Business context and reporting period
This is Midstates Petroleum Company, Inc.’s unaudited Form 10-Q for the three months ended March 31, 2019—not an Amplify Energy Corp. quarterly filing. Midstates operated primarily in Oklahoma’s Mississippian Lime and reported one operating segment. It sold its Anadarko Basin assets in May 2018. On May 6, 2019, it entered into an all-stock merger-of-equals agreement with Amplify; closing was expected in the third quarter of 2019, subject to conditions.
Financial performance and position
| Metric | Q1 2019 | Q1 2018 or prior date |
|---|---|---|
| Revenue from customer contracts | $29.8 million | $52.8 million |
| Total revenue, including derivative losses | $22.1 million | $48.9 million |
| Operating income (loss) | $(16.9) million | $5.8 million |
| Net income (loss) | $(17.8) million; $(0.78) per share | $4.0 million; $0.15 per share |
| Cash from operating activities | $13.2 million | $22.1 million |
| Capital expenditures (cash investing outflow) | $9.5 million | $31.8 million |
| Cash and cash equivalents | $0.7 million at March 31 | $11.3 million at December 31, 2018 |
| Revolving credit facility borrowings | $59.1 million | $23.1 million at December 31, 2018 |
Net working capital was a deficit of $3.9 million, versus positive working capital of $13.9 million at year-end. The $170 million borrowing base provided $109 million of availability after $59.1 million drawn and $1.9 million of letters of credit. The RBL bore interest at LIBOR plus 4.50% (subject to a 1.00% floor); the reported weighted-average rate was 7.0%. The facility matures September 30, 2020. Midstates said it was in covenant compliance at quarter-end; the borrowing base was reaffirmed at $170 million on April 11.
Lease operating and workover costs were $9.0 million, or $7.54 per Boe, and DD&A was $11.8 million, or $9.91 per Boe. A $9.7 million full-cost ceiling impairment was recorded. No income tax expense or benefit was recognized. The company adopted lease accounting guidance and reported $5.3 million of operating lease liabilities and $4.6 million of right-of-use assets at quarter-end.
Material changes versus the prior comparable period
- Customer-contract revenue fell $23.0 million. Management attributed the decline to lower production volumes, the Anadarko divestiture, and lower oil and NGL prices.
- Mississippian Lime production averaged 13,239 Boe/day, down 14.7% from the comparable 2018 quarter; oil was down 25.9%, NGLs 2.9%, and natural gas 13.5%. Q1 production was also down 19.0% from Q4 2018.
- Average oil price without realized derivatives declined 14.0% to $53.65/Bbl; NGL price fell 25.0% to $19.52/Bbl. Natural gas price rose 10.2% to $1.94/Mcf.
- Derivative contracts produced a net reported loss of $7.7 million, including $8.5 million of unrealized losses, compared with a $3.9 million net loss in Q1 2018. Cash settlements were a net receipt of $0.8 million.
- Operating cash flow declined by $9.0 million, while capital spending was lower as the company had paused drilling beginning in Q4 2018. Investing outflows fell to $9.5 million from $31.8 million.
- Interest expense declined to $0.9 million from $1.8 million, reflecting a lower average revolver balance. G&A fell to $6.4 million from $9.9 million, primarily due to lower strategic-review costs and employee/share-based compensation, partly offset by lower cost recoveries after the Anadarko sale.
Outlook, commentary, risks and unusual items
- Management said operating cash flow, cash on hand, and RBL availability were expected to fund anticipated capital expenditures, debt service, and contractual commitments. The filing provides no quantified production, revenue, earnings, or capital-spending guidance.
- Management warned that continued low commodity prices and the drilling pause could result in further full-cost impairment charges in 2019. The Q1 impairment was noncash and did not affect operating cash flow or liquidity.
- Oklahoma saltwater-disposal limits and seismicity-related directives may restrict disposal capacity, raise operating costs, or reduce production. The company said it was meeting current directives and maintaining production without material impact.
- A gas gathering and processing contract includes minimum NGL-volume commitments. Midstates was meeting them, but reduced drilling could make future compliance more difficult.
- The merger agreement provides for change-in-control benefits. Midstates estimated 500,000–800,000 unvested awards would vest and $8.5–$11.5 million of severance payments would be made; final amounts were not determined.
- Midstates repurchased and retired 5.0 million shares for $50 million ($10 per share) in February, partly funded by RBL borrowing. The transaction reduced cash and increased debt; warrant terms were adjusted following the tender offer.
- Accrued loss contingencies were $1.1 million. The company said pending legal matters were not expected to have a material adverse effect, while noting estimates and outcomes could change.
Important facts for investors to verify
- Confirm the filing entity: the reported company is Midstates Petroleum, and Amplify appears as the merger counterparty.
- Track merger approvals, closing timing, exchange ratio (0.933 Midstates shares per Amplify share), and final change-in-control costs.
- Assess whether production declines, the drilling pause, and commodity prices affect future cash generation, reserve values, and further impairment charges.
- Monitor cash levels, RBL borrowings and availability, covenant compliance, and the September 2020 maturity.
- Review hedge settlements and mark-to-market exposure, Oklahoma disposal restrictions, and the ability to meet minimum-volume commitments.