Amplify Energy Corp. quarterly report, Q3 FY2018

Full document

Filing summary

Issuer and period: The supplied filing is Midstates Petroleum Company, Inc.’s unaudited Form 10-Q for the three and nine months ended September 30, 2018, signed November 9, 2018. This does not match the request metadata naming Amplify Energy Corp.; verify the issuer before relying on this summary.

Business context

Midstates was an independent oil and gas exploration and production company operating in Oklahoma, principally in the Mississippian Lime. It sold its Anadarko Basin assets on May 31, 2018, and reported one operating segment.

Financial performance

Amounts below are in millions of dollars unless stated otherwise. Q3 2018 / Q3 2017; nine months 2018 / nine months 2017:

  • Revenue from customer contracts: $54.3 / $53.3; $160.9 / $166.6. Including net derivative losses or gains, total revenue was $47.8 / $49.7; $139.0 / $175.4.
  • Net income: $11.5 / $3.7; $14.0 / $35.9. Diluted and basic EPS were $0.44 / $0.14; $0.54 / $1.39. No income tax expense or benefit was recorded.
  • Operating income: $12.2 / $5.3; $17.7 / $39.7. Q3 operating income was about 25% of total revenue; comparison is affected by derivative results and presentation changes.
  • Derivative results: Net losses were $6.6 in Q3 and $21.9 for the nine months, versus losses of $3.6 and gains of $8.8, respectively, in 2017. Nine-month cash settlements were net payments of $7.5, compared with receipts of $6.1.
  • Cash flow and investment: Nine-month operating cash flow was $81.6 (prior year $89.3); investing cash outflow was $43.4 ($88.6); financing cash outflow was $100.5 ($1.0). Capital investment in property and equipment was $98.2, partly offset by $54.4 of net sale proceeds from the Anadarko assets.
  • Liquidity and debt at September 30: Cash was $6.2, current assets $41.1, current liabilities $64.2, and working capital deficit $23.1. RBL debt was $28.1, down from $128.1 at year-end 2017; borrowing availability was $140.0. The $170.0 borrowing base was reaffirmed October 24. The RBL matures September 2020; the weighted-average interest rate was 6.7%. The company reported compliance with its covenants.
  • Balance sheet: Total assets were $610.0 and stockholders’ equity $505.0. Net derivative liabilities were $17.6. Asset retirement obligations were $7.8.

Changes and management commentary

  • Q3 customer-contract revenue increased modestly, but total revenue declined due to larger derivative losses. Oil and NGL prices rose year over year, while natural gas pricing and volumes weakened. For the first nine months, lower production volumes and derivative results contributed to lower reported revenue and net income.
  • Mississippian Lime Q3 production averaged 17,996 Boe/day, up 4.6% from Q2 2018; oil production rose 8.6%. Nine-month companywide production was lower than 2017, reflecting reduced drilling, natural declines and the Anadarko disposition.
  • The Anadarko sale generated $54.4 million net proceeds; $50.0 million was used to repay RBL borrowings. The company also repaid $50.0 million using cash on hand. Cash consequently fell from $68.5 million at year-end to $6.2 million.
  • Management expected 2018 investment of $95–$100 million in the Mississippian Lime. Operational capital expenditures were $92.9 million for the first nine months, including $21.5 million in Q3. The filing gives no specific production or earnings guidance.
  • ASC 606 adoption changed certain gas sales and gathering costs from gross presentation to net presentation. The filing states adoption had no material effect on financial statements or net income; reported revenue and expenses are therefore not fully comparable on presentation alone.

Risks, contingencies and unusual items

  • Commodity-price volatility, natural production declines, drilling results, access to capital and reserve estimates could affect cash flows and future investment. Derivative positions reduce some price exposure but can limit upside; counterparties and market movements also create risks.
  • Oklahoma regulators have imposed injection limits and disposal-well directives amid concerns about induced seismicity. Management reported compliance with current requests and no material production impact to date, but further restrictions could increase costs or constrain production.
  • The full-cost ceiling test resulted in no oil and gas property impairment in the three or nine months ended September 30, 2018; future impairments remain possible. DD&A per Boe increased, which management attributed primarily to reduced proved reserves following a shift to a one-rig development plan.
  • General and administrative costs included $1.6 million of severance costs and $3.1 million related to strategic-options review in the first nine months. The filing also reports an $850,000 advisory fee for that period.
  • The company disclosed $1.1 million accrued for loss contingencies, including matters arising in the ordinary course of business. Management said pending legal actions were not expected to have a material adverse effect. Tax accounting under the Tax Act remained provisional; a $116.5 million valuation allowance was recorded against deferred tax assets.
  • Lease accounting adoption impact had not been quantified; management expected to complete its assessment in Q4 2018. The filing reported effective disclosure controls and no material change in internal control during the quarter.

Important facts to verify

  • Confirm the filing issuer: the document is for Midstates Petroleum, not Amplify Energy.
  • Reconcile cash decline, the two $50 million RBL repayments, and the Anadarko sale proceeds against the cash-flow statement and post-closing adjustments.
  • Assess the distinction between customer-contract revenue and total revenue, including derivative results and ASC 606 net presentation, when comparing periods.
  • Check hedge volumes, terms, and fair-value exposure against forecast production and commodity-price assumptions.
  • Review borrowing-base availability, covenant headroom, the September 2020 maturity, and potential liquidity needs relative to the 2018 capital-spending plan.
  • Monitor Oklahoma saltwater-disposal restrictions and any resulting effect on operating costs or production.