Mid-Con Energy Partners' (MCEP) Jeffrey Olmstead on Q1 2014 Results - Earnings Call Transcript

May. 6.14 | About: Mid-Con Energy (MCEP)

Mid-Con Energy Partners LP (NASDAQ:MCEP)

Q1 2014 Earnings Conference Call

May 06, 2014 11:00 AM ET

Executives

S. Craig George – Executive Chairman of the General Partner

Jeffrey R. Olmstead – President and Chief Financial Officer

Charles R. Olmstead – Chief Executive Officer

Analysts

Kevin Smith – Raymond James

Dan Schenk – MLV & Co.

John Ragozzino – RBC Capital Markets

Operator

Good day, ladies and gentlemen. Thank you for standing by and welcome to the Mid-Con Energy First Quarter 2014 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. (Operator Instructions) As a reminder, this conference call is being recorded.

I’d now like to turn the conference to our host, Mr. Craig George, Executive Chairman. Sir, you may begin.

S. Craig George

Thanks, Eric. And once again, welcome to Mid-Con Energy Partners’ first quarter 2014 conference call. Among those with us on the call today are Randy Olmstead, our CEO; Jeff Olmstead, President and CFO; Mike Wiggins, COO; Mike Peterson; Dave Culbertson, Chief Accounting Officer; Nathan Pekar, our General Counsel; Matt Lewis, Financial and Investor Relations Associate; and Krista McKinney, Investor Relations Associate.

As you all know, we released earnings last night, and we also released the information about our recent acquisition, and our succession plans for this year. In just a minute, Jeff will lead us through the information about results, acquisitions and plans, and then we’ll open up the call to questions. If you’d like to follow along with this PowerPoint presentation, just go to our website midconenergypartners.com then in the Investor Relations section, click on Events and Presentations.

Before Jeff gets started, I need to make a forward-looking statement comment, specifically that this call includes forward-looking statements that is statements related to future and not past events within the meaning of Federal Securities Laws.

Forward-looking statements are based on our current expectations, and include any statement that does not directly relate to a current or historical fact. For further explanation, you can refer to Slide 2 of today’s presentation.

Now I’ll turn it over to Jeff.

Jeffrey R. Olmstead

Thanks, Craig. Good morning. As you’ll see in the slides, the first part of this year has been a very busy time for the Partnership. Development activity has picked up across all three of our core areas as a result of our continued review of our asset teams and identifying growth opportunities in our existing assets. We also completed our first dropdown from our Mid-Con affiliate, Mid-Con III.

If you’re following along with me, please turn to Slide 3 of the presentation, the first quarter highlights. As I just talked about, in February, we completed our first dropdown from our affiliate Mid-Con III when we acquired producing waterfloods in Hugoton area, and one property in Southern Oklahoma.

In total, we purchased approximately 1.6 million barrels of oil equivalent in reserves, and these assets produced on average 349 barrels of oil equivalent per day in 2013. We funded this acquisition with $7 million in borrowings under revolver, and with issuing 1.5 million common units to Mid-Con III at a value of approximately $34 million.

Production for the first quarter of 2014 averaged approximately 2622 barrels of oil equivalent per day, which was a 4% increase over the first quarter of ‘13, and a 3% increase over the previous quarter. EBITDA for the first quarter of 2014 was approximately $12.7 million, which was down from both the first quarter and the previous quarter.

As discussed at the year-end conference call, we did expect a lower EBITDA as a result of lower realized prices resulting from lower hedges this year compared to last year, combined with higher lease operating expenses and production taxes that were offset by the growth in production.

It is important to note that on a pro forma basis, if this acquisition had occurred on January 1 as opposed to February 28, it impacted the entire first quarter; EBITDA would have been more in line with previous quarters.

Earlier last month, we announced the distribution of $0.515 per unit for the quarter, or $2.06 per unit annualized, which is a 2% increase over the first quarter of last year, and flat from our previous quarter. Finally, we are announcing today that on May 1, we closed a small working interest acquisition of our Southern Oklahoma properties for approximately $7.4 million.

These working interests varied across several of our Southern Oklahoma units, and we’re producing approximately 90 barrels of oil equivalent per day on average from the first quarter of 2014, and have total proved reserves of roughly 300,000 barrels of oil equivalent as of March 31, 2015.

