Mid-Con Energy Partners' (MCEP) CEO Jeffrey Olmstead on Q2 2014 Results - Earnings Call Transcript

Aug. 5.14 | About: Mid-Con Energy (MCEP)

Mid-Con Energy Partners LP (NASDAQ:MCEP)

Q2 2014 Earnings Conference Call

August 5, 2014 11:00 AM ET


Randy Olmstead – Chairman

Jeffrey Olmstead – CEO

Michael Peterson – VP and CFO


John Ragozzino – RBC Capital Markets

Bernard Colson – Oppenheimer


Good day ladies and gentlemen and welcome to the Mid-Con Energy Partners Second 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 is being recorded.

I would like to introduce your host for today’s conference, Mr. Randy Olmstead, Executive Chairman. Sir, you may begin.

Randy Olmstead

Thank you, Vincent and welcome to the Mid-Con Energy Partners second quarter 2014 conference call. Among those with us on the call today are Jeff Olmstead, our CEO; Mike Wiggins, our President, Chief Engineer; Mike Peterson, CFO; Dave Culbertson, Chief Accounting Officer; Nathan Pekar, our General Counsel; Matt Lewis Financial and Investor Relations Associate; Krista McKinney, Investor Relations Associate. Yesterday, we released earnings and information about our recent acquisition.

In a minute, Jeff and Mike will lead us through the information about results, acquisitions and plans and then, we will open up the call to questions. If you like to follow along with this PowerPoint presentation, just go to our website midconenergypartners.com, then to the Investor Relations section and click on Events and Presentations.

I need to make a forward-looking statement comment, specifically that this call includes forward-looking statements that are statements related to future and not past events within the meaning of the Federal Securities Law. Forward-looking statements are based on our current expectations and include any statements that does not directly relate to the current or historical fact. For future explanation, you can refer to slide two of today’s presentation.

Before turning the call over to Jeff, I would like to share a few thoughts of the state of our partnership. Please turn to slide three which has been our highlights since the IPO. In my opinion, is speaking at us in with nearly 40 years of experience, Mid-Con Energy Partners is well positioned for continued success. As I step away from the day to day responsibilities as CEO, I sincerely believe we have the right strategy, the right team, the right assets and right structure which provides investor, great exposure and participation in energy business going forward.

Now, I’ll turn it over to Jeff.

Jeffrey Olmstead

Thank you. First off neither Craig or Randy are going away. As we know last quarter this has been a period of transition for our management team, but I want to thank Randy and Craig for their contributions and guidance over the last few years. The results Mid-Con has produced historically is both the private and public entity has set the bar very high and I’m humbled to be taking over the role of CEO for Mid-Con Energy at this time. Going forward, you are going to continue to see a very similar strategy focused on waterfloods and other enhanced recovery projects, while keeping a conservative approach to both financing and operations. We still believe we have the right assets, team, structure and strategy that many wise leaders have told me that if something isn’t broken, don’t try to fix it.

So again, Randy and Craig, thank you for the example you’ve set for all of us and we look to build on this successful enterprise you’ve created. If you’re following along with the presentation I’m starting on page four. Again, as we stated in the earnings release last night, this quarter was below our expectations in both production and expenses. Now while the quarter was a disappointment in those respects, much of this miss in expectations stemmed more from timing and not from problems with the properties. As we have stated in the past, waterflooding is as much art as it is science in predicting the timing of increased production from new injection is difficult, especially on a quarter-by-quarter basis.

As we have shown Southern Oklahoma, this can many times be a good sign, a slower response sometimes mean there is more reservoir to fill up than we expected, which has, in some cases, resulted in greater reserves than originally anticipated. While it’s still too early to decisively conclude what the final outcome will be, at this point, we don’t see anything that significantly change or forecasted reserves other than timing of response.

In regards to expenses in the quarter, we were hit with larger than normal LOE workover expenses in both Southern Oklahoma and the Hugoton area. These workovers were related to casing leaks and pump replacements and in one case a lost well-board due to a pump stuck down the hole due to a casing failure.

The impact of this downtime in these wells affected well over 100 barrels a day of production in the quarter, as we also lost the one hole due to the pump stuck in the whole that was producing over 50 barrels a day at the time. With that, production for the quarter averaged 2,700 to 2,500 barrels of oil equivalent per day, which was an approximate 5% increase over the same quarter in 2013, approximately 4% increase over the previous quarter. This resulted in EBITDA of approximately $12.7 million for the quarter and approximately $10 million in distributable cash flow for the quarter.

