Business context and reporting period
The supplied filing is Midstates Petroleum Company, Inc.’s Form 10-Q for the quarter ended March 31, 2017; it is not identified as an Amplify Energy Corp. filing. Midstates explores for and produces oil, natural gas liquids (NGLs), and natural gas, primarily in the Mississippian Lime and Anadarko Basin. The company emerged from Chapter 11 in October 2016 and adopted fresh-start accounting, so the 2017 Successor results are not directly comparable with the 2016 Predecessor results.
Key financial metrics
Amounts are in millions of dollars unless noted otherwise.
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Total revenue, including derivative gains | $65.0 | $52.0 |
| Oil, gas, and NGL sales | $59.3 | $51.1 |
| Operating income (loss) | $19.5 | $(135.1) |
| Net income (loss) | $18.5 | $(179.3) |
| Net income attributable to common shareholders; diluted EPS | $17.9; $0.72 | $(179.3); $(16.88) |
| Cash from operating activities | $32.4 | $29.9 |
| Cash used in investing activities | $(24.8) | $(58.7) |
| Cash and cash equivalents at period end | $84.5 | — |
At March 31, 2017, current assets were $133.0 million and current liabilities $62.0 million, giving reported net working capital of $70.9 million. Long-term debt was $128.1 million; the company had $1.9 million of letters of credit and no borrowing availability under its Exit Facility. The facility’s weighted average interest rate was 5.50%. The company reported compliance with its debt covenants.
Reported operating margin was approximately 30% in Q1 2017. The 2016 period included a $127.7 million oil and gas property impairment, while Q1 2017 had no impairment. DD&A was $15.3 million, or $7.23 per Boe, versus $24.8 million, or $8.52 per Boe. No income tax expense or benefit was recorded; the valuation allowance on deferred tax assets was $153.6 million.
Material changes versus the prior comparable period
- Oil, gas, and NGL sales increased to $59.3 million from $51.1 million, with higher realized prices offsetting lower volumes. Average realized prices rose year over year: oil to $49.48 per barrel from $29.09, NGLs to $21.89 from $11.30, and gas to $2.90 per Mcf from $1.86.
- Production declined: combined output was approximately 23,562 Boe/day versus 32,018 Boe/day in Q1 2016. Management attributed the decrease to natural decline and reduced drilling activity during 2016 and Q1 2017.
- Q1 2017 included $4.9 million of net derivative gains, comprising $0.8 million of cash settlements and $4.1 million of unrealized gains. No open or settled derivative positions existed in Q1 2016.
- Operating cash flow rose modestly, while investing cash outflow was lower than in Q1 2016. Q1 2016 financing cash flow included $249.2 million of revolving-facility proceeds; Q1 2017 had no financing cash flow.
Outlook, risks, contingencies, and unusual items
- With one Mississippian Lime rig, management expected 2017 capital investment of $90–$100 million and 24–26 gross wells. It was evaluating a second rig for Q2; if added, the stated range would rise to $120–$140 million and 36–40 gross wells. The company incurred $34.6 million of total capital expenditures in Q1, including $31.7 million of operational expenditures.
- The Exit Facility had a $170 million borrowing base but no availability under its applicable draw limits. It matures September 30, 2020; the filing describes financial covenants and a 2017 capital expenditure cap of $81 million. A second-rig plan would require amendments to certain facility provisions.
- Oklahoma regulators imposed limits on certain Arbuckle saltwater-disposal wells amid concerns about seismic activity. The company said it had met the requests and was disposing of about 40% of produced salt water in formations other than the Arbuckle; further restrictions or permitting difficulties could raise costs or reduce production.
- Commodity prices, natural production declines, drilling results, access to capital, gathering capacity, disposal infrastructure, environmental regulation, and counterparty performance are key risks. Derivative counterparties’ maximum net exposure at quarter-end was reported as $4.1 million.
- The company recorded a $1.9 million insurance reimbursement as a reduction of lease operating expenses. Accrued loss contingencies were $1.7 million at quarter-end; management said pending legal matters were not expected to have a material adverse effect, while noting outcomes are uncertain.
- Management said it expected operating cash flow and cash on hand to fund anticipated capital expenditures, debt service, and contractual commitments. It provided no production or earnings guidance beyond the capital and drilling scenarios above.
Important facts for investors to verify
- Confirm the intended issuer: the supplied document names Midstates Petroleum Company, Inc., not Amplify Energy Corp.
- Assess the limitations of year-over-year comparisons because fresh-start accounting created Successor and Predecessor reporting entities.
- Verify the company’s ability to fund its capital program given declining production, no Exit Facility availability, covenant requirements, and the proposed second-rig scenario.
- Review hedge volumes, pricing terms, and the share of expected production hedged, including the risk that three-way collars provide less protection below their sub-floor prices.
- Monitor saltwater-disposal restrictions, related seismicity concerns, and any impact on operating costs or production.