair value (generally correlated to our estimated future net cash flows from such interest rate swaps) of our interest rate swaps of approximately $1.9 million. Please see “Item 1. Condensed Consolidated Financial Statements (unaudited)” contained herein for additional information.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

In accordance with Exchange Act Rule 13a–15(e) and 15d–15(e), we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2013 to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Our disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Change in Internal Controls Over Financial Reporting

There have not been any changes in our internal controls over financial reporting that occurred during the quarterly period ended September 30, 2013 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We are involved in disputes or legal actions arising in the ordinary course of business. We do not believe the outcome of such disputes or legal actions will have a material adverse effect on our unaudited condensed consolidated financial statements.

ITEM 1A. RISK FACTORS

There have been no material changes with respect to the risk factors disclosed in our Annual Report on Form 10–K for the year ended December 31, 2012.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS 

The exhibits listed below are filed or furnished as part of this report: 

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SIGNATURES 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.  

EXHIBIT INDEX 

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+ Filed herewith