Mid-Con Energy Partners' (MCEP) CEO Jeff Olmstead on Q4 2017 Results - Earnings Call Transcript

Mid-Con Energy Partners, LP (NASDAQ:MCEP) Q4 2017 Earnings Conference Call March 1, 2018 9:00 AM ET

Executives

Jeff Olmstead – Chief Executive Officer

Analysts

Operator

Good day, ladies and gentlemen, and welcome to the Mid-Con Energy Partners’ Fourth Quarter 2017 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] And as a reminder, this conference is being recorded.

I would now like to introduce your host for today’s conference, Jeff Olmstead, CEO. Sir, you may begin.

Jeff Olmstead

Thank you. Good morning everyone and thank you everyone for your participation in the call today. Before we get started, I would like to remind you that today’s call will include forward-looking statements related to future and not past, events within the meaning of the federal securities laws. These forward-looking statements are based on our current expectations and include any statement that does not directly relate to our current or historical facts. For further explanation, please refer to our SEC filings.

Joining me on the call today are Randy Olmstead, our Executive Chairman; Sherry Morgan, our Chief Accounting Officer; Chad McLawhorn, our General Counsel; Chad Roller, our VP of Development; and Larry Morphew, our Executive Vice President, In-Charge of Operations.

This morning we posted a presentation to go along with this call. If you would like to follow along, please go to midconenergypartners.com click in Investor Relations, then Events and Presentations and finally click on the PDF next to the view presentation link under the fourth quarter 2017 earnings call.

If you’re following along with the presentation please turn with me to Slide 3, the 2017 highlights and recent events. If you recall from our year end call last year, we outlined three strategic objectives for 2017 that we have identified on this slide. I will go into more detail for each of subsequent slides. The most important objective we had throughout 2017 was maintaining financial flexibility.

Over the course of the year and into early 2017 we continue to enhance our financial stability through continuing to reduce our outstanding debt, extending maturity in our revolving line of credit, raising additional convertible preferred equity, continuing to decrease our operating costs and finally using excess free cash flow after all CapEx and interest costs that we used to make acquisitions and pay down debt.

In focusing on advancing our waterflood projects, we increased injection in seven different projects during the year. And we started to see response in several of those units from this injection. On the acquisition front, we recently announced our first acquisitions in the Powder River Basin and we acquired the Wheatland properties in Oklahoma in June of last year.

Turning to Slide 4, maintaining financial flexibility. We made quite a few transactions in 2017 and the first month of 2018 that have helped advance the financial stability of the partnership. In 2018, we raised an additional $15 million in Class B convertible preferred equity through a private offering to investors led by our largest investor John Goff. We primarily use these funds to acquire the Powder River Basin assets that we’ll discuss in more detail in a minute with the remainder going to reduce outstanding debt. And we think Mr. Goff and his entire team and their group of investors for their continued support in helping us grow our assets.

We divested our Southern Oklahoma properties on December 22 of last year for $22 million and used the net proceeds from this sale to reduced outstanding borrowing under our revolving credit facility. Through this asset sale combined with the excess free cash flow after all CapEx and acquisitions, we were able to reduce debt by total of $23 million in 2017. We have further reduced debt by approximately $9 million at the end of the year.

As of today, we have approximately $90.2 million outstanding on our revolving credit facility. So as the start of the downturn in oil prices, we’ve now reduced our debt load by over 50%. I’m extremely proud of our team and their ability to continue to manage our debt we’re looking for ways to start growing production and reserves.

In January of this year, our bank extended the maturity of our revolving line of credit through November of 2020. As I mentioned, we currently have $90.2 million outstanding in the line leaving us with $34.8 million in availability. Our leverage covenant for the period ending December 31, 2017 was 3.54 times as calculated by our credit agreement.

Finally, we’ve continued to find ways to make our operations more efficient. During 2017 we reduced total cash operating cost by approximately 4% including a 5% reduction in the lease operating expenses, and approximately 7% in G&A cost. This is on top of reductions in cost of over 20% during 2016.

Turning Slides 5 and 6, advancing our waterflood development. As we discussed at the beginning of the year 2015 and 2016 CapEx was focused on supporting the bank debt and spending capital in our best short-term return projects to help pay down debt as rapidly as possible. We’re now turning our focus to more long-term projects with great growth potential.

During the year we spent approximately $9.8 million in total CapEx including $1.5 million in the fourth quarter. This resulted in an increase in injection of over 4,000 gross barrels of water injected per day across our property set. The 15 gross new producing wells that we stud during the year were primarily in floods with this new injection has been added in order to prepare for the future oil response. We plan to continue focusing on increasing injection in 2018 to get the greatest possible long-term value for our assets.

Turning to Slide 7, our acquisitions along with this long-term focus we have made several acquisitions during 2017 and the first month of 2018. The Wheatland acquisition is an existing waterflood that we believe has potential and optimization. We spent approximately $4.1 million after our preliminary post closing adjustments and as of year end 2017 these properties have added approximately 1.6 million barrels of oil equivalent in proved reserves. Production at the time of the acquisition was approximately 125 barrels of oil equivalent per day, which has increased to roughly 20% since we acquired the assets.

The more significant acquisitions we made in January of this year, were entrants into the Powder River Basin. While fairly small regards to current production we believe these assets have significant long-term potential. This included two large units the House Creek unit is an existing waterflood that we believe has optimization potential in returning wells to production and injection. And the Pine Tree unit has a potential to be the largest grass roots waterflood we have ever done. It will require a small amount of CapEx in 2018 to put in a pilot that if successful will result in a significant CapEx program starting in 2019. We have enough free cash flow off existing assets not only develop our existing reserves and these new assets but also to continue proactively seeking additional transactions in 2018.