Moving to Slide 4, the earnings summary, total production for the three months ended March 31, 2014, it was 232,000 barrels of oil and 21 million cubic feet of gas or 236,000 barrels of oil equivalent, this resulted in a 2622 barrels oil equivalent per day.

Our realized price per barrel of oil equivalent for the quarter was approximately $88.50. This is approximately $4 to $5 lower than what that was in the first quarter of 2013 and our previous quarter. And this difference in our weighted average hedge price of 2013 versus 2014 was also about $4 to $5, and makes up the majority of this difference in the year-over-year and quarter-over-quarter.

Lease operating expenses and production taxes increased from previous quarter, and from the first quarter of 2013, and roughly in line with the expectations we laid out for 2014 guidance. All these resulted in EBITDA, and cash margin of approximately $54 per barrel of oil equivalent, and resulting distributable cash flow of just over $10 million.

If you turn to Slide 5, the coverage ratio calculation. After deducting approximately $866,000 in cash interest expense paid at approximately $1.8 million in estimated maintenance CapEx, the 10.1 million in distributable cash flow resulted in the coverage ratio of around 0.92 times.

This drop of coverage below one time is largely due to the timing of the acquisition and the issuance of new units on February 28. As it happens from time-to-time more segment of the industry – with the timing of the acquisition, the partnership only benefited from one month of cash flow while still having to pay the full distribution on the new units. This resulted in the some part of our distribution coverage.

On a pro forma basis, had the acquisition occurred on January 1, the distributable cash flow would have been higher, and the realized effect of the acquisition and coverage would have exceeded one times.

Moving to Slide 6, distribution history, as we discussed in the past, we’ve been able to grow distributions by approximately 8% since our IPO or roughly 4% annually; and we reiterate our plan now to continue distribution growth this year of approximately 4% based on continued execution of CapEx plan, and acquisitions from both third parties and Mid-Con affiliates.

As of May 15, we will repay $4.55 per unit or 25% return on the IPO price of $18 a unit, and this combined with the price appreciation and resulted in the total return since the IPO of approximately 50% and over two years.

Moving to Slide 7, first quarter of 2014 CapEx update. Total CapEx for the first quarter is approximately $7 million; with $5.2 million we had estimated to spend on growth CapEx, and the remaining $1.8 million on estimated maintenance CapEx.

We are extremely active, drilled 12 new producing wells during the quarter, eight new injection wells, two water supply wells, and converted by nine producing through injection wells during the quarter.

If you turn to Slide 8, you will see that the activity was spread out across all three core areas and expect this level of activity continue throughout the year.

Moving to Slide 9 and 10 for a liquidity and hedging update. Slide 9, borrowing base and liquidity. At quarter end we had approximately $27.4 million in liquidity, which included approximately $400,000 in cash on the balance sheet, and $27 million in availability, under the $150 million revolver.

In April, our lending group approved a $20 million increase to the line of credit to $170 million resulting in a pro forma liquidity of approximately $47.4 million had that increase occurred prior to quarter end.

Debt to EBITDA for the quarter was 2.42 times based on the $123 million in outstanding debt, and adjusted EBITDA of approximately $12.7 million or $50.8 million annualized.

Had the acquisition occurred on January 1, the debt to EBITDA would have been closer to two times, although that is still on the high end of our target range for our debt EBITDA. Our growth plans for this year, while it do include the 4% distribution increase we talked about, also includes lowering of that EBITDA limit.

So, hedging update, although a number of hedges were added in 2014 and 2015; with the acquisition we made in February, there were no changes to our hedge book from our last earnings call.

We currently have about 86% of our expected production based on the midpoint of our guidance for this year. Hedged at average weighted slot price of $93.79, we have approximately 19% of our production in 2015 hedged at average weighted full price of just over $91. Although as you can see from the chart, all these hedges are currently from the first half of the year. We will continue to monitor the movement of 2015 covers, and later on hedges as we see a growth there.

Moving to Slide 11, our executive succession plan. As we announced in our earnings release last night, we have begun a transition point in our management team. In order to have an orderly succession, the following transition has been put in place, and they’d be effective August 1, 2014.

