Business context and reporting period
The supplied filing is Midstates Petroleum Company, Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2017—not a filing identified as Amplify Energy Corp. Midstates was an independent oil and gas producer operating primarily in Oklahoma and Texas, with Mississippian Lime and Anadarko Basin assets. Investors should verify the intended issuer.
Midstates emerged from Chapter 11 on October 21, 2016 and adopted fresh start accounting. Consequently, 2017 “Successor” results are not directly comparable with 2016 “Predecessor” results, despite their presentation side by side.
Financial and operating highlights
| Metric | Q3 2017 | Nine months 2017 |
|---|---|---|
| Total revenue | $49.7 million | $175.4 million |
| Operating income | $5.3 million | $39.7 million |
| Net income | $3.7 million | $35.9 million |
| Net income per share | $0.14 | $1.39 |
| Operating cash flow | Not provided for the quarter | $89.3 million |
| Capital investment cash flow | Not provided for the quarter | $(88.6) million |
- Q3 revenue included $27.2 million oil sales, $10.7 million NGL sales, $14.0 million natural gas sales, and a $3.6 million net derivative loss; nine-month derivative results were a net gain of $8.8 million.
- Nine-month operational capital expenditures were $97.7 million; total capital expenditures incurred, including capitalized costs and interest, were $105.3 million. Cash ended the period at $76.5 million, down $0.3 million from year-end 2016.
- At September 30, debt was $128.1 million under a $170.0 million borrowing base, with $40.0 million stated availability and $1.9 million of letters of credit. Net working capital was $58.4 million; total stockholders’ equity was $605.6 million. The company reported compliance with debt covenants.
- Production averaged 21,358 Boe/day across the two reported basins in Q3, down from 28,059 Boe/day in the 2016 quarter. Mississippian Lime production was 17,606 Boe/day and Anadarko production was 3,752 Boe/day.
Changes versus prior comparable period
- Q3 2017 net income of $3.7 million compared with a $38.4 million predecessor-period loss; nine-month income of $35.9 million compared with a $208.7 million predecessor-period loss. Fresh start accounting limits the comparability of these results.
- Q3 oil, NGL, and gas sales before derivative results totaled $51.8 million, down from $62.2 million in Q3 2016. Higher realized commodity prices were more than offset by lower production volumes. Nine-month sales were $163.4 million versus $174.4 million.
- Production declined year over year in both basins, which management attributed to natural decline and lower drilling activity. Q3 2017 had no oil and gas property impairment, versus $33.9 million in Q3 2016; nine-month 2016 impairment was $224.6 million.
- Nine-month operating cash flow increased to $89.3 million from $78.2 million; investing outflow decreased to $88.6 million from $129.1 million. Prior-period financing inflow of $249.3 million largely reflected revolving-credit borrowings; 2017 financing outflow was $1.0 million.
Outlook, commentary, risks and unusual items
- Management expected a two-rig program to support 2017 capital investment of $130–$140 million and drilling of 36–40 gross wells. Two rigs were operating in the Mississippian Lime at quarter-end; no rigs were operating in the Anadarko Basin.
- The borrowing base was redetermined on October 27, 2017 at $170.0 million, unchanged; Anadarko Basin assets in Texas and Oklahoma were excluded from that redetermination.
- Management said operating cash flow and cash on hand should be primary liquidity sources and expected available resources to fund planned capital expenditures, debt service, and commitments. It was also considering substantial divestitures and acquisitions, without committing to a transaction.
- Commodity-price exposure remains significant. The company had oil and gas swaps and collars extending through 2019; a 10% change in forward curves would change derivative net asset values by approximately $5.5 million for oil and $2.3–$2.4 million for gas. Derivatives expose the company to counterparty risk and can limit benefit from price increases.
- Oklahoma restrictions on wastewater injection and potential further seismicity-related limits could raise costs or constrain production. The company reported compliance with current Arbuckle injection limits and said it disposed of about 40% of produced salt water into other formations.
- Q3 G&A included $2.8 million of noncash share-based compensation; nine-month G&A included $2.7 million of post-emergence bankruptcy-related trailing costs. An insurance reimbursement of $1.9 million reduced nine-month lease operating expense. The company sold certain Lincoln County, Oklahoma properties for $7.0 million gross cash proceeds, or $2.9 million net after assumed liabilities.
- Related-party service provider EcoStim, affiliated with a holder of approximately 25.5% of Midstates’ common stock, received $7.3 million for services in the first nine months of 2017. The filing reported a $1.4 million accrual for loss contingencies and stated pending legal matters were not expected to have a material adverse effect.
- David J. Sambrooks became CEO effective November 1, 2017, following Fredric F. Brace’s resignation. The filing also describes executive equity awards and accelerated vesting of Brace’s outstanding awards.
Important facts for investors to verify
- Confirm the intended issuer: the supplied document names Midstates Petroleum Company, Inc., not Amplify Energy Corp.
- Review the effect of fresh start accounting before interpreting year-over-year earnings, balance sheet, or per-share comparisons.
- Verify the production outlook, capital spending plan, and ability to fund investment from operating cash flow and borrowing availability.
- Assess borrowing-base and covenant headroom, including the exclusion of Anadarko assets from the October 2017 borrowing-base redetermination.
- Monitor production declines, commodity prices and hedge positions, and wastewater disposal restrictions and related operating costs.
- Review the related-party EcoStim payments, CEO transition and equity awards, property-sale proceeds, and any developments in legal or other contingencies.