Filing summary
Entity and period: The supplied filing is Midstates Petroleum Company, Inc.’s Form 10-K for the fiscal year ended December 31, 2012 (filed March 21, 2013; ticker MPO). It is not an Amplify Energy Corp. filing. The 10-K reports full-year results and includes selected fourth-quarter data.
Business context and reporting period
Midstates is an oil and gas exploration and production company operating in Louisiana’s Gulf Coast region and, following its October 1, 2012 acquisition of Eagle Energy assets, Oklahoma and Kansas’ Mid-Continent region. The acquired assets contributed only from October 1 onward to reported 2012 results. The company completed its IPO and corporate reorganization in April 2012 and reports one operating segment.
Financial and operating metrics
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Total revenue, including net derivative losses | $247.7 million | $209.4 million |
| Oil, gas and NGL sales, before derivatives | $258.1 million | $213.8 million |
| Operating income | $20.5 million | $18.7 million |
| Net income (loss) | $(150.1) million | $16.7 million |
| Adjusted EBITDA, non-GAAP | $144.6 million | $152.6 million |
| Cash from operating activities | $137.2 million | $141.6 million |
| Cash used in investing activities | $(773.6) million | $(242.6) million |
| Cash from financing activities | $647.9 million | $96.5 million |
| Cash and cash equivalents at year-end | $18.9 million | $7.3 million |
| Long-term debt at year-end | $694.0 million | $234.8 million |
- Production was 3.659 million Boe, up 34%; average daily production was 9,999 Boe/d. Year-end proved reserves were 75.5 MMBoe, 69% oil and NGLs; 37% were proved developed.
- Average realized prices before derivatives declined year over year: oil to $104.35/Bbl from $110.25, natural gas to $2.81/Mcf from $4.20, and NGLs to $38.27/Bbl from $50.98. Realized derivative losses were $15.8 million.
- Fourth-quarter 2012 revenue was $88.9 million, operating income $7.5 million, net loss $2.4 million, and loss available to common shareholders $8.9 million. Fourth-quarter results include the acquired properties.
- At year-end, the revolver had $94 million drawn against a $250 million borrowing base, with $156 million available. Cash plus available revolver capacity totaled about $175 million. The March 2013 borrowing base was subsequently increased to $285 million.
- The credit agreement’s maximum debt-to-EBITDA covenant was 4.0x; reported year-end debt-to-EBITDA was 3.70x and current ratio was 1.87x. Common dividends were restricted and none were planned.
Material changes versus the prior year
- Revenue rose about 18%, primarily reflecting higher production and the Eagle acquisition; reported production increased 34%. Acquisition effects limit direct year-over-year comparability.
- Net income shifted to a $150.1 million loss despite $7.8 million of pretax income, principally because the April 2012 change to corporate tax status triggered a $149.5 million one-time tax charge; total income tax expense was $157.9 million.
- Debt increased after the company issued $600 million of 10.75% senior notes due 2020. The October acquisition consideration was $325 million cash plus 325,000 Series A preferred shares, with an initial $325 million liquidation preference and 8% cumulative dividends.
- Investing cash outflow rose sharply, including $351.3 million of acquisition spending and expanded drilling and development investment. Adjusted EBITDA declined about 5%, while operating cash flow declined modestly.
- Operating expense per Boe increased: lease operating and workover costs rose to $8.34 from $5.89, and severance and other taxes to $6.81 from $4.98. G&A fell to $30.5 million from $68.9 million, largely because 2011 included a $53.7 million non-cash share-based compensation charge.
Outlook, commentary, risks and unusual items
- Management planned $420–$450 million of 2013 exploration, development, lease and seismic spending, plus $28–$32 million of capitalized interest. Plans included 23–26 Gulf Coast wells and 72–78 Mid-Continent horizontal wells.
- Management described capital spending as adjustable in response to commodity prices, financing, costs, drilling results, equipment availability and regulatory approvals. It targeted hedging about 50% of current proved-developed-producing volumes.
- Key risks include oil and gas price volatility, reserve-estimate uncertainty, the high undeveloped-reserve share (about 63%), concentrated operations and customers, reliance on third-party transportation and services, acquisition integration, debt covenants and borrowing-base redeterminations, and environmental and hydraulic-fracturing regulation. Chevron represented 41% of 2012 revenue.
- Derivative contracts can reduce downside price exposure but also limit gains; mark-to-market changes affect earnings because hedge accounting was not used. Derivative fair value was a net liability of $4.1 million at year-end.
- The Clovelly Oil litigation received a favorable Louisiana Supreme Court ruling on March 19, 2013; the filing noted that a rehearing application remained possible. The company said other proceedings were not expected to have a material adverse effect.
- The independent auditor issued an unqualified opinion on the financial statements. Management said disclosure controls were effective at year-end; the filing also describes a material weakness in the 2011 internal-control environment. No auditor attestation on internal control was included under the newly public company transition rules.
Important facts for investors to verify
- Confirm the issuer identity: the supplied document is Midstates Petroleum Company, Inc., not Amplify Energy Corp.
- Review the audited statements and acquisition accounting, including final Eagle purchase-price adjustments and the effects of the acquisition on ongoing earnings and cash flows.
- Assess the sustainability of production growth, reserve additions and development of the 47.7 MMBoe of proved undeveloped reserves, including associated capital needs.
- Verify debt service capacity, covenant headroom, revolver availability and the effect of future borrowing-base redeterminations; consider the 10.75% notes and preferred-stock dividends or conversion dilution.
- Evaluate the one-time tax-status charge separately from recurring operating performance, and reconcile GAAP net loss with non-GAAP Adjusted EBITDA and operating cash flow.
- Check subsequent developments in the Clovelly matter, 2013 drilling results, commodity hedges, and environmental or regulatory requirements.