Harvest Oil & Gas Corp. - Quarter Report: 2015 March (Form 10-Q)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549 

Form 10-Q 

For the quarterly period ended March 31, 2015 

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 May 1, 2015, the registrant had 48,871,399 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. together with its wholly owned subsidiaries (“we,” “our” or “us”) is a publicly held limited partnership. 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.

With the sale of our interest in Cardinal Gas Services, LLC (“Cardinal”) in October 2014 and the sale of our interest in Utica East Ohio Midstream LLC (“UEO”), which is expected to close in July 2015, we no longer operate in the midstream segment, and we have reclassified our unaudited condensed consolidated financial statements for all periods presented to reflect the operations of our midstream segment as discontinued operations (see Note 9). We now operate in one reportable segment engaged in the acquisition, 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, 2014.

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 estimated the fair value of the phantom units using the Black–Scholes option pricing model. Compensation cost is recognized for these phantom units on a straight–line basis over the service period and is net of estimated forfeitures. These phantom units are subject to graded vesting over a four year period. We recognized compensation cost related to these phantom units of $4.7 million and $3.1 million in the three months ended March 31, 2015 and 2014, respectively. These costs are included in “General and administrative expenses” in our unaudited condensed consolidated statements of operations.

As of March 31, 2015, there was $19.4 million of total unrecognized compensation cost related to unvested phantom units which is expected to be recognized over a weighted average period of 2.6 years.

In September 2011, we issued 0.3 million performance units to certain employees and executive officers of EV Management and its affiliates. These performance units were fully vested as of January 2015. We recognized compensation cost related to these performance units of $0.2 million and $1.4 million in the three months ended March 31, 2015 and 2014, respectively. These costs 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)

NOTE 3. 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 “Gain (loss) on derivatives, net” in our unaudited condensed consolidated statements of operations.

As of March 31, 2015, we had entered into commodity contracts with the following terms:

As of March 31, 2015, 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 March 31, 2015 and December 31, 2014, 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)

NOTE 4. 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 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 using the income approach with inputs such as 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 three months ended March 31, 2015.

Nonrecurring Basis

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

EV Energy Partners, L.P.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

In the three months ended March 31, 2015, as a result of a reduction in estimated future net cash flows primarily caused by the continuing decrease in prices, we recognized a $58.2 million impairment charge to write down oil and natural gas properties to their fair value of $31.4 million.

The fair values were determined using the income approach and were based on the expected present value of the future net cash flows from proved reserves. Significant Level 3 assumptions associated with the calculation of discounted cash flows used in the impairment analysis included estimates of future prices, production costs, development expenditures, anticipated production of our estimated reserves, appropriate risk–adjusted discount rates and other relevant data. 

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. The estimated fair value of our senior notes due 2019 was $456.3 million and $427.5 million at March 31, 2015 and December 31, 2014, respectively, which differs from the carrying value of $499.4 million at both March 31, 2015 and December 31, 2014. The fair value of the senior notes due 2019 was determined using Level 2 inputs.

NOTE 5. 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 March 31, 2015 and December 31, 2014, $1.9 million of our ARO is classified as current and is included in “Accounts payable and accrued liabilities” in our unaudited condensed consolidated balance sheets.

NOTE 6. LONG–TERM DEBT

Credit Facility

As of March 31, 2015, we have a $1.0 billion credit facility that expires in February 2020. 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 (“EBITDAX”) of no greater than 3.5 to 1.0. As of March 31, 2015, we were in compliance with these financial covenants.

EV Energy Partners, L.P.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

The facility does not require any repayments of amounts outstanding until it expires in February 2020. 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 2.94% and 2.93% at March 31, 2015 and 2014, respectively).

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 March 31, 2015, the borrowing base under the facility was $650.0 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. There will be no redetermination in April 2015 since the borrowing base was redetermined in February 2015 in conjunction with the amendment to our credit facility.

We had $541.0 million and $531.0 million outstanding under the facility at March 31, 2015 and December 31, 2014, 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 EV Energy Partners, L.P. nor Finance have independent assets or operations apart from the assets and operations of our subsidiaries.

The aggregate carrying amount of our senior notes due 2019 was $499.4 million at both March 31, 2015 and December 31, 2014, respectively.

NOTE 7. 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 March 31, 2015 or December 31, 2014.

