Business context and reporting period
This is Midstates Petroleum Company, Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2012—not a filing under the name Amplify Energy Corp. The company explored for and produced oil, natural gas and natural gas liquids, operating in Louisiana during the reported periods. On October 1, 2012, it completed the Eagle Energy acquisition, adding properties in Oklahoma and Kansas.
Financial performance
Amounts below are in millions of dollars unless stated otherwise.
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Oil, gas and NGL sales | $59.5 | $51.8 | $168.7 | $147.6 |
| Total revenue, including derivative results | $25.9 | $92.5 | $158.8 | $170.3 |
| Operating income (loss) | $(28.6) | $49.1 | $13.0 | $56.6 |
| Net income (loss) | $(17.8) | $48.5 | $(147.7) | $55.9 |
| Operating cash flow | Not provided | Not provided | $94.7 | $103.3 |
| Capital expenditures | $108.2 | Not provided | $314.8 | Not provided |
- Q3 average production rose 11% year over year to 8,182 Boe/d; nine-month production rose 19% to 8,120 Boe/d. Oil and NGL volumes increased, while Q3 natural gas production fell 38%.
- Q3 oil, gas and NGL sales increased 15%, but reported total revenue fell sharply because derivative results swung from a $40.6 million gain in Q3 2011 to a $33.7 million loss in Q3 2012. The 2012 derivative loss included $29.6 million of unrealized losses.
- Q3 operating margin was approximately negative 110% of total revenue; nine-month operating margin was approximately 8%. Revenue including derivatives is unusually volatile and is not equivalent to commodity sales.
- Operating expenses rose to $54.5 million in Q3 and $145.8 million for nine months. DD&A increased to $40.76/Boe in Q3 from $33.50/Boe, while lease operating and workover costs rose to $8.72/Boe from $5.69/Boe.
- Nine-month net loss includes a $149.5 million one-time deferred tax charge following the company’s conversion from an LLC to a taxable corporation after its IPO. The nine-month tax expense was $157.3 million; Q3 included an $11.6 million tax benefit.
Balance sheet, liquidity and financing
- At September 30, cash was $4.7 million, current assets $36.3 million and current liabilities $113.2 million; the reported current ratio was 0.53. Working-capital deficit was approximately $77.0 million.
- Debt under the revolving credit facility was $216.3 million, down from $234.8 million at December 31, 2011. The borrowing base was $235 million, with $18.5 million of available capacity. The facility was secured by substantially all oil and gas properties; weighted-average interest rate was 3.0%.
- The company disclosed that it would not have met the credit facility’s 1.0 minimum current-ratio covenant at quarter-end without a lender waiver for Q3. Debt/EBITDA was reported at 1.48, against a maximum covenant of 4.0.
- Nine-month cash decreased $2.7 million: operating inflow of $94.7 million and financing inflow of $187.5 million were outweighed by $284.9 million of investing outflow. Cash flow from operations declined from $103.3 million in the comparable period.
- Subsequent to quarter-end, the company issued $600 million of 10.75% senior notes due 2020, receiving estimated net proceeds of $582 million. It used proceeds in part for the Eagle acquisition and to repay $182.9 million of revolver borrowings. After these transactions, it reported approximately $38 million of cash and $216 million of revolver availability, with a $250 million borrowing base and facility maturity extended to October 2017.
Changes, outlook and material risks
- On October 1, 2012, the company acquired Eagle Energy assets for $325 million cash plus 325,000 Series A preferred shares with an initial $1,000 liquidation value each. The acquired properties included about 82,000 net acres in the Mississippian Lime and about 15,000 net acres in the Hunton formation. The filing cited approximately 33.3 MMboe of acquired proved reserves as of June 30, 2012. Acquisition results are excluded from the reported periods.
- Management raised expected 2012 capital expenditures from $365 million to approximately $440 million: $355 million drilling and completion, $58 million acreage and seismic, and $27 million facilities and other. It anticipated about $75 million of remaining Louisiana spending and $50 million in the acquired Mississippian Lime properties. Management stated that liquidity, together with operating cash flow, was expected to fund the development program through the end of 2013.
- Q3 drilling activity included 20 Louisiana wells and two horizontal sidetracks. Management planned 12 horizontal wells in Oklahoma during the remainder of 2012; drilling results, costs, and production outcomes remain uncertain.
- The Eagle preferred stock accrues an 8% annual dividend, payable in cash or added to liquidation preference at the company’s option, and is convertible beginning October 2013, with mandatory conversion by September 2015 if not earlier converted.
- Principal risks include volatile commodity prices, hedging gains and losses, natural production declines, higher per-unit operating and DD&A costs, borrowing-base redetermination, variable-rate debt, restrictive covenants, and dependence on continued access to capital. The company also disclosed counterparty risk in derivatives.
- In the Clovelly litigation, an adverse decision could grant the claimant a 56.25% interest in affected leases. Approximately 2.0 MMboe of the company’s 26.2 MMboe of year-end 2011 proved reserves were potentially associated with those properties; the company disputed the claim and was pursuing further review.
- Management reported disclosure controls and procedures were effective at September 30, 2012, with no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the registrant identity: this filing names Midstates Petroleum Company, Inc.; the metadata names Amplify Energy Corp.
- Reconcile operating performance using commodity sales separately from volatile derivative mark-to-market results, and assess the cash impact of realized hedges.
- Review post-quarter-end debt and acquisition effects, including the $600 million notes at 10.75%, preferred-stock terms, and the resulting leverage and interest burden.
- Check covenant compliance and liquidity after the transactions, and track the March 2013 borrowing-base redetermination.
- Assess whether the $440 million capital plan and projected funding through 2013 are supported by realized drilling performance, operating cash flow, and acquisition integration.
- Track the Clovelly litigation and any resulting reserve, ownership, or cash-flow exposure.