Randy Olmstead will be transitioning to the Chairman role, and Craig George will continue on as an active member of our Board of Directors. I’ll be transitioning from the President and CFO role to the CEO position. Mike Wiggins will remain our Chief Engineer, while also taking my role as President, and finally we’re excited to announce Michael Peterson as our new Chief Financial Officer.

Many of you know Michael from his previous role as Managing Director and Head of Energy Research at MLV & Co., and we look forward to the talent he brings to our management team.

Finally, in summary, the quarter was very busy in challenging time for the partnership. Production did increase as a result of continued development and acquisitions. However, this growth in production was offset by the increase of both lease operating expenses, and production taxes as well as a drop in realized pricing due to lower hedges.

We believe the partnership is well positioned both from the opportunity and balance sheet standpoint to see continued growth in the coming year as a result of our CapEx program and continued acquisitions. We’re excited of have our first dropdown acquisition completed, and anticipate future dropdowns later this year.

We continue to expect growth in distributions later this year of approximately 4% as a result of our growth, and we expect the succession plan that we’ve laid out for our management team to be a smooth transition and position us well for the future.

With that, Eric, we’ll open up to questions.

Question-and-Answer Session

Operator

(Operator Instructions) And our first question comes from Kevin Smith of Raymond James. Please go ahead.

Kevin Smith – Raymond James

Good morning.

Jeffrey R. Olmstead

Good morning, Kevin.

Kevin Smith – Raymond James

Congrats on all the management changes.

Jeffrey R. Olmstead

Thank you.

Kevin Smith – Raymond James

If my memory serves me correct, you’re expecting to see the benefit of switching some of those producers to injectors that you didn’t, I guess 4Q, and then as well in this quarter. During the middle of 2014, are we starting to see the production response from that or is it still too early?

Jeffrey R. Olmstead

I think it’s still a little too early. We’ve seen a slight up tick in some areas, some of the other areas you’ve still seeing the depressed production from the conversion from producer to injector, it is something we expect to see the results this year. It’s like anything else, so our timing, where we can nail it down in the quarter, it’s probably not as accurate as we could be, although we tried, but within the year. I think we still expect to see the growth.

Kevin Smith – Raymond James

Gotcha. And then, can you update me on your plans on converting producers and injectors, how many are you expecting in the second quarter and maybe what’s the production impact of that?

Jeffrey R. Olmstead

I don’t know that we’ve laid it out by quarter. We have weighted out from our guidance at the end of the year, which I apologize, but I don’t have right in front of me. We did nine conversions in the first quarter. I want to say that we had – sorry, Chris, just handed it to me. We expect basically 19 for the total year. So at least ten more, and I think you could see some additional beyond that.

Kevin Smith – Raymond James

Okay. Perfect. That’s all I had.

Jeffrey R. Olmstead

From a quarter standpoint, I don’t think, we’d nail it down by quarter.

Kevin Smith – Raymond James

Fair enough. Thank you.

Operator

Our next question comes from Dan Schenk of MLV & Co. Please go ahead.

Dan Schenk – MLV & Co.

Hey, good morning.

Jeffrey R. Olmstead

Hi, Dan.

Dan Schenk – MLV & Co.

Just a quick question for you. I was wondering if I can get a little clarity on the exploration of the Oklahoma enhanced recovery exemptions, and also I mean is there – going forward the timing for the remainder of those exemptions?

Jeffrey R. Olmstead

Yeah. I think the ones that are still out there in Southern Oklahoma are the ones with small amounts. I think it’s the Ardmore West and a little bit on Twin Forks. Those expired later this year. I want to say, we expect them somewhere around the third quarter.

Dan Schenk – MLV & Co.

All right, next?

Jeffrey R. Olmstead

I think that’s right, Dan.

Dan Schenk – MLV & Co.

Ardmore West was in 2013.

Jeffrey R. Olmstead

I could not hear that, Dan. Ardmore West actually gets in 2015, but it’s not a significant production, less than 100 barrels a day.

Charles R. Olmstead

I think we also have a little bit, still (indiscernible) and Cleveland field as we are flooding some additional zones on that stack place.

Jeffrey R. Olmstead

So we do have potential to add some on, but it won’t be significant enough that, while our tax rate was 6.2% for this year, the 7% guidance we put out there, I think is still a realistic budgeting standpoint, we might beat it, but we’re not going to beat it significantly to make a big difference.