NOTE 8. OWNERS’ EQUITY

Units Outstanding

At March 31, 2015, owners’ equity consists of 48,871,399 common units, representing a 98% limited partnership interest in us, and a 2% general partnership interest.

Issuance of Units

In the three months ended March 31, 2015, we issued 0.3 million common units related to the vesting of equity–based awards. In conjunction with the vesting of these units, we received contributions of $0.1 million by our general partner to maintain its 2% interest in us.

Cash Distributions

On February 2, 2015, the board of directors of EV Management declared a $0.50 per unit distribution for the fourth quarter of 2014 on all common units. The distribution of $25.3 million was paid on February 13, 2015 to unitholders of record at the close of business on February 9, 2015.

On April 30, 2015, the board of directors of EV Management declared a $0.50 per unit distribution for the first quarter of 2015 on all common units. The distribution of $25.3 million is to be paid on May 15, 2015 to unitholders of record at the close of business on May 11, 2015.

EV Energy Partners, L.P.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

NOTE 9. DISCONTINUED OPERATIONS

Our midstream segment, which consisted of our investments in UEO and Cardinal, was engaged in the construction and operation of natural gas processing, natural gas liquids fractionation, connecting pipeline infrastructure and gathering systems to serve production in the Utica Shale area in Ohio. We sold our interest in Cardinal in October 2014 and, in April 2015, we signed a definitive agreement to divest our 21% interest in UEO for $575.0 million. The agreement is subject to customary purchase price adjustments and closing conditions. We expect the transaction to close in July 2015 and will use the net proceeds from the disposition to repay all amounts outstanding under our credit facility and to fund future activities, including acquisitions of oil and natural gas properties.

We have reclassified our unaudited condensed consolidated financial statements for all periods presented to reflect the operations of our midstream segment as discontinued operations. Accordingly, in our unaudited condensed consolidated balance sheets, amounts previously included in “Investments in unconsolidated affiliates” have been reclassified to ”Assets held for sale” and, in our unaudited condensed consolidated statement of operations, amounts previously included in “Equity in income of unconsolidated affiliates” have been reclassified to “Income from discontinued operations” .

Summarized financial information for our midstream segment is as follows:

EV Energy Partners, L.P.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

NOTE 10. EARNINGS PER LIMITED PARTNER UNIT

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

NOTE 11. RELATED PARTY TRANSACTIONS

Pursuant to an omnibus agreement, we paid EnerVest $3.3 million and $3.0 million in the three months ended March 31, 2015 and 2014, 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.

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 $4.1 million and $4.5 million in the three months ended March 31, 2015 and 2014, 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.

EV Energy Partners, L.P.

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

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 April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015–03, Interest – Imputation of Interest. This ASU changes the presentation of debt issuance costs in financial statements. Under ASU 2015–03, an entity presents such costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset. The provisions of ASU 2015–03 are applicable to annual reporting periods beginning after December 15, 2015 and interim periods within those annual periods. Early adoption is permitted for financial statements that have not yet been previously issued. We do not expect that adopting this ASU will have a material impact on our unaudited condensed consolidated financial statements.

No other new accounting pronouncements issued or effective during the three months ended March 31, 2015 have had or are expected to have a material impact on our unaudited condensed consolidated financial statements.

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, 2014.

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.

With the sale of our interest in Cardinal in October 2014 and the expected sale of our interest in UEO in July 2015, we no longer operate in the midstream segment. We now operate in one reportable segment engaged in the acquisition, development and production of oil and natural gas properties and all of our operations are located in the United States.

As of December 31, 2014, our oil and natural gas 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 Monroe Field in Northern Louisiana, the San Juan Basin, Michigan, Central Texas (which includes the Austin Chalk area), and the Permian Basin. As of December 31, 2014, we had estimated net proved reserves of 11.9 MMBbls of oil, 712.2 Bcf of natural gas and 36.1 MMBbls of natural gas liquids, or 1,000.5 Bcfe, and a standardized measure of $1,093.3 million.

CURRENT DEVELOPMENTS

In the three months ended March 31, 2015, prices for oil, natural gas and natural gas liquids have continued to decline, and they continue to remain low by historical standards. These low prices have affected our business in numerous ways, including:

In response to continued lower prices, we have taken a number of actions to preserve our liquidity and financial flexibility, including:

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 are expected 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 oil, 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. Factors affecting the price of natural gas include North American weather conditions, industrial and consumer demand for natural gas and natural gas liquids, possible natural gas exports, 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 2016, 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

We hold approximately 173,000 net working interest acres in Pennsylvania and Ohio and an approximate 2% average ORRI 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. Exploration and development activities targeting the Utica Shale are progressing, 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.

