Mid-Con Energy Partners: Mid $50s Oil Will Help It Avoid Trouble In November

| About: Mid-Con Energy (MCEP)

Summary

Mid-Con Energy Partners needs around $58 oil in November with the current futures curve shape to avoid forced asset sales or equity raises.

A steeper futures curve could reduce this to $53 oil.

There is a significant risk that oil prices may not reach that level in time, but if it does, Mid-Con could be worth at least $3 to $4 again.

Oil prices below the mid-$50s by November could force asset sales or equity raises. I think Mid-Con is in little danger of bankruptcy, but its stock would get hit hard.

Due to the borrowing base squeeze, Mid-Con is being quite frugal now and is closing down its Dallas office.

This article will attempt to determine what oil prices in November are likely to result in Mid-Con Energy Partners (NASDAQ:MCEP) escaping without needing to do another asset sale or equity offering. It appears that roughly $58 oil in November with the current futures curve shape or $53 oil with a steeper futures curve will likely be sufficient for this to occur. I have now taken a small speculative position in Mid-Con again. Although there is a significant risk that Mid-Con will need to raise additional funds to reduce its outstanding borrowings, at least the oil prices that it needs to avoid that are within striking range. This is a contrast to companies like Linn Energy and BreitBurn Energy Partners which realistically needed $70 to $80 oil to function in the long run.

Calculating Reserve Values

Mid-Con's remaining reserves have a PV-10 of $179 million at $50 oil. Around 73% of its reserve value is proved developed producing [PDP] reserves, while another 6% is shut-in. That means that Mid-Con has approximately $131 million in PDP reserves at $50 oil and a 10% discount rate.

Banks have recently lent an average of 62% of PDP reserves and appear to attribute limited value to non-PDP reserves at best. Banks also use price decks that tend to follow strip prices and incorporate an average 9% discount rate. Note that the banks' base case prices in the Macquarie survey were calculated at a different time than the NYMEX futures pricing shown. Due to the pricing volatility at the time, there are significant differences between the base case prices and future prices in the survey as the spot price of oil changed by $10 in a matter of weeks.

The use of a 9% discount rate instead of a 10% discount rate may increase the value of Mid-Con's reserves by around 5%. The use of strip prices may increase the value of Mid-Con's reserves by another 20% as strip prices over the next 12 months may average $50 (similar to SEC pricing), but future year strip prices involve oil prices above the $50 mark.

Based on current strip prices and capping long-term oil prices at $61, I'd estimate that Mid-Con's allowed borrowing base at 62% of PDP reserves would be approximately $100 million. This allows for some modest reduction in reserves as the reserves may not be fully replenished with Mid-Con's current capital expenditure budget. The shut-in production also remains shut-in for these calculations.

Borrowing Base Changes

If the current price of oil stays the same, but the future curve steepens so that the price of oil in year five is $60 instead of $55, and the capped price increases to $70 from $61, I'd estimate that Mid-Con's borrowing base would end up at $118 million instead.

The current futures curve with a $5 shift in prices all along the curve would result in a $121 million estimated borrowing base, while a steeper curve plus the $5 increase would result in a $140 million borrowing base. A $10 shift in prices and the current futures curve would result in an estimated $142 million borrowing base. These are my calculations, so the actual bank results may differ of course. However, the calculations are based on the average bank inputs as per the lenders survey.

Current Year Price

Fifth Year Price

Capped Price

Estimated Borrowing Base ($ Million)

$50

$55

$61

$100

$50

$60

$70

$118

$55

$60

$66

$121

$55

$65

$76

$140

$60

$65

$72

$142

Click to enlarge

As I've discussed before, Mid-Con's outstanding borrowings are projected to be around $134 million by the end of November. This is based on $50 oil, while a $10 increase in the average price of oil during the next six months would improve Mid-Con's cash flow by approximately $3 million.

Thus, if oil reaches around $58 by November with the current futures curve steepness, Mid-Con will probably not be forced to take action to further reduce its outstanding borrowings and its borrowing base will likely end up at $134 million or above.

Conclusion

Mid-Con Energy Partners is in a challenging situation where all its positive cash flow is going to pay down its credit facility borrowings. It is also closing its Dallas office to save some money, which has resulted in its CFO leaving rather than moving to Tulsa. I don't think that the office closure will save a huge amount of money as the rent appears to have only been around $135k per year (although there are other costs associated with maintaining two corporate offices). It does show that Mid-Con is in a position where it needs to be very frugal though.

That being said, oil prices aren't too far off from where Mid-Con needs it to be. Depending on the steepness of the oil futures curve, mid $50s oil in November is probably enough for the credit facility lenders to back off on requiring Mid-Con to pay its credit facility down from the projected $134 million to $105 million. Such a result would probably mean that Mid-Con will trade for at least $3 to $4 per unit again.

The downside risk is that if oil is below the mid $50s in November, Mid-Con will probably be required to sell assets or raise equity to bring its outstanding borrowings down by as much as $29 million. If oil prices are at $50 or below (or if asset sales made up a significant proportion of the fundraising), another borrowing base deficiency may be created as well. As seen with Mid-Con's recent price action, this could have a severe effect on its units. Mid-Con's units are down 30% since the end of May while other oil companies are typically flat to down mid-single digit percent over the same period.

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Disclosure: I am/we are long MCEP.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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