Amplify Energy Corp. quarterly report, Q2 FY2014

Filing summary

Entity and period: The supplied filing is Midstates Petroleum Company, Inc.’s Form 10-Q for the quarter and six months ended June 30, 2014—not an Amplify Energy Corp. filing. The filing text does not explain the discrepancy with the requested company metadata. Dollar amounts below are in millions unless stated otherwise.

Business context and reporting period

Midstates was an independent oil and gas exploration and production company with operations in the Mississippian Lime, Anadarko Basin and Gulf Coast. Results reflect substantial production growth following the May 2013 Anadarko Basin acquisition, as well as the May 2014 sale of Pine Prairie assets.

Key financial metrics

Six-month DD&A was $138.0 million, including an $86.5 million oil and gas property impairment charge. Six-month interest expense, net of capitalized interest, was $67.8 million. Cash capital expenditures were $279.0 million; total capital expenditures incurred, including accrued amounts and capitalized costs, were $291.2 million.

At June 30, long-term debt was $1,654.2 million: $354.2 million drawn under the revolver, $600 million of 10.75% notes due 2020 and $700 million of 9.25% notes due 2021. The $475 million revolver borrowing base left approximately $120 million of available capacity. Management reported total liquidity of approximately $150 million, including cash. The company reported compliance with its credit-facility covenants, a 1.31:1 current ratio and a 3.96:1 debt-to-EBITDA ratio.

Material changes versus prior comparable periods

• Second-quarter oil, NGL and gas sales rose 74% year over year to $179.3 million; six-month sales increased 79% to $346.4 million. Average daily production increased 63% in the quarter and 70% for the six-month period. Comparisons are affected by the Anadarko acquisition, which contributed only one month of production to the 2013 comparative periods.
• Total revenue was $148.0 million in the second quarter versus $126.0 million a year earlier, as derivative results shifted from a $22.4 million gain to a $31.5 million loss. For the six months, total revenue rose to $292.7 million from $197.0 million, while net loss widened from $4.6 million to $85.7 million, primarily reflecting the impairment, higher interest expense and derivative losses.
• Operating cash flow increased to $177.0 million from $72.8 million in the first half of 2013. Investing cash outflow was much lower than the prior year, which included $621.7 million for the Anadarko acquisition.
• The Pine Prairie sale generated estimated net proceeds of $147.5 million; $131.0 million was applied to revolver repayment. The sale reduced Gulf Coast production and related obligations.

Outlook, risks and unusual items

• Management expected 2014 exploration, development, lease and seismic capital spending of $500–$550 million and said liquidity, expected operating cash flow and revolver availability should fund current plans through 2015. It also was pursuing potential asset sales, joint ventures or farm-outs; no transaction was assured.
• The company reported an $86.5 million impairment charge in the statements of operations; the notes separately describe an $83.5 million after-tax impairment. Investors should verify the presentation and reconciliation of these amounts. Management cited the full-cost ceiling test and transfers of unevaluated property costs as relevant factors, and warned that further impairments could result from lower prices, reserve revisions, development costs or expiring leases.
• Commodity hedges generated a $54.1 million net loss for the first half, including $31.9 million realized losses. At June 30, net derivative fair value was a $53.0 million liability. The filing identifies commodity-price, counterparty and floating-rate exposure; all commodity derivatives were with seven bank counterparties.
• Management disclosed that disclosure controls were not effective and that a material weakness in controls over oil and gas reserve estimates remained unremediated. The weakness related to validation of source data provided to reserve engineers and management review of reserve reports.
• Other obligations included $23.5 million of drilling, lease and seismic commitments, plus minimum-volume commitments under a gas gathering and processing contract. The company said it was meeting the contract’s minimum volumes and did not expect future shortfall payments. Ordinary-course litigation was not expected to have a material adverse effect.
• After quarter-end, PetroQuest agreed to pay $3 million (received July 3), a further $7 million by January 5, 2015, and up to $14 million of development-cost credits or payments for a 50% interest in the Fleetwood prospect area.

Most important facts to verify

• Confirm the issuer: this filing is for Midstates Petroleum Company, Inc., not Amplify Energy Corp.
• Reconcile the impairment amount and whether the cited $83.5 million after-tax figure corresponds to the $86.5 million expense reported in the statements.
• Review the reserve-estimate control weakness, remediation progress and any effect on reserve disclosures, DD&A or impairment estimates.
• Assess liquidity and covenant headroom against the $500–$550 million 2014 capital plan, debt service and scheduled borrowing-base redeterminations.
• Evaluate hedge-related losses and liabilities, and the sensitivity of cash flow and borrowing capacity to commodity prices.