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 2013, we, along with certain institutional partnerships managed by EnerVest, signed agreements to divest a portion of our Utica Shale acreage in Ohio. Through March 2015, we have closed on sales with proceeds of $45.6 million for these acres. We continue to pursue additional forms of monetizations, 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

Net loss for the three months ended March 31, 2015 was $61.7 million compared with $6.3 million for the three months ended March 31, 2014. The significant factors in this change were (i) a $57.9 million increase in impairment of oil and natural gas properties, (ii) a $48.1 million decrease in total revenues; (iii) a $46.6 million favorable change in gain (loss) on derivatives, net; and (iv) a $3.4 million increase in income from discontinued operations.

Oil, natural gas and natural gas liquids revenues for the three months ended March 31, 2015 totaled $46.4 million, a decrease of $47.7 million compared with the three months ended March 31, 2014. This was the result of decreases of $46.5 million related to lower prices and $1.7 million related to decreased oil and natural gas production offset by $0.5 million of increased natural gas liquids production.

Lease operating expenses for the three months ended March 31, 2015 decreased $1.9 million compared with the three months ended March 31, 2014 as the result of $1.6 million from a lower unit cost per Mcfe and $0.3 million related to our decreased production. The lower unit cost per Mcfe reflects the downward trend in operating costs throughout the oil and natural gas industry. Lease operating expenses per Mcfe were $1.52 in the three months ended March 31, 2015 compared with $1.61 in the three months ended March 31, 2014.

Production taxes, which are generally based on a percentage of our oil, natural gas and natural gas liquids revenues, for the three months ended March 31, 2015 decreased $1.8 million compared with the three months ended March 31, 2014 due to decreased oil, natural gas and natural gas liquids revenues. Production taxes for the three months ended March 31, 2015 were $0.11 per Mcfe compared with $0.22 per Mcfe for the three months ended March 31, 2014.

DD&A for the three months ended March 31, 2015 decreased $0.3 million compared with the three months ended March 31, 2014 due to lower overall production. Depreciation, depletion and amortization was $1.67 per Mcfe for both the three months ended March 31, 2015 and 2014.

General and administrative expenses for the three months ended March 31, 2015 totaled $12.4 million, an increase of $0.1 million compared with the three months ended March 31, 2014. This increase is primarily the result of (i) $2.3 million of additional equity compensation costs related to the accelerated vesting of the phantom units of a former officer; (ii) $0.3 million of higher fees paid to EnerVest under the omnibus agreement; and (iii) $0.2 million related to a general increase in costs; offset by (iv) $1.8 million of lower equity–based compensation costs, after consideration of the $2.3 million discussed above, and (v) $0.9 million of decreased compensation costs related to the vesting of our phantom units issued under our equity–based compensation plan. General and administrative expenses were $0.80 per Mcfe in the three months ended March 31, 2015 compared with $0.78 per Mcfe in the three months ended March 31, 2014.

In the three months ended March 31, 2015, as a result of a continued reduction in estimated future net cash flows primarily caused by the decrease in prices, we incurred impairment charges of $58.2 million 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. Significant assumptions associated with the calculation of discounted cash flows used in the impairment analysis included estimates of future prices, production costs, development expenditures, anticipated production of our estimated reserves, appropriate risk–adjusted discount rates and other relevant data. In the three months ended March 31, 2014, we incurred impairment charges of $0.3 million, of which $0.2 million related to a charge to write down assets held for sale to their fair value and $0.1 million related to leasehold impairment charges.

Gain (loss) on derivatives, net was $23.6 million for the three months ended March 31, 2015 compared with $(23.0) million for the three months ended March 31, 2014. This change was attributable to decreases in future oil and natural gas prices. The 12 month forward price at March 31, 2015 for oil averaged $53.30 per Bbl compared with $56.46 at December 31, 2014, and the 12 month forward prices at March 31, 2015 for natural gas averaged $2.91 per MmBtu compared with $3.03 at December 31, 2014. The 12 month forward price at March 31, 2014 for oil averaged $97.33 per Bbl compared with $95.66 per Bbl at December 31, 2013, and the 12 month forward price at March 31, 2014 for natural gas averaged $4.50 per MmBtu compared with $4.19 at December 31, 2013.