Slide 8 outlines our reserves as of December 31, 2017. At year end we had approximately 19.6 million barrels of oil equivalent in total reserves in Oklahoma and Texas with a 17 year reserve to production life. These reserves do not include any of the reserves associated with the Powder River Basin acquisitions we made in January of 2018.

So turning to Slide 9, you’ll see what our planes are for 2018 and you’ll see that we have three primary objectives again this year. We want to continue maintaining financial flexibility, we expect to have cash flow to not only cover our existing CapEx plans but also excess free cash flow to either make additional acquisitions, accelerate development if any of our unit shows sooner than expected response to injections or continue paying down debt. We are focused on continuing to delever the partnership through asset development accretive acquisitions and/or continued debt repayment.

From a capital allocation perspective, we spend a significant amount of time trying to balance the best use of our free cash flow. We have allocated our cash flow across four categories; near-term projects with quick pay outs of less than 12 months. Longer-term projects that have significant potential upside in both production and reserves and the remaining cash will be used to either pay down debt or make opportunistic acquisitions.

On the acquisition and development front, we are focused on building our inventory of future growth. Several pilots including the new Pine Tree unit have the potential to add significant development prospects in the future if they’re successful. We will also be looking for additional assets to add to our growth opportunities.

On Slide 10, you’ll see that we’ve currently allocated about $12 million in CapEx across our three core areas of Oklahoma, Texas and Wyoming. Wyoming will likely do smaller allocation of capital this year and then if the pilot worked successful it will start making up a larger portion of our budget in the future.

If you’ll turn with me to Slide 12, overview of operating and financial results for the fourth quarter ending December 31, 2017. Total production for the fourth quarter was approximately 309,000 barrels of oil equivalent, which was a 4% decrease from the previous quarter and 12.5% decrease from the previous year. The year-over-year and previous period decreases were primarily due to some steeper than expected declines in several Texas properties and the recently sold Southern Oklahoma properties. This was also due to most of our CapEx being focused on injection rather than near-term production.

Total revenues net of cash settlements from mature derivatives inclusive of premiums paid were $10.8 million in the fourth quarter of 2017. This compared to $11.2 million in the previous quarter and $16.4 million in the fourth quarter of 2016. The primary differences were lower production and lower hedge prices partially offset by higher WTI prices.

As we discussed earlier, lease operating expenses and G&A expenses were both down from the previous year. G&A expenses were slightly higher than the previous quarter due primarily to increased legal costs related to the different transactions. Production taxes were up both quarter-over-quarter and year-over-year. The year-over-year increase was primarily due to the elimination of the Oklahoma Enhanced Oil Recovery tax credit that took effect on July 1 of 2017. And quarter-over-quarter increases were primarily due to higher oil revenues resulting from higher WTI prices.

This all resulted in EBITDA for the quarter ending December 31, 2017 of approximately $8.1 million. This was down roughly 10% from the same quarter in 2016 due to lower production partially offset by lower operating cost and higher WTI prices. This little more than doubled the EBITDA from the previous quarters. The third quarter 2017 EBITDA was lower than normal as we own well some deferred premium puts for future periods during the third quarter. This cause part of the lower EBITDA in that period and was done to help enhance future periods as we’re going through a bank redetermination at the time.

On that note, looking at Slide 13, you’ll see our debt to EBITDA for the last two years. Debt to EBITDA for this quarter was approximately 3.54 times as calculated by our credit agreement. It’s important to note, that with our most recent bank amendment the leverage covenant calculation will start with the fourth quarter of 2017 as a period annualized calculation and build to a trailing 12 months calculation.

So for this quarter the test just included EBITDA from the fourth quarter of 2017. This test also excludes any cash flow related to the Southern Oklahoma properties since they were sold during that period. If we did not eliminate approximately $1 million in cash flow associated with Southern Oklahoma the calculation would have been closer to 3 times.

Slide 14, outlines our updated hedge portfolio. We added a significant amount of hedges during the borrowing base redetermination and you can see that we have greater than 50% of our production now hedged through September of 2020 based on the midpoint of our 2018 guidance. With a greater percentage hedged in the near quarters, they were done primarily with new swaps with a few collars and puts left over from previous trades.

Finally in Slide 15, you’ll see we’ve outlined our guidance for the year. With this being year-over-year, again focused on increasing injection to grow production reserves in the long-term, you’ll see we’re expecting production to remain relatively flat from December even though we sold approximately 500 barrels of oil equivalent per day with the Southern Oklahoma sale.

We expect lease operating expenses to be a little bit higher than in the past few years as we are focused on increasing the injection. This will result in increased LOE costs while we spend more money to inject water into our units. In the long run this should result in production response that greatly decreases our lease operating expenses on a per unit cost. Production taxes on a percentage basis should in line with the past few quarters and we outlined earlier how we expect to spend approximately $12 million in CapEx during the year.

If we remain in this guidance range we will have additional free cash flow beyond the $12 million in CapEx. But again we can use to acquire additional assets or continue paying down debt.

I thank everyone for the participation on the call and listening to our prepared comments. Operator, we’ll now open it up to questions.

Question-and-Answer Session

Operator

Operator

And I’m showing no questions at this time. I’d like to turn the conference back over to Jeff Olmstead, CEO for closing remarks.

Jeff Olmstead

Thank you. Again, thank you everyone for your participation and listening in. We all look forward to an exciting 2018. We’re excited about the new assets in Wyoming and some things going on in our existing assets in Texas and Oklahoma. And we look forward to providing you additional updates next quarter. Thank you and have a good day.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude the program. You may now disconnect. Everyone have a great day.