Eagle Rock Energy planning to lower leverage ratio, pay down revolver

By Jennifer Lanning Drey

Portland, Ore., May 8 - Eagle Rock Energy Partners, LP is looking to reduce its leverage ratio by repaying revolving credit facility debt, Joseph A. Mills, chief executive officer of Eagle Rock, said Friday during the company's first-quarter earnings call.

Eagle Rock hopes to return to a ratio of between 3.0 times and 3.5 times debt to adjusted EBITDA with respect to its midstream and mineral businesses, which the company believes is appropriate given economic conditions and industry standards, Mills said.

Eagle Rock's leverage ratio was roughly 4.4 times at the time of Friday's call, according to its earnings release.

The company estimates it may need to reduce debt by as much as $200 million to achieve the leverage ratio goal, Mills said.

Accordingly, Eagle Rock announced on April 29 that it would reduce its quarterly distribution rate to improve liquidity.

The company also said Friday that it has begun exploring potential asset sales ranging from small midstream systems sales to the sale of portions of its upstream or minerals businesses.

"Our goal is to enhance our liquidity in the near term and position the partnership to grow again in the near future and resume our distribution growth to our common and our subordinated noteholders," Mills said.

Absent any unexpected operational issues or further significant production curtailments in its core areas, Eagle Rock believes it will be able to reduce leverage or otherwise enhance liquidity by $75 million to $100 million within the next year, Jeff Wood, chief financial officer of Eagle Rock, said during the call.

The CFO later noted that asset sales are not a part of the company's core strategy for reducing debt but would accelerate repayment plans.

Current liquidity

Eagle Rock ended the first quarter with $837.4 million drawn under its revolving credit facility, representing an increase of $38 million from year-end 2008. The increase was driven by spending on growth capital in the first quarter and financing that was part of its 2008 growth capital but originally funded through internally generated cash flow.

Since the end of the quarter, Eagle Rock has repaid $17 million to the revolving credit facility and currently has $820 million drawn, Wood said.

The credit facility has total commitments of $971 million after adjusting for the unfunded portion of Lehman Brothers' commitment. Availability under the facility is limited by the borrowing base of the upstream business and traditional cash-flow based covenants.

At March 31, the borrowing base for the upstream business was $206 million. However, as part of the normal, semiannual borrowing base re-determination, the borrowing base was re-determined in April to be $135 million.

Eagle Rock's current availability under the agreement is $100 million.

Adjusted EBITDA drops

Eagle Rock's adjusted EBITDA decreased to $41.1 million in the first quarter, which was down 22% from $52.5 million in the prior-year first quarter. First-quarter distributable cash flow decreased by 32% as compared to the same period in 2008.

Mills said Eagle Rock's results reflected a significant decline in commodity prices, which impacted financial results in each of its operating segments. At the same time, the fall in natural gas prices caused many of Eagle Rock's producer-customers to curtail drilling programs, lowering Eagle Rock's throughput volumes.

The company is aggressively hedged for 2009, which it believes will support cash flows during the period of volatility, Mills said.

"We are certainly living in the reality of a new world with commodity prices where they are. We will adjust our business to manage through this difficult cycle," he said.

The company expects to continue with its reduced distribution rate until commodity prices rise and remain at a level that supports resumed drilling activities in core areas and when the board feels liquidity is appropriate.

"This partnership will survive this economic storm and, quite frankly, prosper once we get to the other side," he said.

Eagle Rock is a Houston-based natural gas and natural gas liquids company.

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