Valuing Mid-Con Energy Partners Based On PV-10 And EBITDA

Summary

• Based on the PV-10 of its reserves and other mature asset sales, Mid-Con's value is estimated at $1.88 per common unit.
• An EBITDA-based valuation would estimate Mid-Con's value at a bit above its current unit price when looking at forward strip prices a couple years out.
• Mid-Con needs to start growing production again (or long-term oil prices need to increase from the low $50s) for its common units to have major upside.
• There also are some risks involved with Mid-Con's preferred units, which may need to be redeemed in cash in 2021 if its common unit price remains low.

I'd have to say that I don't consider Mid-Con Energy Partners (NASDAQ:MCEP) to be dirt cheap at the moment. It does appear to be decently undervalued based on general asset sale transaction values, but with EBITDA-based metrics it would need to start growing production again for the common units to have much upside.

Mid-Con's enterprise value is mostly composed of its credit facility debt and preferred units at the moment, with its common units accounting for only 25% of the total enterprise value. This means that a surge in longer-term oil prices would likely make Mid-Con's unit prices increase very significantly. However, I'm somewhat skeptical at the moment about the ability of long-term oil prices to reach the $65, $70-plus level. US production growth would certainly accelerate if producers were able to hedge at those prices for several years forward.

Asset Based Valuation

One way to estimate Mid-Con's value is to look at the PV-10 of its reserves. The standardized measure (essentially PV-10) of Mid-Con's estimated proved reserves was $207 million as of the end of 2017. This was based on $51.34 NYMEX oil and $2.98 NYMEX natural gas. This is generally pretty close to long-term oil and gas prices. Oil futures are higher than that for the next few years, but decline to around $51 by 2022.

Linn Energy has sold off a number of long life (mature) producing assets for an average of approximately 1.15x proved developed PV-10 at $50 oil and $3 natural gas. Linn received a higher multiple for what it termed its emerging growth assets, but Mid-Con's assets would fall into the mature property category.

Mid-Con's reserve report indicates that its proved developed PV-10 value is approximately $164 million (based on total proved reserve value of $212 million, which differs slightly from the $207 million mentioned above). Multiplying $164 million by 1.15 would result in an estimated value of $189 million.

Source: Mid-Con Energy Partners

At the end of February 2018, Mid-Con had $89 million in net debt as well as $40 million in preferred units. That leaves around $60 million in value for the common units, or around $1.99 per common unit. The $15 million in Class B preferred units can be converted at $1.53 per unit, so adjusting for the conversion of the Class B preferred units would bring the value of the common units down to $1.88 per common unit. This is 25% more than Mid-Con's current unit price.

EBITDA-Based Valuation

If we were to take Mid-Con's 2018 guidance midpoint of 3,000 BOEPD in production, we'd estimate that Mid-Con would generate around $55.2 million in revenue at $55 WTI oil and $65.5 million in revenue at $65 WTI oil.

This translates into $26.4 million EBITDA at $55 WTI oil and $36.1 million EBITDA at $65 WTI oil.

Using a 6x EV/EBITDA multiple would result in an estimated value of $0.97 per common unit at $55 WTI oil and $2.47 per common unit at $65 WTI oil. This accounts for the potential conversion of preferred units into common units as well.

WTI Oil	$55	$60	$62	$65
Revenue ($ Million)	$55.2	$60.4	$62.4	$65.5
Expenses ($ Million)	$28.8	$29.1	$29.2	$29.4
EBITDA ($ Million)	$26.4	$31.3	$33.2	$36.1
Value/Unit	$0.97	$1.84	$2.13	$2.47

Click to enlarge

The WTI futures strip indicates roughly $62 oil in 2018 currently, but that goes down to around $58 in 2019 and declines further after that to around $55 in 2020.

Thus if Mid-Con doesn't increase its production from 3,000 BOEPD, it would be valued at only $0.97 per unit (plus whatever debt reduction it can achieve) by 2020 at current strip. At strip prices, Mid-Con may be able to reduce its debt by around $17 million over the next couple years, which would then put its value at around $1.54 per unit at the beginning of 2020, around 3% more than its current unit price.

Conclusion

The current price of $1.50 per common unit seems like an OK price to own Mid-Con at. However, I would not consider it a bargain. It appears to be moderately undervalued, with the EBITDA-based and asset-based valuations averaging out to around 14% above Mid-Con's current unit price. There's still risk involved about whether Mid-Con can halt its production declines (the above calculations assume flat production growth), as well as the potential for Mid-Con to raise additional preferred unit capital in the future. The preferred unit investment has helped Mid-Con with its credit facility issues, but does reduce the upside for the common units as well as reduce Mid-Con's cash flow, while also potentially needing to be redeemed in cash in 2021.

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Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.