Business context and reporting period
This is Midstates Petroleum Company, Inc.’s unaudited Form 10-Q for the three months ended March 31, 2014—not a filing in the name of Amplify Energy Corp. Midstates was an independent oil and gas exploration and production company operating in the Mississippian Lime, Anadarko Basin and Gulf Coast regions. The Anadarko Basin acquisition completed in May 2013 materially affects year-over-year comparisons.
Financial results and liquidity
| Metric | Q1 2014 | Q1 2013 / comparison |
|---|---|---|
| Total revenue | $144.7 million | $71.0 million |
| Oil, NGL and gas sales before derivative losses | $167.1 million | $90.7 million |
| Operating loss | $52.0 million | $2.1 million |
| Net loss | $83.6 million | $7.9 million |
| Net loss attributable to common shareholders; diluted loss per share | $86.3 million; $1.31 | $12.1 million; $0.18 |
| Operating cash flow | $97.4 million | $62.2 million |
| Cash used in investing activities | $114.8 million | $132.5 million |
| Cash and cash equivalents at quarter-end | $14.6 million | $33.2 million at Dec. 31, 2013 |
| Total debt | $1.701 billion | Unchanged from Dec. 31, 2013 |
Revenue growth reflected higher production, including contribution from the Anadarko acquisition, and higher NGL and natural gas prices; oil price realizations declined. Net derivative losses were $22.7 million, including $14.8 million realized and $7.9 million unrealized. Operating expenses included an $86.5 million oil and gas property impairment ($83.5 million after tax). The filing does not present a single gross-margin measure.
At March 31, liquidity was reported as approximately $113 million, comprising $99 million of available revolver capacity and $15 million of cash (rounded). The credit facility had a $500 million borrowing base and $401.2 million drawn. The company reported compliance with its covenants, a 1.0-to-1.0 current ratio and debt-to-EBITDA of 4.1-to-1.0. Debt comprised a $401.2 million revolver, $600 million of 10.75% notes due 2020 and $700 million of 9.25% notes due 2021. Net interest expense was $33.9 million, versus $10.9 million a year earlier.
Material changes versus the prior comparable period
- Average daily production increased 79% year over year to 29,004 Boe/d; reported oil, NGL and natural gas sales rose 84% to $167.1 million. The acquired Anadarko properties contributed to the increases.
- Net loss widened substantially, principally reflecting the property impairment, higher DD&A and increased interest expense following the 2021 notes issuance and acquisition financing.
- Operating cash flow increased to $97.4 million. Cash fell by $18.5 million during the quarter, compared with a $31.7 million increase in Q1 2013.
- Capital expenditures incurred were $142.7 million, including $4.6 million of capitalized interest; $134.0 million of property and equipment investment was accrued but unpaid at quarter-end.
- Series A preferred dividends were paid by increasing the preferred liquidation preference; the shares carry an 8% cumulative dividend.
Outlook, commentary, risks and unusual items
- Management expected 2014 capital investment of $500–$550 million and said Pine Prairie sale proceeds, operating cash flow and available credit were expected to fund planned spending through 2015.
- Management planned Q2 spending of approximately $80–$85 million in the Mississippian Lime and $40–$45 million in the Anadarko Basin. It cited severe winter weather as a cause of production downtime and delayed well turn-ins. Full-year production or earnings guidance was not provided in the supplied filing text.
- The Pine Prairie disposition closed May 1, 2014 for estimated net proceeds of $147.5 million after adjustments. Midstates used $131 million to repay revolver borrowings, retained the balance for expenses and working capital, and terminated a $125 million bridge-facility commitment, incurring $2.3 million of related fees and expenses. The borrowing base fell to $475 million after closing.
- The company identified commodity-price volatility, production declines, drilling and execution risks, access to capital, weather and infrastructure constraints, counterparty risk, and possible further full-cost ceiling-test impairments. It hedged a portion of expected production; the net derivative fair value was a $38.7 million liability at quarter-end.
- Disclosure controls and procedures were deemed ineffective because a material weakness in controls over oil and gas reserve estimates remained unremediated. The weakness involved validation of source data provided to independent reserve engineers and management review of reserve estimates.
- Management reported no litigation expected to have a material adverse effect and no material change in the risk factors described in its 2013 Form 10-K. It anticipated a current-year tax loss and no current income tax payments, while maintaining a valuation allowance against certain deferred tax assets.
Important facts for investors to verify
- Confirm the requested issuer: this filing is for Midstates Petroleum Company, Inc.; the supplied company metadata says Amplify Energy Corp.
- Review the scale and assumptions behind the $86.5 million impairment and the continuing reserve-estimate control weakness.
- Verify post-quarter Pine Prairie sale proceeds, the $131 million revolver repayment, revised borrowing base and covenant headroom.
- Assess whether planned capital spending can be funded while sustaining production, given quarter-end cash of $14.6 million and debt of $1.701 billion.
- Review hedge volumes, realized losses, derivative liabilities and exposure to commodity prices and counterparties.