Amplify Energy Corp. annual report, FY2014

Filing identity and reporting period

Important metadata discrepancy: The supplied filing is Midstates Petroleum Company, Inc.’s Form 10-K for the fiscal year ended December 31, 2014, filed March 16, 2015. It is not an Amplify Energy Corp. filing. The filing reports annual results and selected unaudited quarterly data, including fourth-quarter 2014.

Business context and key financial metrics

Midstates was an independent oil and gas producer operating in the Mississippian Lime, Anadarko Basin, and Gulf Coast regions. At year-end, it reported 153.7 million Boe of proved reserves, 59% oil and NGLs, and average 2014 production of 32,137 Boe per day.

Reported revenue and earnings include derivative results: FY 2014 included a $139.2 million net derivative gain, including $157.5 million of unrealized gains and $18.3 million of realized losses. Fourth-quarter 2014 revenue was $276.8 million, operating income $170.1 million, and net income $128.1 million. The reported fourth-quarter earnings were materially affected by derivatives and should not be read as a run-rate result.

Oil sales prices excluding realized derivatives declined 9% to $90.71 per barrel; NGL prices were nearly flat at $36.31 per barrel; natural gas prices increased 17% to $3.97 per Mcf. Average daily production increased 34% year over year. Lease operating and workover costs fell to $6.79 per Boe from $8.41, while DD&A was $23.01 per Boe versus $28.67.

Material changes versus the prior period

• Production growth and a full year of Anadarko Basin production lifted sales volumes and operating cash flow, although 2014 production and revenue comparisons also reflect the May 2014 sale of Pine Prairie.
• Net income turned positive from a substantial 2013 loss, when Midstates recorded a $453.3 million oil and gas property impairment. The company recorded an $86.5 million impairment in 2014; it stated that February 2015 forward prices would have implied an additional $600–$800 million pre-tax ceiling-test impairment at year-end.
• Debt increased to $1.735 billion from $1.701 billion. Net cash declined to $11.6 million from $33.2 million.
• Midstates sold Pine Prairie for $147.7 million net proceeds, using $131 million to reduce revolver borrowings. It agreed in March 2015 to sell its remaining producing Louisiana Dequincy assets for $44 million, subject to adjustments and closing conditions.
• Proved reserves rose to 153.7 MMBoe from 127.8 MMBoe, driven by 77.0 MMBoe of extensions and discoveries, partly offset by 22.9 MMBoe of negative revisions and the sale of 16.4 MMBoe.

Outlook, risks, contingencies, and unusual items

Going-concern warning and liquidity: Management said forecast cash and available credit were not expected to meet obligations over the next 12 months and that covenant compliance depended on increasing liquidity. The auditor’s report included an explanatory paragraph stating that the projected covenant violation and lack of liquidity raised substantial doubt about Midstates’ ability to continue as a going concern. The statements were prepared on a going-concern basis without adjustments for that uncertainty.

• At December 31, 2014, cash was approximately $11.6 million, revolver availability approximately $90 million, and revolver borrowings $435.2 million against a $525 million borrowing base. The next scheduled borrowing-base redetermination was April 1, 2015.
• About $150 million of obligations were due within 12 months, including approximately $130 million of senior-note interest. Senior notes comprised $600 million at 10.75% due 2020 and $700 million at 9.25% due 2021.
• Year-end leverage was 3.7:1 against a 4.0:1 maximum covenant beginning in 2015; management warned a breach could occur in the third quarter of 2015 if liquidity concerns were not addressed. The company reported year-end covenant compliance and obtained a waiver relating to the going-concern-qualified audit opinion.
• Management was pursuing debt-capital-structure actions, asset sales, lower capital spending, lender waivers or amendments, working-capital management, and operating improvements. Success and timing were not assured.
• For 2015, the company planned $250–$275 million of capital spending and 58–64 gross Mississippian wells, while expecting no Anadarko Basin wells in the prevailing price and cost environment. This spending plan was expressly subject to capital availability; most drilling capital was directed to the Mississippian.
• Commodity prices fell sharply in late 2014 and early 2015. Most hedges were scheduled to expire in 2015, increasing exposure to market prices thereafter. Year-end hedges covered 3.276 million barrels of 2015 oil at a weighted-average $88.72 and 20.05 million MMBtu of gas at $4.15.
• Other material risks include borrowing-base reductions, covenant and cross-default provisions, reserve-estimate uncertainty, further impairments, concentrated purchasers, water disposal and induced-seismicity regulation, environmental and hydraulic-fracturing rules, and potential acreage expirations.
• The 2013 material weakness in controls over oil and gas reserve estimates was reported as remediated in 2014; management and the auditor concluded internal control over financial reporting was effective at year-end.

Most important facts for investors to verify

1. Confirm the issuer: this source is Midstates Petroleum, not Amplify Energy, and confirm the intended reporting period.
2. Check subsequent events and actual outcomes for the Dequincy sale, other asset sales, debt restructuring, and lender waivers.
3. Review the April 2015 borrowing-base redetermination, covenant calculations, and available liquidity against upcoming interest and operating obligations.
4. Separate recurring operating performance and cash generation from noncash derivative gains, impairments, and asset-sale effects.
5. Assess the sensitivity of reserves and property values to current commodity prices, including potential ceiling-test impairments and negative reserve revisions.