Business context and reporting period
This is Midstates Petroleum Company, Inc.’s Form 10-Q for the three months ended March 31, 2012—not an Amplify Energy Corp. filing. The unaudited financial statements are for Midstates Petroleum Holdings LLC and its subsidiary, before the April 2012 reorganization and IPO. Midstates is a Louisiana-focused oil and gas exploration and production company.
Financial results and key metrics
Amounts are in millions of dollars unless stated otherwise.
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Total revenue, including derivative losses | $30.2 | $13.2 |
| Oil, gas and NGL sales before derivative losses | $54.8 | $41.7 |
| Operating loss | $(15.8) | $(16.1) |
| Net loss | $(17.5) | $(16.1) |
| Pro forma net loss per share | $(0.16) | $(0.15) |
| Net cash from operating activities | $34.3 | $26.7 |
| Capital investment cash outflow | $(72.5) | $(52.4) |
| Cash at period end | $9.2 | $4.1 |
Reported revenue incorporates $24.7 million of net derivative losses ($18.2 million unrealized and $6.5 million realized). Operating margin on reported revenue was approximately negative 52%; the unusually large derivative mark-to-market loss materially affects comparison with underlying sales.
Production averaged 8,275 Boe/d, up 34% from 6,173 Boe/d a year earlier, but below Q4 2011’s 9,433 Boe/d. Oil sales were $45.1 million, natural gas sales $3.5 million and NGL sales $6.3 million. Average oil price before realized derivatives was $111.21/Bbl; after realized derivatives it was $95.18/Bbl.
At March 31, cash was $9.2 million and total debt under the revolving facility was $234.8 million. The March borrowing-base redetermination cut availability from $235 million to $210 million, making $25 million of debt current and requiring repayments. The facility bears floating interest (3.1% weighted-average rate at quarter-end), matures December 2014 and is secured by substantially all oil and gas properties. The company reported covenant compliance. Preferred units were recorded as a $40.8 million liability, including accrued interest.
Material changes versus prior period
- Oil, gas and NGL sales increased 31%; higher sales volumes contributed $9.8 million of the $13.1 million increase, and price changes contributed $3.3 million.
- Production rose 34%, while lease operating and workover costs increased 148% to $6.5 million ($8.59/Boe versus $4.69/Boe). DD&A increased 51% to $28.0 million; G&A increased 55% to $6.1 million.
- Net loss widened by $1.4 million, reflecting higher operating costs and $1.7 million of net interest expense, partly offset by lower unrealized derivative losses than in Q1 2011.
- Operating cash flow increased to $34.3 million, but investing outflows also increased, to $72.5 million. Financing provided $40.0 million, principally from preferred-unit issuance.
Outlook, commentary, risks and unusual items
- Management budgeted $380 million of 2012 capital expenditures and expected to spud 76 wells, with activity weighted toward the second half. It reported 14 gross wells spudded in Q1 and planned 12 horizontal projects for 2012. The filing does not provide formal earnings or production guidance.
- After the April 25 IPO, Midstates received approximately $215.6 million net of estimated offering expenses. It used $67.1 million to redeem preferred units and about $99 million to repay facility borrowings; remaining proceeds were intended to fund growth. May 29 liquidity was reported as $90.4 million, including $78.2 million of unused borrowing base.
- The company estimated a one-time $150–$160 million tax charge in Q2 from the reorganization’s book-tax basis difference, and estimated a 2012 effective tax rate of approximately 50% before that charge. It expected available cash, operating cash flow and facility borrowings to fund operations through 2013.
- Commodity prices, production declines, drilling success and execution, capital availability, operating costs, interest rates and counterparty performance are key risks. Derivative liabilities had a net balance-sheet fair value of $35.4 million at March 31; contracts were with two bank counterparties. Additional 2013 basis-differential hedges were entered into in May.
- A Louisiana lease-interest lawsuit remained on appeal; management did not expect a material financial impact. New EPA air-emissions rules and proposed federal hydraulic-fracturing measures could increase costs or affect production.
- Management stated disclosure controls were effective and believed actions had remediated a material weakness in financial reporting identified for year-end 2011; the effectiveness of those corrective actions merits monitoring.
Important facts for investors to verify
- Confirm this filing belongs to Midstates Petroleum, not Amplify Energy, and review the post-IPO capital structure and use of proceeds.
- Track the projected $150–$160 million reorganization tax charge, actual tax rate and resulting earnings impact.
- Assess whether the 2012 drilling and $380 million capital program delivered production growth and returns, particularly given Q1’s decline from Q4 2011 production.
- Review subsequent borrowing-base determinations, debt repayment, covenant headroom and liquidity as capital spending proceeds.
- Evaluate hedge settlements and fair-value changes, including the effect of hedges on realized prices and cash flows.
- Monitor the lease litigation, evolving environmental and hydraulic-fracturing regulation, and remediation of the previously reported internal-control weakness.