Further, Eagle Rock was then able to leverage its extended footprint in the Panhandle to add new fee-based gas gathering and processing agreements with other major producers, such as Apache Corporation (NYSE:APA). That deal, which was signed this past March, added 106,000 gross acres as it supersedes and expands the previous agreements, making it a win for both sides. It’s this combination of organic and acquired growth that should keep Eagle Rock’s income growing for a long, long time.
Soaring growth potential
What makes Eagle Rock unique is that in addition to owning a traditional midstream business, the company balances it with upstream oil and gas assets. Overall, the company has 350 billion cubic feet equivalent of oil and gas reserves across five operating areas. These are long-lived, low-decline assets, which are great for an MLP like Eagle Rock.
The big issue recently is that top upstream MLP, Linn Energy LLC (NASDAQ:LINE), has come under attack this year as some investors have questioned its business model. Eagle Rock has been caught in the downdraft in the sector, and its units have dropped more than 25% in the past quarter. But Eagle Rock is a much different company than LINN — nearly half of Eagle Rock’s assets are midstream assets while Linn Energy LLC (NASDAQ:LINE) has relatively few midstream assets. The other major difference between the two is that LINN hedges 100% of its production several years out, and had been purchasing puts as a means to hedge. Eagle Rock, on the other hand, hedges around 80% of its production out for two years, and dramatically reduces the volumes hedged after that. Further, its hedges are in swaps and collars so most of the issues that shorts have with LINN aren’t to be found at Eagle Rock. However, it does highlight an area investors need to watch.
The bottom line for Eagle Rock though is that the upstream assets add upside to it’s business as the company will benefit to some degree from rising oil and gas prices as well a from its ability to grow production either organically or by acquisitions. Most of the organic upside will come from its “SCOOP” acreage, which is the South Central Oklahoma Oil Province. The company owns about 16,000 net acres and has one rig currently running, while also participating in 10 non-operated wells this year. Production from this growth asset will help offset declines elsewhere in its portfolio as well as enable the company to grow its production overall.
Final Foolish thoughts
There’s a lot more to the Eagle Rock story, which is why I’ll be drilling down deeper into the company in future articles. It’s a very intriguing two-for-one play, as it offers both growth and income from its combination of upstream and midstream assets. That’s not to say that the company is without risk, but that’s a story for another day.
The article Looking for Rock-Solid Returns and Soaring Growth? originally appeared on Fool.com and is written by Matt DiLallo.
Fool contributor Matt DiLallo owns shares of LINN Energy, LLC. Matt DiLallo has the following options: short October 2013 $25 puts on LINN Energy, LLC. The Motley Fool owns shares of Apache.
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