Business context and reporting period
Important entity discrepancy: The supplied filing is Midstates Petroleum Company, Inc.’s Form 10-K for the year ended December 31, 2015, filed March 30, 2016. It is not an Amplify Energy Corp. filing. The report includes unaudited fourth-quarter 2015 results.
Midstates was an independent U.S. oil and gas producer focused on the Mississippian Lime and Anadarko Basin. Following its April 2015 sale of its remaining producing Louisiana properties, its proved reserves and production were concentrated in Oklahoma and Texas.
Financial and operating performance
| Metric | 2015 | 2014 |
|---|---|---|
| Total revenue | $365.1 million | $794.2 million |
| Operating income (loss) | ($1,643.8 million) | $260.8 million |
| Net income (loss) | ($1,797.2 million) | $116.9 million |
| Adjusted EBITDA | $315.3 million | $474.1 million |
| Cash from operating activities | $213.4 million | $351.5 million |
| Cash used in investing activities | $294.6 million | $404.3 million |
| Cash from financing activities | $150.7 million | $31.1 million |
Fourth-quarter 2015 revenue was $68.8 million; operating loss was $470.3 million and net loss was $510.9 million. Fourth-quarter 2014 revenue was $276.8 million and net income was $128.1 million.
- Annual production averaged 32,880 Boe/day, up 2% from 2014. Mississippian production grew 22% to 26,282 Boe/day, while Anadarko production fell 25% to 6,222 Boe/day.
- Unhedged realized prices fell sharply year over year: oil to $45.40/bbl (down 50%), NGLs to $15.46/bbl (down 57%) and gas to $2.35/Mcf (down 41%). Oil and gas sales, excluding derivatives, totaled $322.7 million versus $653.6 million.
- Realized derivative cash gains were $167.7 million, equal to 78.6% of operating cash flow. All hedges expired in 2015; no derivatives were outstanding at year-end.
- A $1.626 billion full-cost impairment, driven primarily by lower commodity prices, was non-cash. The company also recorded a $689.4 million valuation allowance against tax loss carryforwards.
- Year-end proved reserves were 73.5 MMBoe, down from 153.7 MMBoe in 2014; 94% were proved developed. Negative revisions were 75.7 MMBoe. The filing transferred 77.4 MMBoe of proved undeveloped reserves to probable reserves because financing development within five years was uncertain.
- Year-end cash was $81.1 million. Year-end debt was reported at $1.891 billion carrying value, including debt classified as current; stated principal was $1.796 billion. All debt was classified as current because of the Credit Facility default and covenant uncertainty. Year-end liquidity was stated as $330.3 million, including $249.2 million of undrawn facility availability.
- In February 2016, the company drew the remaining approximately $249.2 million under its facility; it reported cash of approximately $335.7 million as of February 9.
Material changes versus the prior comparable period
- Revenue fell 54%, primarily because of lower commodity prices; production grew modestly overall, but oil volumes declined 7%.
- The company moved from 2014 net income to a 2015 net loss, principally reflecting the $1.626 billion impairment, lower commodity-related revenue and restructuring costs.
- Operating cash flow declined 39%. Derivative settlements partly cushioned the decline, but those hedges had expired by year-end.
- Proved reserves more than halved, reflecting major negative revisions, the transfer of undeveloped reserves to probable, and divestitures.
- Debt rose to approximately $1.9 billion carrying value, and a 2015 restructuring replaced/reworked debt with new second- and third-lien notes and unsecured notes. Debt restructuring and advisory fees were $36.1 million.
- The Dequincy divestiture generated approximately $42.4 million net proceeds and left the company without Gulf Coast proved reserves or production at year-end.
Outlook, risks and unusual items
- Going-concern warning: Management and the auditor cited substantial doubt about the company’s ability to continue as a going concern. The filing reports a Credit Facility default tied to the auditor’s explanatory paragraph, no lender waiver, and potential cross-default and acceleration of other debt. Management said forecast cash and credit would not be sufficient for the next 12 months, even after planned cost and capital reductions.
- The company was evaluating whether to make a $15.8 million interest payment due April 1, 2016, and disclosed approximately $188.0 million of contractual payments due over the next 12 months, including $179.5 million of interest. Management said a Chapter 11 filing might be the most expeditious capital-structure solution; no assurance of a restructuring was given.
- The next borrowing-base redetermination was scheduled for April 2016. A reduction could require repayment of a deficiency, with limited capacity to meet it. The filing also forecast a further material first-quarter 2016 impairment of approximately $100–$150 million.
- For 2016, management planned to allocate substantially all drilling and completion capital to Mississippian development, reduce from three rigs to one by the end of March, and undertake no Anadarko drilling. No clear consolidated 2016 financial guidance is provided.
- Oklahoma disposal-well restrictions affected operated wells; regulators requested an approximately 40% reduction in wastewater disposal volumes. Management was in discussions with regulators and assessing operating impacts.
- Other risks include volatile oil and gas prices, no current hedges, concentrated purchasers (two accounted for 68% of 2015 revenue), lease expirations, environmental and regulatory costs, and saltwater disposal constraints. NYSE delisted the shares on February 3, 2016; they began trading OTC under MPOY.
- The company reported disclosure controls and internal control over financial reporting effective at year-end, while also describing a cash-flow review material weakness identified during 2015 and additional remediation procedures.
Most important facts for investors to verify
- Confirm the filing’s issuer: it is Midstates Petroleum, not Amplify Energy, and confirm which company and reporting period are intended.
- Check subsequent filings and developments on the Credit Facility default, lender waivers, cross-defaults, interest payments, restructuring or bankruptcy, and the going-concern status.
- Verify the April 2016 borrowing-base outcome and cash available after debt service and required repayments.
- Review the causes and assumptions behind the reserve decline, impairment, and transfer of undeveloped reserves to probable reserves.
- Assess the effect of expired hedges, realized commodity prices, disposal-volume limits and purchaser concentration on forward cash generation.