Interest expense for the three months ended March 31, 2015 increased $2.1 million compared with the three months ended March 31, 2014 due to a decrease in capitalized interest of $1.9 million and $0.2 million from a higher weighted average long–term debt balance.

Income from discontinued operations, which consists of the results of our midstream segment, was $5.1 million for the three months ended March 31, 2015 compared with $1.7 million for the three months ended March 31, 2014. The significant factor in the change was the continued increase in throughput at UEO as more wells come on line.

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, contributions to our midstream investments, distributions to our unitholders and general partner and working capital needs. For 2015, we believe that cash on hand, proceeds from sales of assets, 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.

In the three months ended March 31, 2015, prices for oil, natural gas and natural gas liquids have continued to decline, and they continue to remain low by historical standards. In response to these continued lower prices, we have taken a number of actions to preserve our liquidity and financial flexibility, including:

We intend to repay amounts outstanding under our credit facility with proceeds from the sale of our interest in UEO and the $33.8 million in proceeds from the sale of certain oil and natural gas properties that were deposited with a qualified intermediary, and to hold the remainder available for future activities. Upon the sale of our interest in UEO, the borrowing base under out credit facility will be reduced by $150.0 million to $500.0 million. We plan to utilize availability under our credit facility to invest in future acquisitions of long–life, producing oil and natural gas properties, which we believe will increase our borrowing base.

Long–term Debt

As of March 31, 2015, we have a $1.0 billion credit facility that expires in February 2020. Borrowings under the facility may not exceed a “borrowing base” determined by the lenders based on our oil and natural gas reserves. As of March 31, 2015, the borrowing base was $650.0 million, and we had $541.0 million outstanding.

With the amendment of our credit facility in February 2015, we extended our ratio of senior secured debt to EBITDAX of no greater than 3.5 to 1.0 covenant to March 31, 2016, after which it reverts back to a ratio of total debt to EBITDAX of no greater than 4.25 to 1.0.

As of March 31, 2015, we have $500.0 million in aggregate principal amount outstanding of 8.0% senior notes due 2019. As of March 31, 2015, the aggregate carrying amount of the senior notes due 2019 was $499.4 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 March 31, 2015, we had $10.3 million of cash and short–term investments, which included $6.1 million of short–term investments.  With regard to our short–term investments, we invest in money market accounts with major financial institutions. 

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 March 31, 2015, 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 $45.3 million and $32.6 million in the three months ended March 31, 2015 and 2014, respectively. The significant factors in the change were a $47.7 million decrease in our oil, natural gas and natural gas liquids revenues and a decrease in working capital, primarily related to lower accounts receivable as a result of lower oil, natural gas and natural gas liquids prices at March 31, 2015 compared with March 31, 2014, offset by $36.7 million of increased cash settlements from our matured derivative contracts. The increased cash settlements are due to the impact of derivative contracts with less favorable terms that expired as of December 31, 2014.

Investing Activities

During the three months ended March 31, 2015, we spent $25.6 million for additions to our oil and natural gas properties and received $0.8 million in proceeds from the sale of oil and natural gas properties. During the three months ended March 31, 2014, we spent $23.1 million for additions to our oil and natural gas properties and increased our investment in Cardinal and UEO by $44.4 million. In addition, we received $7.3 million in proceeds from the sale of oil and natural gas properties.

Financing Activities

During the three months ended March 31, 2015, we received $10.0 million from borrowings under our credit facility, incurred loan costs of $3.3 million related to the amendment of our credit facility and paid distributions of $25.3 million to holders of our common units, phantom units and our general partner. During the three months ended March 31, 2014, we received $66.0 million from borrowings under our credit facility and paid distributions of $38.7 million to holders of our common units, phantom 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 on Form 10–K for the year ended December 31, 2014. 

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, 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 2016. As of March 31, 2015, we have commodity contracts covering approximately 62% of our production attributable to our estimated net proved reserves from April 2015 through December 2016, 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 March 31, 2015 was a net asset of $127.6 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 $21.9 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 three months ended March 31, 2015 would have increased by approximately $1.3 million. The fair value of our interest rate swaps at March 31, 2015 was a liability of $0.9 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 $0.3 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 and 15d–15, 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 March 31, 2015 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 March 31, 2015 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, 2014.

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:

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

+ Filed herewith