Business context and reporting period
The supplied filing is Midstates Petroleum Company, Inc.’s Form 10-Q for the quarter and six months ended June 30, 2012—not a filing by Amplify Energy Corp. Midstates was a Louisiana-focused oil and gas exploration and production company; it completed its IPO and corporate reorganization on April 25, 2012.
Financial and operating results
Amounts below are in U.S. dollars; financial statement figures are in millions unless stated otherwise.
- Revenue: Second-quarter revenue was $102.6 million, up from $64.7 million a year earlier; six-month revenue was $132.8 million versus $77.8 million. These totals include net commodity-derivative gains of $48.1 million for the quarter and $23.5 million for six months. Oil, gas and NGL sales alone were $54.3 million and $109.1 million, respectively.
- Production and prices: Second-quarter production averaged 7,904 Boe/d, up 13% year over year; six-month production averaged 8,090 Boe/d, up 23%. Second-quarter oil sales volume rose, but the average oil price before realized derivatives fell 8% to $107.56/Bbl. Natural gas prices fell 52% to $2.27/Mcf. Six-month realized oil price including realized derivatives was $95.59/Bbl, down 2% year over year.
- Profit and margins: Operating income was $57.4 million for Q2 and $41.6 million for the first half, versus $23.7 million and $7.5 million, respectively, in 2011. Net loss was $112.4 million for Q2 and $129.9 million for six months, compared with net income of $23.5 million and $7.4 million. The losses principally reflect a $149.5 million deferred tax charge associated with the change to corporate tax status; total income tax expense was $168.9 million. The reported net loss per share was $1.85 for Q2 and $2.39 for six months.
- Costs: Six-month lease operating and workover expense increased 97% to $12.4 million; DD&A rose 40% to $55.9 million. G&A fell 24% to $11.0 million, mainly because prior-year share-based compensation was higher.
- Cash flow and investment: Six-month operating cash flow was $60.0 million, down from $67.0 million; investing cash flow was negative $184.2 million, compared with negative $102.3 million. Financing provided $128.6 million, including IPO proceeds. Cash increased $4.3 million to $11.7 million. Capital expenditures incurred were $206.5 million; $79.4 million of property investment was accrued but unpaid.
- Debt and liquidity: Long-term debt was $151.7 million at June 30, down from $234.8 million at year-end. The amended revolving facility had a $500 million commitment, a $200 million initial borrowing base and a June 2017 maturity; borrowings were secured by substantially all oil and gas properties. The company reported compliance with its financial covenants at quarter-end. Current assets were $55.1 million and current liabilities $90.5 million.
Material changes versus prior comparable periods
- First-half production grew 23% year over year, but first-half operating cash flow declined about 10% as realized commodity prices and working-capital effects weighed on cash generation.
- Derivative results swung from a $18.1 million net loss in the first half of 2011 to a $23.5 million net gain in 2012. The 2012 gain included $35.2 million of unrealized gains, which are non-cash and reflect mark-to-market valuation.
- The IPO raised approximately $213.8 million net of company-paid offering expenses. Proceeds were used to redeem preferred units, repay $99.0 million of revolver borrowings and fund drilling.
- The company increased its drilling and acreage investment, while production in Q2 was below Q1, primarily due to declines at South Bearhead Creek and weaker-than-expected West Gordon results and downtime.
Outlook, risks and unusual items
- Capital plan: The 2012 capital budget was revised down from $380 million to $365 million. Management planned to concentrate second-half drilling more heavily in Pine Prairie, while pausing expansion-area drilling to reassess results. It stated the existing second-half program could not be funded without capital markets or other external funding; absent funding, spending would need to be significantly reduced.
- Acquisition and financing: On August 11, 2012, after quarter-end, Midstates agreed to acquire Eagle Energy assets for $325 million cash plus 325,000 Series A preferred shares, subject to closing conditions; closing was expected around October 1. The preferred shares carry an 8% dividend. Financing commitments included a proposed bridge facility of up to $500 million, initially priced at LIBOR (subject to a 1.50% floor) plus 9%, and proposed revolver amendments. These were commitments, not completed funding at the filing date. The company also disclosed an additional $20 million revolver borrowing on July 13.
- Operating and commodity risks: Management cited natural production declines, volatile oil and gas prices, drilling outcomes, downtime, equipment and labor availability, and access to capital. Commodity hedges reduce some price exposure but introduce counterparty risk; the maximum loss from counterparty nonperformance after netting was estimated at $18.3 million at June 30.
- Litigation: In the Clovelly dispute, an adverse ruling could give the plaintiff a 56.25% interest in affected leases. Approximately 2.0 MMBOE of 26.2 MMBOE of year-end 2011 proved reserves were potentially affected. The company was contesting the claim; the appeal had been remanded for further proceedings.
- Tax and controls: The reorganization created a large one-time deferred tax charge. Management said disclosure controls were effective and believed actions taken had remediated a material weakness in internal control identified at December 31, 2011.
Important facts for investors to verify
- Confirm the intended issuer: this filing is for Midstates Petroleum Company, Inc., not Amplify Energy Corp.
- Separate recurring operating performance and cash generation from substantial unrealized derivative gains and the one-time tax-status charge.
- Check whether the Eagle acquisition closed, how it was financed, and the resulting debt, preferred-stock terms and liquidity.
- Track production trends, well performance and the revised $365 million capital plan against available funding.
- Monitor the Clovelly litigation and potential impact on the affected leases and reserves.