Filing identity and reporting period
The supplied filing is Midstates Petroleum Company, Inc.’s unaudited Form 10-Q for the three and six months ended June 30, 2013, filed August 8, 2013. It is not an Amplify Energy Corp. filing; the company and period in the request metadata do not match the filing text.
Midstates is an oil and gas exploration and production company operating in the Gulf Coast and Mid-Continent regions. The May 31, 2013 Anadarko Basin acquisition materially expanded its operations. Comparisons with 2012 are affected by acquisitions: the 2012 periods largely reflect Gulf Coast assets, while the 2013 periods include Eagle-acquired assets and, from May 31, Anadarko assets.
Financial performance and position
Amounts below are in millions of dollars except per-share data, production, and ratios.
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Total revenue | $126.0 | $102.6 | $197.0 | $132.8 |
| Oil, NGL and gas sales | $103.1 | $54.3 | $193.8 | $109.1 |
| Operating income | $21.9 | $57.4 | $19.9 | $41.6 |
| Net income (loss) | $3.3 | $(112.4) | $(4.6) | $(129.9) |
| Net income (loss) per common share | $0.01 | $(1.85) | $(0.17) | $(2.39) |
| Average daily production | 19,634 Boe/d | 7,904 Boe/d | 17,930 Boe/d | 8,090 Boe/d |
Q2 operating margin was approximately 17% of revenue, versus 56% a year earlier; first-half operating margin was approximately 10%, versus 31%. Higher operating costs, DD&A, G&A, acquisition expenses and interest weighed on results. Q2 2012 and first-half 2012 net losses included a $149.5 million noncash deferred-tax charge associated with the 2012 corporate reorganization.
- Six-month operating cash flow was $72.8 million, compared with $60.0 million in 2012. Investing cash outflow was $881.3 million, including $621.7 million for acquired properties and $259.6 million for property and equipment. Financing provided $801.9 million; cash declined $6.6 million to $12.3 million.
- At June 30, cash was $12.3 million and available revolver capacity was approximately $204 million, for stated liquidity of $216 million. Current assets were $127.6 million and current liabilities $182.3 million; the company reported a covenant-defined current ratio of 1.9x.
- Total debt was $1.521 billion: $221.2 million drawn on the revolver, $600 million of 10.75% notes due 2020 and $700 million of 9.25% notes due 2021. The company reported debt/EBITDA of 4.4x against a 4.5x covenant limit for the quarter. Cash less reported debt implies approximate net debt of $1.509 billion.
- Six-month capital expenditures incurred, including capitalized interest, were $282.2 million. Lease operating and workover expense rose to $9.69/Boe from $8.42/Boe; DD&A declined to $29.21/Boe from $37.98/Boe.
Material changes and operating developments
- Production rose 148% year over year in Q2, primarily due to the acquired Mid-Continent assets. Oil sales increased 61%, NGL sales 182% and natural gas sales 504%. Unhedged average oil and NGL prices fell 9% and 11%, respectively; natural gas price rose 56%.
- The Anadarko Basin acquisition closed May 31 for approximately $618 million, funded primarily by the $700 million 2021 notes offering. The acquired properties contributed $14.2 million of Q2 revenue and 2,668 net Boe/d to the quarter’s daily average. Acquisition and transaction costs were $11.5 million in the first half.
- Q2 net derivative gains were $22.4 million, including $23.5 million of unrealized gains and $1.1 million of realized losses. First-half net gains were $2.3 million, including $8.4 million unrealized gains and $6.1 million realized losses. Derivatives are not designated as accounting hedges, so fair-value changes flow through revenue.
- Interest expense, net of capitalized interest, was $16.6 million in Q2 and $27.5 million in the first half, up substantially as the company added high-coupon notes. First-half gross interest expense was $42.4 million, of which $14.9 million was capitalized.
- At June 30, the oil and gas ceiling-test cushion was less than 1%, although no ceiling-test impairment was recorded. Management also concluded that further West Gordon development was not warranted at that time, moved remaining unproved costs into the full-cost pool, and removed approximately 4.6 MMBoe of proved undeveloped reserves.
Outlook, risks and contingencies
- For Q3 2013, management planned approximately $25 million of Gulf Coast investment and two to three horizontal wells; approximately $105 million and 20 to 25 wells in the Mississippian Lime; and approximately $45 million and 16 to 18 wells in the Anadarko Basin.
- Management expected to fund the remainder of 2013 capital expenditures with operating cash flow and revolver borrowings. It stated that if external funding were unavailable, it might reduce the capital program; available cash, expected operating cash flow and revolver capacity were expected to cover reduced expenditures and operating needs beyond Q2 2014.
- Key exposures include volatile oil and gas prices, natural production declines, operating and infrastructure constraints, access to capital, acquisition integration and execution, and counterparty risk. The company hedged portions of expected oil, gas and NGL production; its positions included oil swaps through 2015 and gas and NGL contracts through 2014. A 1 percentage-point increase in average LIBOR and federal funds rates was estimated to raise first-half interest expense by $4.5 million, partly subject to capitalization.
- The revolver borrowing base was $425 million and subject to scheduled redetermination on October 1, 2013. The company was compliant with financial covenants at June 30, but reported debt/EBITDA of 4.4x versus the 4.5x limit then in effect; the covenant limit tightens in later periods.
- The Clovelly Oil dispute remained in the Louisiana district court, but the Louisiana Supreme Court ruled for Midstates on the central issue and denied rehearing. The company intended to seek dismissal. Management said other ordinary-course proceedings were not expected to have a material adverse effect. No material change to the previously disclosed risk factors was reported.
Important facts for investors to verify
- Confirm the issuer: this filing identifies Midstates Petroleum Company, Inc. (ticker MPO), not Amplify Energy Corp.
- Review the October 2013 borrowing-base redetermination, covenant headroom, and the company’s ability to fund its drilling plans and debt service.
- Assess whether acquired-asset production, operating costs and integration support the expected returns, particularly given the substantial increase in debt and interest expense.
- Check commodity hedge settlements and mark-to-market effects, and the sensitivity of earnings and cash flow to prices and basis differentials.
- Monitor the near-ceiling full-cost test, reserve revisions, the West Gordon decision and any subsequent impairment or acquisition purchase-accounting adjustments.
- Note the filing’s stated Q2 common-shareholder earnings of $0.629 million and the EPS note’s allocation of $0.170 million to participating securities, leaving $0.459 million attributable to common shareholders; both presentations report EPS of $0.01.