I recently took a brief look at one of the more unique MLPs, Eagle Rock Energy Partners, L.P. (NASDAQ:EROC). What makes this company unique is that it’s a blend of both traditional midstream MLP assets and oil and gas production assets. Today, I want to take a closer look at those oil and gas production assets, which I think provide investors with a lot of upside potential.
Proven reserves = steady returns
Eagle Rock Energy Partners, L.P. (NASDAQ:EROC) had 350 billion cubic feet equivalent (Bcfe) of oil and gas reserves as of the end of last year. Those reserves are spread across five main operating areas:
Two-thirds of the reserves are located in the midcontinent, which are well-known for holding great MLP-type assets that have long life and low decline. Peers like Linn Energy LLC (NASDAQ:LINE) and Vanguard Natural Resources, LLC (NASDAQ:VNR) each has a substantial presence in the midcontinent region. Eagle Rock Energy Partners, L.P. (NASDAQ:EROC)’s reserves there have a heavy natural gas component; gas is 64% of these reserves. However, Eagle Rock Energy Partners, L.P. (NASDAQ:EROC) has an exciting oil play in the region, which I’ll get to in a moment.
The rest of its assets are spread around Texas, Alabama, and Mississippi. These assets are primarily oil assets, and combined produce about 27.5 million cubic feet equivalent per day (MMcfe/d) of Eagle Rock Energy Partners, L.P. (NASDAQ:EROC)’s overall average production of 75.1 MMcfe/d. One particular area of interest is Eagle Rock Energy Partners, L.P. (NASDAQ:EROC)’s Permian Basin assets. Both Linn Energy LLC (NASDAQ:LINE) and Vanguard Natural Resources, LLC (NASDAQ:VNR) have invested heavily in the Permian over the past year, as the formation is an excellent MLP asset with low decline rates and long-life, liquids-rich production. The bottom line is that Eagle Rock’s oil and gas assets are focused in the same conventional areas as its peers because these are the type of low-decline, long-life assets that are critical to fueling the hefty distributions that these companies pay.
With a “SCOOP” of upside potential
The most interesting asset, and the one with the highest upside is Eagle Rock’s position in the “SCOOP”, or South Central Oklahoma Oil Province. Top Bakken producer Continental Resources, Inc. (NYSE:CLR) calls it a “new, high-impact resource play” and Eagle Rock has 16,000 net acres right in the heart of this play. The potential is there for this to be a play with high returns and, therefore, high upside for Eagle Rock. In fact, it has seen a 31% jump in production growth as its interest in nine horizontal wells have come on line.