Business context and reporting period
Filing identity: The supplied filing is Midstates Petroleum Company, Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2013; it does not identify Amplify Energy Corp. as the registrant. Verify the company and filing match before relying on this summary. Midstates was an oil and gas exploration and production company operating in Louisiana, Oklahoma, Texas and Kansas.
Results include the Eagle properties acquired in October 2012 and the Anadarko Basin properties acquired May 31, 2013. The Anadarko acquisition cost approximately $618 million in cash and was funded principally with $700 million of 9.25% notes due 2021.
Financial performance and position
Dollar amounts below are in millions except per-share data, production and prices.
| Metric | Three months ended Sept. 30, 2013 | Nine months ended Sept. 30, 2013 | Comparable 2012 period |
|---|---|---|---|
| Oil, NGL and gas sales | $156.8 | $350.6 | $59.5 / $168.7 |
| Total revenue, including derivative results | $111.5 | $308.5 | $25.9 / $158.8 |
| Operating income (loss) | $(10.9) | $9.0 | $(28.6) / $13.0 |
| Net income (loss) | $(23.6) | $(28.2) | $(17.8) / $(147.7) |
| Net loss attributable to common shareholders; loss per share | $(26.2); $(0.40) | $(37.5); $(0.57) | $(17.8); $(0.27) / $(147.7); $(2.54) |
| Average daily production | 28,464 Boe/d | 21,480 Boe/d | 8,182 / 8,120 Boe/d |
Nine-month operating cash flow was $179.9 million versus $94.7 million in 2012. Investing cash use was $1.059 billion versus $284.9 million, while financing provided $885.4 million versus $187.5 million. Cash increased $6.1 million to $25.0 million.
At September 30, 2013, total debt was $1.606 billion: $306.2 million drawn on the revolver, $600 million of 10.75% notes due 2020 and $700 million of 9.25% notes due 2021. Stockholders’ equity was $654.7 million. Current assets were $165.7 million and current liabilities $261.8 million; the company reported a covenant-defined current ratio of 1.5:1.0 and $218.6 million of liquidity, including $193.7 million of revolver availability and $25.0 million of cash.
Operating margin, calculated as reported operating income divided by total revenue, was approximately negative 9.7% for Q3 and positive 2.9% for the first nine months. This measure reflects derivative losses included in revenue. DD&A was $28.56 per Boe in Q3 and $28.92 per Boe for nine months, below the respective 2012 rates of $40.76 and $38.92.
Material changes versus comparable periods
- Nine-month production rose 164% to 21,480 Boe/d, largely due to the Eagle and Anadarko acquisitions; oil, NGL and gas sales increased 108% to $350.6 million.
- Q3 production was 248% higher year over year. Total revenue growth was partly offset by net derivative losses of $45.3 million in Q3 and $43.0 million for nine months. Nine-month derivative results shifted from a $5.6 million unrealized gain in 2012 to a $27.0 million unrealized loss in 2013.
- Interest expense net of capitalized interest increased to $25.9 million in Q3 and $53.4 million for nine months, mainly reflecting the senior notes issued to finance acquisitions.
- Nine-month net loss improved substantially from 2012, when the company recorded a $149.5 million non-cash deferred-tax charge related to its IPO reorganization. The 2013 balance sheet also reflects a correction to 2012 deferred taxes: deferred tax liabilities fell by $33.9 million and additional paid-in capital increased by the same amount. The correction did not affect the reported 2012 statements of operations or cash flows cited in the filing.
- Gulf Coast production declined 13% sequentially in Q3, attributed to base decline and reduced drilling. Mississippian Lime/Hunton production rose 38% sequentially; Anadarko production rose 215%, principally because Q3 included three months of activity versus one month in Q2.
Outlook, commentary and risks
- Management planned approximately $85 million of Q4 2013 Mississippian Lime investment for 20–25 wells and approximately $45 million of Anadarko investment for 18–20 wells. No formal earnings or production guidance is provided in the supplied filing text.
- Management expected to fund capital spending for the remainder of 2013 and 2014 with operating cash flow and revolver borrowings. If external funding is unavailable, it said it could reduce the capital program; it believed liquidity and operating cash flow could cover reduced spending and operating needs beyond Q3 2014.
- The revolver borrowing base increased from $425 million to $500 million in September 2013; the next scheduled redetermination was April 1, 2014. The company reported debt-to-EBITDA of 4.4:1.0 and covenant compliance at quarter-end. The amended maximum leverage covenant tightens over time, reaching 4.0:1.0 from Q1 2015 onward.
- Commodity-price volatility, production declines, drilling and acquisition execution, access to capital, borrowing-base redeterminations, interest rates, infrastructure, and counterparty performance are key risks. The full-cost ceiling test found no impairment, but capitalized costs were within 5% of the ceiling at September 30, 2013.
- Derivative contracts were not designated as accounting hedges, so fair-value changes flowed through current-period revenue. Net derivative liabilities were $31.1 million at quarter-end; management estimated maximum loss from counterparty nonperformance, after netting arrangements, at approximately $4.1 million.
- The company recorded an estimated 36.5% effective tax benefit rate for 2013 and expected a tax loss and no current income tax payments. Management recorded no valuation allowance, relying on anticipated future taxable income from reversal of temporary differences.
- Q3 included a $0.6 million loss on disposal of field equipment inventory. The company reported no legal proceedings reasonably expected to have a material adverse effect, while noting ordinary-course disputes and the continuing Clovelly Oil Company action without a change from the prior quarterly report. Disclosure controls were deemed effective; implementation of a new accounting, production and land system was continuing.
Important facts for investors to verify
- Confirm the registrant and ticker: this source is Midstates Petroleum Company, Inc. (NYSE: MPO), not Amplify Energy Corp.
- Review acquisition-related production, costs and integration, especially the May 2013 Anadarko purchase and its preliminary purchase-price allocation.
- Assess debt service and covenant headroom, including high-coupon notes, the tightening leverage limits and the next borrowing-base redetermination.
- Examine hedge volumes, settlement terms and mark-to-market exposure alongside realized commodity prices and production.
- Monitor the oil and gas ceiling-test cushion, capital spending needs, production trends and the assumptions supporting deferred tax assets without a valuation allowance.