Turning to slide five, the highlights, on a positive note, we’ve announced two nice acquisitions over the last couple of weeks. The Oilton acquisition is a dropdown from our private affiliate Mid-Con Energy III which will close today. And the liberty property is a third party acquisition and our entrance into the Gulf Coast area. It will close at the end of August. I’ll talk more about both of these in just a few minutes.

Turning to slide six, you will see that year-to-date we’ve made or announced four acquisitions totaling approximately $124 million. These were four very different acquisitions, with two of these having been dropped down from Mid-Con Energy III and two from third parties. They were also core areas and entrance into a new core area which will help diversify our portfolio. While our forecast at the beginning of the year did not include making many of these acquisitions, with the delays in response from our injecting efforts, these acquisitions will serve to fill the gap in the interim and we expect them to allow us to fall through on our distribution growth and debt to EBITDA reduction goals.

For more details on the recently announced acquisitions if you’ll turn to slide seven, I’ll hit the highlights of the Oilton dropdown first. The Oilton properties are very close in proximity to our Cleveland field in Northeastern Oklahoma and has historically produced from the Arbuckle, Wilcox and Bartlesville formations. Since acquiring them, we’ve been testing the productivity and waterflood position in both the Red Fork and Cleveland intervals and see promising results at both formations. These results helped us de-risk the potential of the assets were owned by a private entity and we expect the MLP to benefit from this future potential.

For SPE and SEC guidelines, none of the waterflood upside is currently captured in the existing proved reserves and will hopefully provide some nice organic growth in the coming years. This acquisition will close today at price of $56.5 million and will be funded with the issuance of approximately 2.2 million partnership units and $4.5 million in cash in borrowings under revolver. Mid-Con Energy Partners is acquiring approximately 2.6 million barrels of oil equivalent reserves. They are approximately 90% oil and produce 410 barrels of oil equivalent per day on average in the second quarter of 2014.

Looking to slide eight, the Liberty property is a third party acquisition, that’s been under water since 2011. We’ve agreed to $19.4 million purchase price that is expected to close on or about August 29th, with an effective date of July 1, 2014. We’re acquiring 658,000 barrels of proved reserves that are currently 99% oil and these properties averaged about 154 barrels of oil equivalent per day in April and May of 2014. The proved reserves are currently LPDP and their additional problem with waterflood reserves, we would look to exploit in the future.

Turning to slide 9 and 10, the 2014, capital expenditures, we expect approximately $8.9 during the quarter. This led to spudding 12 new producers, two new injection wells along with four conversions to producers to injectors and two new recompletions during the quarter. At the end of the quarter, you can see that eight of these new wells were still waiting on completion on injection permits.

And as you can see on slide 10, the majority of this work was done in Northeastern Oklahoma, with nine new producers spudded during the quarter, along with one new injection well and two conversions to injection. The remainder was spent Southern Oklahoma and Hugoton area and with the growth in production we’re seeing in Northeastern Oklahoma along with Oilton acquisition, Northeastern Oklahoma is going to continue to see a significant portion of our CapEx in the near future greater than it has in the last couple of years.

With that, I’ll turn it over to Michael Peterson who will go through the financial results for the quarter.

Michael Peterson

Thank you, Jeff and good morning everyone. Over the next few minutes, I would like to walk you through our second quarter 2014 financial results, discuss our revenue security via hedges and close with a review of our financial flexibility. For those of you following along with our presentation, please turn to slide 11. Our top-line revenues begin with the operating results summarized by Jeff. During the second quarter 2014, average daily production increased 3.9% sequentially and 5.1% year-over-year. Over the same time period, operating revenues per BOE increased 1.4% over the first quarter of 2014 and declined 2.9%, compared to the second quarter 2013.

It is important to note that the stabilizing impact of our hedges, which kept operating revenues within the range of plus or minus $3 per BOE. This is in contrast to nearly $9 per BOE range Mid-Con reported from our oil and natural gas sales alone. I will return to the topic of hedges in a few minutes, but wanted to point out the volatility dampening benefit hedges provide in stabilizing quarterly oil and natural gas sales prices.

Before we move on, I would also like to direct your attention to this information, oil and natural gas sales plus derivatives settlement. As you can see, the portion of the revenues affecting cash flows increased 6.6% sequentially and 2% year-over-year. While we are disappointed higher production volumes did not drive more substance of increases, it merits your attention that revenue affecting cash flows continue to advance up and to the right.

While total operating costs and expenses did contract, 16.4% from the first quarter of 2014, we the management team, along with the entirety of our partnership do not view this sequential improvement as a victory. As the variance table details, lease operating expenses increased $1.9 million quarter-over-quarter or $6.72 per BOE. A portion of this increase can be attributed to the addition of higher operating costs assets into the portfolio.

