Filing identity and reporting period
Important identity mismatch: The supplied filing is Midstates Petroleum Company, Inc.’s unaudited Form 10-Q for the quarter ended September 30, 2014—not an Amplify Energy Corp. filing. Confirm the issuer before relying on this summary.
Midstates was an independent oil and gas exploration and production company operating in Louisiana, Oklahoma, and Texas. Figures below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial results and liquidity
| Metric | Three months ended Sep. 30, 2014 | Nine months ended Sep. 30, 2014 | Comparable 2013 period |
|---|---|---|---|
| Total revenue, including derivative gains/losses | $224.8 | $517.4 | $111.5 quarter; $308.5 nine months |
| Oil, NGL, and gas sales, before derivatives | $173.0 | $519.4 | $156.8 quarter; $350.6 nine months |
| Operating income (loss) | $111.1 | $90.8 | $(10.9) quarter; $9.0 nine months |
| Net income (loss) | $74.6 | $(11.1) | $(23.6) quarter; $(28.2) nine months |
| Net income (loss) per common share | $0.69 | $(0.31) | $(0.40) quarter; $(0.57) nine months |
| Operating cash flow | Not presented for quarter | $312.1 | $179.9 nine months |
| Capital expenditures incurred | $139.0 | $430.0 | Not clearly provided on a directly comparable basis here |
Third-quarter results included a $51.0 million net commodity-derivative gain, including $58.2 million of unrealized gains; the comparable 2013 quarter had a $45.3 million derivative loss. For the first nine months, derivatives produced a $3.2 million net loss, including $36.1 million of unrealized gains and $39.2 million of realized losses. Derivatives were not designated as accounting hedges, so fair-value changes affected reported revenue and earnings.
Average daily production was 33,799 Boe in Q3, up 19% year over year; nine-month production was 31,589 Boe/day, up 47%. Q3 sales prices before realized derivatives were $95.37/Bbl for oil, $34.89/Bbl for NGLs, and $3.61/Mcf for gas.
At September 30, cash was $25.7 million and current assets were $174.9 million versus current liabilities of $249.1 million. Management reported liquidity of approximately $181 million, comprising $155 million of revolver availability and $26 million of cash. Long-term debt was $1.669 billion: $369.2 million under the revolving facility, $600 million of 10.75% notes due 2020, and $700 million of 9.25% notes due 2021. The revolver borrowing base was increased from $475 million to $525 million. The company reported compliance with covenants, a 1.3:1 current ratio, and a 3.6:1 debt-to-EBITDA ratio.
Material changes versus prior periods
- Q3 oil, NGL, and gas sales rose 10% year over year; management said the increase would have been 28% after normalizing for the Pine Prairie asset sale. Production growth was led by the Mississippian Lime.
- Nine-month production rose 47%, reflecting development and the inclusion of a full nine months of Anadarko Basin results in 2014 versus only four months in 2013.
- Operating cash flow increased to $312.1 million from $179.9 million, while investing cash outflow narrowed to $284.8 million from $1.059 billion, which included the 2013 Anadarko acquisition.
- Nine-month interest expense, net of capitalized interest, rose to $102.0 million from $53.4 million, primarily reflecting the 2021 notes issued in 2013 and higher average revolver borrowings.
- The company recorded an $86.5 million oil and gas property impairment in the first nine months of 2014, following earlier ceiling-test impairments. The filing states the September ceiling-test result was within 5% of the ceiling; the impairment was recorded after the March 31 test.
Outlook, risks, and unusual items
- Management expected 2014 exploration, development, lease, and seismic capital spending of $500–$550 million and expected to capitalize $13–$15 million of interest.
- Management believed cash flow, available revolver capacity, hedges, and expected proceeds from the Dequincy sale would fund current capital plans through 2015. This depends on commodity prices, production, reserve levels, and access to capital.
- After quarter-end, the company agreed to sell Dequincy-area assets and the El Grande pipeline for stated consideration of $90 million, including $80 million cash, subject to adjustments and closing conditions. Closing was expected in November 2014; proceeds were intended primarily to repay revolver borrowings.
- The Pine Prairie sale closed May 1, 2014 for estimated net proceeds of $147.5 million; $131 million reduced revolver borrowings. The sale was accounted for as a reduction in the full-cost pool, with no gain or loss recognized.
- Commodity-price declines could reduce cash flow, liquidity, reserves, and borrowing capacity. Management warned that lower oil prices in Q4 increased the likelihood of another year-end ceiling-test impairment because hedges were not eligible for the ceiling-test price calculation.
- Mississippian Lime gathering and processing contracts contain minimum-volume commitments and potential shortfall payments. The company said it was meeting required volumes and did not expect shortfall payments.
- Disclosure controls were deemed ineffective as of September 30, 2014 because a material weakness in controls over oil and gas reserve estimates remained unremediated. Management cited weaknesses in validating source data provided to reserve engineers and reviewing the completeness and consistency of reserve estimates.
- The company planned to relocate its headquarters from Houston to Tulsa in early 2015 and warned of possible operational disruption, employee-retention challenges, and higher G&A costs.
- The filing reported no litigation expected to have a material adverse effect. It identified no other material change to critical accounting policies.
Most important facts to verify
- Confirm issuer and ticker: this filing identifies Midstates Petroleum Company, Inc. (MPO), not Amplify Energy Corp.
- Review the scale and timing of the 2014 capital program against operating cash flow, liquidity, and the stated funding outlook through 2015.
- Assess debt-service burden, revolver availability after borrowing-base redeterminations, covenant headroom, and the effect of floating rates.
- Separate recurring operating performance from substantial mark-to-market derivative gains and losses; verify hedge volumes, prices, and realized cash settlements.
- Evaluate the risk of further full-cost ceiling-test impairments, given the reported proximity to the ceiling and sensitivity to commodity prices and reserve estimates.
- Track completion of the Dequincy disposition and use of proceeds, and review remediation progress for the material weakness in reserve-estimation controls.