Mid-Con Energy Partners Is Doing A Fantastic Job
Summary
- The management team at Mid-Con continues to surprise investors, not only when it comes to debt, but when it comes to reserves as well.
- By any real measure, the company looks significantly undervalued relative to reserves.
- However, there are some items I'm not terribly happy with, which I believe management can and should work on.
I can’t help but to applaud the management team at Mid-Con Energy Partners (NASDAQ:MCEP). The firm recently announced financial results for the fourth quarter of its 2017 fiscal year, as well as expectations for what 2018 should look like. On the whole, the company has done well to recover from the oil price downturn and, while some pieces of news are less than ideal, the data is better for Mid-Con now than it has been in a while.
Debt keeps declining, and reserves are rising
As I reported in a prior article, the debt picture for Mid-Con has improved as of late. Due to preferred stock offerings and some asset sales, debt has now dropped to $90.2 million, down from $99 million at the end of last year and down from $122 million at the end of its 2016 fiscal year. Not only that, but the E&P firm’s credit facility capacity of $125 million (implying liquidity today of $35.8 million) offers some wiggle room in the event that the oil markets happen to tank again.
While this data isn’t new, one piece of news that is relates to Mid-Con’s reserves. As you can see in the image below, total proved reserves as of the end of 2017 came out to 19.557 million boe (barrels of oil equivalent). Of this, an impressive 95% is oil, which matches well the roughly 93% of Mid-Con’s production that is in the form of oil. At the end of 2016, the company’s proved reserves totaled 19.231 million boe, which implies a modest increase of 1.7%, but this doesn’t account for some differences in the timing of events. In December of last year, management divested of assets in Oklahoma that represented 2.70 million boe and early this year they closed the purchase of assets in the Powder River Basin with proved reserves of 2.974 million boe. Keeping all else the same just from these two transactions, reserves should be 22.531 million boe, or 17.2% above 2016’s.
*Taken from Mid-Con Energy Partners
Another important point to make involving the company’s reserves is the fact that management has done well to focus on development. At the end of 2017, if the company’s figures are correct, proved developed reserves represent 73% of total proved reserves. This compares to the 64.6% that were proved developed at the end of the firm’s prior fiscal year.
Not only have we seen an improvement in Mid-Con’s proved reserves as measured by boe, we’ve also seen improvement when it comes to the estimated value they bring to the firm. Excluding the Powder River Basin acquisition, the standardized measure of Mid-Con’s reserves stood at $207.2 million at the end of 2017. This is 31.7% above the $157.3 million seen for the company’s 2016 fiscal year. If we assume that Mid-Con’s latest acquisition has the same per-boe benefit to the business as its other assets, this number might look to be closer to $238.7 million, but until more details are provided by management, this is sheer speculation.
*Taken from Mid-Con Energy Partners
It’s worth noting here that Mid-Con is the only E&P company I’ve seen since the recovery in energy prices began where I can recall its Enterprise Value being lower than its standardized measure. Though I am critical of using EV for valuation purposes, it’s useful in situations like this. Assuming that all of Mid-Con’s preferred shares eventually convert into common, the firm’s EV today stands at $176.2 million. Even just using the stated standardized measure of $207.2 million, this implies a trading multiple on the business of just 0.85.
If you consider that other E&P firms like Linn Energy (LNGG) have been selling off non-core assets with a weighted-average price / standardized measure of 1.41, one possible valuation for Mid-Con might be between $292.2 million and $336.6 million (and this excludes other assets and ignores current cash flow). Stripping out debt and classifying preferred shareholders as common, this implies a per-share value on the business of between $3.92 and $4.78, both well above today’s price of $1.67. Never mind the fact that this analysis employs a price on oil of $51.34 per barrel when it’s actually at $61.68, or 20.1% higher.
Applying price differences here is tricky, but we can get a general idea by assuming the same discount factor for the higher prices and by applying the rise in oil and the drop in natural gas that we’ve seen to Mid-Con’s existing reserve values. In all, with current energy prices, it’s logical for Mid-Con to be valued somewhere between $5.68 per share and $6.81 per share, and if oil moves up to $70 per barrel while natural gas remains unchanged, this figure could rise to between $7.12 per share and $8.46.
My only two qualms
All in all, I am pleasantly surprised with the news management offered. That said, there were two items that I did not like. First and foremost is management’s forecast for this year. As you can see in the image below, not only will production average, at the mid-point, 3,000 boe per day, which is down from 3,510 boe per day in 2017 (the difference being caused by asset sales), but there’s also the fact that costs have risen. Lease operating expenses for 2018 should total $18.50 per boe at the mid-point, which is higher than last year’s $16.87 per boe. To put this in perspective, at 3,000 boe per day, this increase amounts to added expense for the company of $1.78 million per year.
*Taken from Mid-Con Energy Partners
The other issue I have with Mid-Con is more significant. As you can see in the image below, the company has decided to take a cautious approach to the oil recovery. Through the third quarter of 2020, management has hedged 55% of production or greater and at prices in 2020 as low as $54.06 per barrel. If energy prices tank again, this will prove an attractive asset for Mid-Con, but current data suggests that this maneuver might end up resulting in lost opportunities for investors in the next few years.
*Taken from Mid-Con Energy Partners
Takeaway
Over the past few weeks I have been adding to my stake in Mid-Con (I opened my position in it this year), and I will likely add some more before all is said and done. At this point in time, it’s my second-largest position, right behind my stake in Legacy Reserves (LGCY). After seeing these results, I am happy that I jumped in and, while there are still some negatives to investing in the business, I believe that management’s report is a sign of the significant upside potential that shares can offer.
Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.
This article was written by
Daniel is an avid and active professional investor.
He runs Crude Value Insights, a value-oriented newsletter aimed at analyzing the cash flows and assessing the value of companies in the oil and gas space. His primary focus is on finding businesses that are trading at a significant discount to their intrinsic value by employing a combination of Benjamin Graham's investment philosophy and a contrarian approach to the market and the securities therein. Learn more.Analyst’s Disclosure: I am/we are long MCEP, LGCY. 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.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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