However, the unanticipated majority resulted from lower injection responses from the conversion of certain production wells into injectors, and then unusually high number of non-reoccurring workover costs. For perspective, non-reoccurring workover costs during the second quarter of 2014 approximated $800,000 or roughly $3.20 per BOE.

Other drivers of the increase in second quarter operating costs included DD&A, which increased 27.5% and production taxes which rose 10.1%. Regarding DD&A expenses, higher costs were largely attributable for the inclusion of the Hugoton and Southern Oklahoma assets into the portfolio earlier this year. The increase in production taxes was attributable to higher production volumes with the effective tax rate 6.1% in the second quarter of 2014, approximating that in the first quarter of 2014. Offsetting higher LOE and DD&A, lower general and administrative costs which declined 77.4% reflected significantly lower non-cash equity based expenses.

Cash G&A during the second quarter of 2014 approximated $1.5 million and declined approximately 31% sequentially due to the absence of transaction fees incurred in the first quarter which were attributable to our Hugoton acquisition. On a year-over-year basis, total operating costs increased 27.2%, mainly due to additions to our portfolio which contributed to higher LOE, DD&A and production taxes.

Net interest expense, in the second quarter of 2014, increased 30.7% due to higher amounts outstanding on our borrowing base. During the period our effective interest rate averaged 2.81% versus 2.7% during the first quarter of 2014 and 2.78% during the second quarter of 2013. Net income attributable to second quarter of 2014 approximated $3.8 million or $0.18 per limited partner unit.

Turning to slide 12, I will review our non-GAAP measures. Adjusted EBITDA for the second quarter of 2014 was $12.7 million, approximating results during the first quarter of 2014 and down 20.9% from the second quarter of 2013. The negative year-over-year variance was primarily an extension of lower net income, combined with the net effective unsettled derivatives. Distributable cash flow attributable to second quarter of 2014 approximated $10 million, in line with the first quarter results and 21.4% lower than a year ago period. Distribution coverage was subpar, registering 0.91 times.

Turning to slide 13, you can see from the chart, we have secured 85% of our production for the next 12 months at an average price of $94.15 per BOE. Please note, this average is based on midpoint of our 2014 production guidance issued at the beginning of this year. I would like to direct your attention to the last line of the table, production weighted average. This metric represents total revenues secured by our hedges, divided by the midpoint of our production guidance. Set differently and solely for the purpose of example.

If oil prices were to drop to zero and remain there for the next 12 months, our hedges would secure revenues of approximately $80.28 per BOE, again, based on our midpoint of our full year 2014 guidance. To be clear, the message is not that we’re predicting oil prices of zero dollars per barrel or simply that we’ve hedged a significant percentage of our expected production over the next 12 months. Rather, the volumes we’ve hedged combined with the prices at which we’ve hedged them largely insulate our unit holders from even the most bearish of commodity price scenarios.

Going forward, you can expect us to continue to target via hedging higher production volumes on a rolling next 12 months basis. While our analysis of historic oil prices suggests this program addresses a significant portion of the price risk we face from commodity market volatility, we also recognize we can do more. In the quarters ahead, we intend to advance our hedging problem farther out on the forward curve. Since our first quarter 2014 conference call, we have added swaps on 422,000 barrels of oil for the volume metric equivalent of roughly 40% of our current annual production.

Turning to slide 14; pie chart illustrates our conservative equity weighted capitalization. Although we maintain the lowest leverage in the upstream MLP peer group, and as many of you have heard before, we regard our current 2.7 times debt to adjusted EBITDA leverage as high. Accordingly, you can expect our bias for incremental capitalization to remain equity focused. Lastly, on the topic of financial flexibility, we consider our quarter end liquidity of $32.8 million as more than sufficient to support the partnerships near term operating needs and capital requirements.

With that, let me turn the call back over to Jeff for closing remarks.

Jeffrey Olmstead

Thank you. So just to wrap up, as we head into the second half of the year, we’ve announced two acquisitions that will close this quarter that will help offset the timing of injection response from our legacy assets. And with these acquisition efforts, combined with the expected results of our development activity, we expect we’ll be able to provide and near the goals of drilling production cash flow and distribution at a level you come to expect out of us. We appreciate the continued interest and support. And Vincent, now we’re opened up for questions.

Question-and-Answer Session


Thank you. [Operator Instructions]. First question comes from John Ragozzino of RBC Capital Markets. Your line is open.

