Based in Tulsa, Oklahoma, Mid-Con Energy Partners, LP (MCEP) scheduled a $108 million IPO with a market capitalization of $353 million at a price range mid-point of $20 for Thursday, December 15, 2011.
MCEP expects to pay 9.5%, MCEP is similar to LRR Energy, L.P. (LRE) which is also backed by a private equity firm, and expected to pay 9.5% at the price range mid-point of $20, the same as MCEP.
See our pre-IPO report on LRE. LRE priced under range at $19 and currently trades slightly below its IPO price.
Because MCEP expected reserve life is limited to 20 years, the S-1 filing reads more like a royalty trust than a true limited partnership with a strong general partner, rather than a relatively weak private equity firm.
Much of MCEP’s expected payout is based in projections which show a significant increase from current operations. MCEP projects full year 2012 revenue of $64 million, up from $34 million for the September 2011 nine months, and full year earnings of $31 million up from $19.7 for the nine months ended September 2011.
. Projections not especially believable
. Historical cash shortfall
. Price to book at 8x is too high.
. IPO units do not have priority
. Senior dilution without approval
. Unitholders may have liability to repay distributions.
We would avoid MCEP on its IPO. MCEP is a poster child of how a private equity backer can try to take advantage of public shareholders.
Formed in July 2011 to own, operate, acquire, exploit and develop producing oil and natural gas properties in North America, with a focus on the Mid-Continent region of the United States.
As of September 30, 2011, total estimated proved reserves were 9.9 MMBoe, of which approximately 98% were oil and 69% were proved developed, both on a Boe basis.
As of September 30, 2011, MCEP operated 99% of its properties through its affiliate, Mid-Con Energy Operating, and 92% of properties were being produced under waterflood, in each instance on a Boe basis.
Average net production for the month ended September 30, 2011 was approximately 1,343 Boe per day and total estimated proved reserves had a reserve-to-production ratio of approximately 20 years.
. MCEP intends to pay an initial quarterly distribution of $0.475 per unit per quarter on all common and general partner units ($1.90 per unit on an annualized basis)
. 9.5% annualized yield
This equates to an aggregate cash distribution of approximately $8.6 million per quarter, or $34.2 million on an annualized basis, based on the number of common units and general partner units expected to be outstanding immediately after the closing of the offering.
PRO FORMA CASH (SHORTFALLS) EXCESS
Year ended December 31, 2010: $29 million shortfall
12 months ended September 30, 2011: $18 million shortfall
Year ending December 31, 2012: $6.8 million excess assuming oil is at $96 NYMEX-WTI per barrel.
IPO UNITHOLDERS HAVE RISKS
IPO units do not have priority
Public unitholders do not have a priority right to receive distributions and are not entitled to receive any payments of arrearages.
Unlike many publicly traded partnerships, initially MCEP will not have any incentive distribution rights or subordinated units. Because MCEP will have no subordinated units after this offering, public unitholders will not be senior in payment of distributions at the initial quarterly distribution rate, or at any rate, over the Contributing Parties.
Senior dilution without approval
MCEP may issue an unlimited number of additional units, including units that are senior to the common units, without unitholder approval, which would dilute unitholders’ ownership interests.
Unitholders may have liability to repay distributions.
Under certain circumstances, unitholders may have to repay amounts wrongfully returned or distributed to them. Under Section 17-607 of the Delaware Revised Uniform Limited Partnership Act,
PRIVATE EQUITY SPONSOR
Yorktown currently has more than $3.0 billion in assets under management and Yorktown’s employees have extensive investment experience in the oil and natural gas industry.
MCEP would not have generated sufficient available cash on a pro forma basis to have paid the initial quarterly distribution on all of our units for the twelve months ended September 30, 2011.
Unless MCEP replaces the oil reserves it produces, revenues and production will decline, which would adversely affect cash flow from operations.
USE OF PROCEEDS
Of $108 million plus $45 million in new borrowings
. $121 distribution to Contributing Parties
. $15.2 million to repay debt
. $6 million for Cushing Field working assets
. $10.6 million to pay offering expenses