Mid-Con Energy Partners: Some Uncertainty About Its Production Levels
Summary
- Mid-Con's production hasn't met expectations recently. Production from its retained assets appeared to decline in Q4 2017 compared to expectations for flat to slightly increased production.
- Mid-Con's 2018 outlook indicates a wide range of possible outcomes for its legacy assets. Production could be down modestly or increase a bit more.
- Mid-Con's waterflood investments may result in improved production in 2019, but for now, it is difficult to get a good read on the capex level required to maintain production.
- Mid-Con's financial situation is significantly improved, though, and its credit facility should have plenty of borrowing capacity going forward.
- Mid-Con is expected to generate around $7 million in positive cash flow in 2018 at roughly $61 WTI oil.
Mid-Con Energy Partners (NASDAQ:MCEP) appears to be still dealing with steeper than expected base production declines that have not been fully offset by positive waterflood responses yet. This resulted in Q4 2017 production (excluding the divested Southern Oklahoma assets) declining from Q3 2017 levels, when it was supposed to stay flat or increase. The outlook for 2018 may be more positive, but the guidance calls for anywhere from a modest decline in production to a larger increase.
While production is a question mark, Mid-Con has stabilised its financial situation and should further reduce its debt during 2018. Mid-Con's credit facility doesn't seem to be an issue anymore, and it has a fair amount of borrowing capacity.
Production Declines Remain Concerning
I had mentioned before that Mid-Con's production declines were concerning, and this still seems to be an issue. Mid-Con's Q4 2017 production came in lower than expected at 3,359 BOEPD. This includes the effect of the Southern Oklahoma divestiture, which closed in late December. Without that divestiture, Q4 2017 would have been an estimated 3,410 BOEPD, which is a 2.6% decrease from Q3 2017 production levels. The relatively low Q4 2017 production resulted in full year 2017 production coming in at 3,510 BOEPD, which is towards the lower end of its previous 3,500 to 3,600 BOEPD guidance.
It should also be noted that the Southern Oklahoma divestiture closed on December 22, while it was previously expected to close on or before November 30. If the divestiture had closed on November 30, Mid-Con's full-year 2017 production would have finished at around 3,480 BOEPD, lower than the guidance range it gave at the time of the divestiture announcement.
Mid-Con's December 2017 average production was 3,163 BOEPD, which becomes approximately 2,920 BOEPD after factoring out the estimated Southern Oklahoma production during the month and adding the estimated production from the subsequent Powder River Basin acquisition. This gives a rough estimate of Mid-Con's production to start 2018.
Mid-Con's production guidance for 2,800 BOEPD to 3,200 BOEPD in 2018, therefore, implies approximately 2.7% growth at its midpoint compared to end of 2017 production (including the Powder River Basin production). The large range also indicates a fair amount of uncertainty about production results, though, with the range indicating anywhere from a 4.1% decline to 9.6% growth versus end of 2017 production.
Breakeven Point
Mid-Con looked like it had a very low breakeven oil price before, but the uncertainty over what it would take to maintain production levels makes it hard to estimate Mid-Con's current breakeven point.
Mid-Con's December 2016 average production without Southern Oklahoma was 3,108 BOEPD, while December 2017's average production without Southern Oklahoma and the June 2017 Wheatland acquisition would probably be around 2,700 BOEPD. This means that production at the other assets declined around 13% from December 2016 to December 2017 while Mid-Con spent $9.8 million in capital expenditures.
Assuming the midpoint of Mid-Con's 2018 guidance, production might end up being around 3,100 BOEPD by the end of 2018. Without the Wheatland and Powder River Basin acquisitions, December 2018 production may be closer to 2,900 BOEPD. This would mean that spending close to $22 million in capital expenditures over two years wouldn't quite get legacy production back to December 2016 levels. However, the typical waterflood response time is said to be around six to 18 months from initial development according to Mid-Con's 10-K filings, so some of that spending would impact future production in 2019 more than it would in 2018.
If we assume that $12 million per year is enough to maintain production around 3,000 BOEPD, then Mid-Con's WTI oil breakeven point would be around $48 now. A $1 million change in the capital expenditures required to maintain production would change this oil breakeven point by close to $1.
2018 Outlook Based On Guidance
At the midpoint of Mid-Con's guidance, it expects to average 3,000 BOEPD in production during 2018. Although production was approximately 95% oil in Q4 2017, I am modeling 93.5% oil production for Mid-Con in 2018. This is because Mid-Con divested its Southern Oklahoma properties, which were 100% oil, and added Powder River Basin assets, which recently produced 77% oil.
At roughly $61 WTI oil, during 2018, Mid-Con would be expected to deliver $55.9 million in revenues net of hedges.
Barrels/Mcf | $ Per Unit | $ Million | |
Oil | 1,023,825 | $58.00 | $59.4 |
Natural Gas | 427,050 | $2.80 | $1.2 |
Hedge Value | -$4.7 | ||
Total | $55.9 |
Mid-Con's total cash expenditures are expected to be around $48.7 million during 2018. Lease operating expenses are expected to increase from $16.87 per BOE in 2017 to approximately $18.50 per BOE in 2018, although Mid-Con explains that this is due to increased injections which should result in lowered lease operating expenses per BOE in the long run as production increases.
$ Million | |
Lease Operating Expenses | $20.3 |
Production Taxes | $3.9 |
Cash G&A | $5.0 |
Interest Expense | $4.3 |
Preferred Distributions | $3.2 |
Capital Expenditures | $12.0 |
Total | $48.7 |
Based on guidance, Mid-Con is expected to generate around $7.2 million in positive cash flow during 2018. This is less than I previously expected, due to a combination of higher costs and lower production levels than I had modeled before. The lower average production levels in 2018 are due to Mid-Con ending 2017 with a noticeably lower production level than previously expected.
Conclusion
I am taking a wait-and-see approach to Mid-Con at this point. It is making progress in reducing its debt some more, and its credit facility doesn't appear to be a significant issue anymore, with the potential to have close to $45 million in borrowing availability by the end of the year. Mid-Con has also added a significant amount of hedges out until Q3 2020, so it seems to be fairly well-protected from downside oil pricing scenarios.
While Mid-Con has lower financial risk now, its production situation appears more murky. Even excluding the effect of the Southern Oklahoma divestiture, production fell by 2.6% from Q3 2017 to Q4 2017, when it was expected to remain flat or increase by a few percent. While Mid-Con does potentially expect some growth in 2018 starting from these lower production levels, its guidance range implies a significant amount of uncertainty, with the lower end of its range indicating further declines. Due to the still significant amount of debt and preferred units ranking ahead of the common units, I will probably stay on the sidelines with respect to Mid-Con's common units until a clearer picture of the production situation emerges. Higher production levels are needed to truly drive value to the common units.
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