John Ragozzino – RBC Capital Markets

Good morning, guys.

Michael Peterson

Good morning, John.

John Ragozzino – RBC Capital Markets

Mike you mentioned the pro forma liquidity position $32.8 million just to clarify, that does not include $19 million deal that was announced this morning? And if you look at pro forma for that you’re talking 20 million bucks or so. How do you feel about that as far as on a go forward basis it allows you to do future transaction and what’s the strategy there?

Jeffrey Olmstead; I’ll jump in sorry, Mike. John we are in the process of going through a borrowing base review, and we will have an announcement about that when it’s done. We’ll show you the new liquidity position at that time.

John Ragozzino – RBC Capital Markets

Do you anticipate meaningful bump in the borrowing base on the A&D activity today?

Jeffrey Olmstead

I do.

John Ragozzino – RBC Capital Markets

Okay, great. And then, turning back to LOE in the quarter, you mentioned there was a lack of production response from conversion of certain producers to injected. I don’t mean to be the dead horse, but is there any implications for longer term, organic productions, growth trends there?

Jeffrey Olmstead

I guess as we say, it’s more of a… We believe right now, it’s just the timing issue just get the water into the ground and start to see the displacement. Kind of as we talk to state stuff, it’s much art as it is science where we do our best to predict the timing of it. But if we’re off by quarter two here and there, that’s going to happen but it’s not an issue with the properties. It’s more of a timing what’s going on surface.

John Ragozzino – RBC Capital Markets

Okay. And just one more housekeeping item, as far as the LOE for the quarter, what’s a good run rate if you exclude some of the one-time work over expenses? Should we look at the first quarter ‘14 as a good proxy for the back half of the year?

Jeffrey Olmstead

Yes on the legacy assets, but you got to add some for the acquisitions. But just on a gross number, now that we’ve added Oilton and added Liberty that’s going to add just gross LOE. On a per BOE basis, that should stay somewhat similar.

John Ragozzino – RBC Capital Markets

Great. Thanks very much guys. That’s what I go.


Thank you. And our next question comes from Bernie Colson of Oppenheimer. Your line is open.

Jeffrey Olmstead

Good morning, Bernie.

Bernard Colson – Oppenheimer

Good morning. How are you guys?

Jeffrey Olmstead


Bernard Colson – Oppenheimer

Good, good. Have you guys looked at the preferred equity market as a way to finance growth going forward?

Jeffrey Olmstead

We have looked at it reviewed it. In fact, I think as we update our shelf we will include our provision in that shelf to do some preferred and that would be one of our options obviously it’s time to raise equity as a potential source.

Bernard Colson – Oppenheimer

Okay. And as far as drop down inventory that potential for Mid-Con what are we looking at there?

Jeffrey Olmstead

I’m a little hamstrung based on how the SEC has kind of formed us through letters to some of our peers. Until we or unless we actually issue reserves the way we do for the public partnership for Mid-Con III, I’m not allowed to talk about what’s in there in terms of reserves or volumes. We do still have an inventory of projects many of them are grass root floods that are still in the early stages. We have two projects that are a little bit more mature that could have some potential in the near term, but a lot of them are more like two or three years out with a couple of mid are available over the next 12 to 18 months or so. I just can’t give you any info in terms of size.

Bernard Colson – Oppenheimer

Okay. And then lastly for me, if you care to provide any color about the deals you’ve done clearly, nice accretive deals looks like coverage be probably be significantly better than the second half of the year. Any comments on resumption of distribution growth?

Jeffrey Olmstead

We do expect well resumed distribution growth. We’re going to make sure time as it occurs we don’t want to grow them at any time that puts us into a one-time coverage. But they are accretive, they do both have again currently unclassified probable reserves that we hope to continue to develop and add to it, that will show you the organic growth that comes with them. Whether it’s next quarter or the fourth quarter, I can’t tell you with absolute, but we do expect to grow the distributions this year as we had expected at the beginning of the year.

Bernard Colson – Oppenheimer

Okay. Great. All right. Thanks a lot.


[Operator Instructions]. At this time, I’m not showing any additions questions, sir.

Jeffrey Olmstead

Great. Again closing the call, we do appreciate your interest and support. We are around most of us are in the Tulsa office today. So if you do have follow on questions as you get through the material, please feel free to call Mike, I or Krista and we’ll be happy to walk you through any follow up problems you have. Thank you very much. Vincent, are we done?


Yes, sir. Thank you, ladies and gentlemen. Thank you for your participation in today’s conference. This concludes your program. You may all disconnect. Everyone have a great day.

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