Dan Schenk – MLV & Co.

Okay. Great, that’s helpful. And finally, G&A expense, would you consider fourth quarter of about $2.5 million, a good run rate going forward or what this current quarter G&A expense be?

Jeffrey R. Olmstead

Yeah. The current quarter of course had most of the year end electric bonuses paid in it, and so it is much more lumpy at that point. On an annual basis, we probably plan to – assuming to meet our goals, and continue to grow production reserves and distributions. We expect to distribute 300,000 units to 350,000 total units on the year, more weighted towards the first and third quarters, January and July is when they actually get issued. In terms of how much that will relate to, that will depend on what the unit price is at the time of the awards.

As you can see, first quarter of last year and first quarter this year, I think it was about $1 million difference, and that was almost completely related to the value of the units when they awarded this year versus last year.

On a cash basis, I think we guided at the end of the year, whatever the dollar per barrel number was, it was roughly a $6 million cash G&A for the year, that will go up slightly as we did not budget for fairness opinion that we had in the first quarter, which is about $1.25 million, remember it was closer to $300,000 of legal fees too. And we may have another one of those associated with the drop down later this year. So that would be the one place that the $6 million in cash G&A might be a little bit off from our – end of your guidance.

Dan Schenk – MLV & Co.

Great. That’s helpful. That’s all I had. Thanks.

Operator

(Operator Instructions) Our next question comes from John Ragozzino from RBC Capital Markets. Please go ahead.

John Ragozzino – RBC Capital Markets.

Hi, good morning, guys. Congratulations, Jeff.

Jeffrey R. Olmstead

Thanks, John.

John Ragozzino – RBC Capital Markets.

Just to get a little bit more detail on the conversion up to the injectors. Is there any way you could possibly, perhaps just give the – like a specific volume associated with the long-term upside, and then perhaps what’s the short-term impact, if you could quantify what the quarter impact in barrels was?

Jeffrey R. Olmstead

We have not provided those numbers in the past, and really don’t point to at this point in future because they can be somewhat misleading depending on where those producers are and relative to the waterflood if you will. And its overall impact of the total flood. We’ve tried to capture it all in our annual guidance.

We’ve not yet got into quarterly guidance, because I think it can be tricky on a quarterly basis, where I think we’d be more accurate on an annual basis, so I know it would be more helpful, and I know it’d be easier to kind of try that significant model, but I think in long run, we would be much more inaccurate or would be much more accurate by guiding on an annual basis, and providing that information.

John Ragozzino – RBC Capital Markets.

All right. And are there any other additional working interest opportunities, you guys with another $7.5 million packed this quarter, but that…

Jeffrey R. Olmstead

None that we really see. That was actually – was a surprise. It was a result of a company that got bought, and the company that bought them basically didn’t want the non-operated working interest down, and so they called us and said, hey, will you buy this from us?

And so – but I really don’t anticipate much more working interest opportunities, working interest always sort of held on. They’ve pretty well received the offers for last four or five years from us, and seem to be people who are into long run. So I don’t anticipate something – because of the, from surprises like we had, but nothing substantial.

John Ragozzino – RBC Capital Markets.

Okay. And then as you kind of think about the longer term and the opportunities that you’re facing, have you guys taken a look at any other water flood opportunities outside of the Mid-Con region and into other basins?

Jeffrey R. Olmstead

We have. We have looked at and even the private side purchased a number of outside the Mid-Con area, we’ve looked at – we’ve looked pretty heavily at things in California. We’ve looked at things in Wyoming, similarly (indiscernible) with their announcement in Wyoming. We’ve looked at waterfloods up there. We’ve looked at things in Illinois, Alabama, and Mississippi. So yes, we are looking many places other than just the in Mid-Con.

John Ragozzino – RBC Capital Markets.

All right. Thanks very much guys.

Operator

And I’m showing no further questions at this time.

S. Craig George

Okay. If there’s no other questions again, we appreciate the interest and participation. As always, we are around, if there is any follow-up calls, as you get to the information, all of us are in the Tulsa office today. So if you call that number, they’re going to track us down. Appreciate it.

Operator

Ladies and gentlemen, this concludes today’s conference. Thank you for your attendance. You may now disconnect. Everyone have a great day.

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