This is a brief update piece to our backgrounder from January and should be read in conjunction with that piece.
Mid-Con Energy Partners (MCEP) announced solid 1Q13 results last week with slightly better than Street expected volumes and EBITDA. Production appears to be tracking as per guidance or slightly better (they were slightly high to our model for the quarter). Operating costs came in slightly lower than expected and we continue to expect near and long-term volume and distribution growth out of this name.
Another Adroit Acquisition. On May 13, Mid-Con announced a $28 mm producing property acquisition that increases MCEP's working interest in a number of the company's existing water flood projects in Oklahoma. The acquisition adds 1.3 MMBOE in reserves bringing them to 14.48 MM BOE (just adding the new barrels to the YE12 proved figure) and 215 BOEpd of production (almost all oil) which lumped onto 1Q13 levels would take them close to 2,650 BOEpd. We like that MCEP trades at over $41 per proved BOE (normally that would be high, but with MLPs, it's not uncommon) and is adding these assets for roughly half that figure (about $21.50 per proved BOE). There's a nice private market to public market arbitrage at work here that management has repeatedly been able to take advantage of. And we especially like the idea of increasing working interests in projects that the company already knows well and which have been responding to flood in line with or better than expectations. This is the kind of acquisition the company was set up for and we say more of this please.
Growth Upgrade. Before the acquisition, management had provided guidance that equated to YoY volume growth of 36% on the midpoint of their range. Folding in the mid May acquisition, we put them at 47% growth. It's small company and low cost additions like this one have a big impact. The summary version of our model is outlined in the table (see zmansenergybrain.com for the model). Note that they don't yet give quarterly guidance but we expect them to start doing so probably with the 3Q and maybe as early as the 2Q13 call.
Balance Sheet: Mid-Con used the revolver for this purchase and liquidity remains more than adequate to see them through the remainder of the 2013 program without need for external capital. Pro forma the deal, debt to annualized 1Q13 EBITDA is 1.8x and we see this falling to an even more manageable 1.7x 2013 projected debt to our 2013 EBITDA estimate of nearly $69 mm. We expect the revolver commitment size of $130 mm to be increased by at least 15% with the October redetermination and we don't see a need for another unit offering in the near term barring additional acquisitions of size but in all honesty would welcome more liquidity in the units over time as they grow in a balanced way. Perhaps down the road, the revolver gets termed out but for now, with a highly hedged production base, our sense is that they like their 3%-ish cost of borrowing.
Nutshell: The following model summary has not been "blessed" by management but it is derived from their guidance and our price deck for the rest of the year. Building in the new production wedge and adjusting capex and debt levels for the acquisition yields a stronger case for near-term distribution hikes, however, we believe MCEP will take a measured, conservative approach to increasing the dividend. As shown below, distribution coverage becomes overly comfortable late in 2013 or at least well above management's long-term view of 1.15x. While we are looking for the next distribution increase in 3Q13 and guidance for the coming year in terms of distribution growth thinking at that time as well, we see the current distribution of $0.505 per quarter as quite secure. We're just noting that it could be lifted considerably at the discretion of management while still maintaining strong coverage (above what our table shows below). We continue to own MCEP as a Core position in the ZLT and our sense is that the shares will continue to mark the distribution of this nearly all oil, high growth, predictable MLP higher over time.