Mid-Con Energy Partners: Maintaining Production And Continuing Debt Reduction

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About: Mid-Con Energy Partners, LP (MCEP)
by: Elephant Analytics
Summary

Mid-Con's projected 2019 production is close to its Q4 2018 production.

It should be able to produce $10 million in positive cash flow after capital expenditures at current strip prices.

Mid-Con appears focused on reducing debt ahead of its 2020 credit facility maturity and 2021 preferred unit maturities.

The acquired properties have a significantly higher operating cost than the divested properties, in-line with my expectations.

Mid-Con Energy Partners (MCEP) is focusing on continuing to reduce its debt ahead of its 2020 credit facility maturity and its 2021 preferred unit maturities. Production will remain relatively flat in 2019 and Mid-Con may be able to reduce its debt by another $10 million at strip prices.

Notes On Production And Lease Operating Costs

Mid-Con's guidance range for production is pretty wide at 3,400 to 3,800 BOEPD, so there's a fair amount of uncertainty there. At the midpoint of its guidance range, average daily production for 2019 would decline around 1.7% from Q4 2018's 3,663 BOEPD. I've noted that the recent acquisitions and divestitures may net out to a minimal impact on production (the Oklahoma acquisitions produced around 52 BOEPD more than the Texas divestitures in Q3 2018), so Mid-Con may experience a slight decline in organic production with its $9 million capital expenditure budget.

In general, Mid-Con's organic production growth has been modest at best, with Q4 2018 production up only 1.5% from Q3 2018's production levels, and potentially benefiting from a full quarter of production from acquisitions that closed early in Q3 2018. Mid-Con's Q4 2018 daily production also was down 1.4% from its September 2018 production levels.

Mid-Con also has validated my earlier estimate that its acquired Oklahoma properties have significantly higher operating costs than its divested Texas properties. Mid-Con reported lease operating expenses of $19.71 per BOE in Q4 2018. The midpoint of its 2019 guidance points to lease operating expenses of $22.50 per BOE. This increase is due to the acquired properties having lease operating expenses that (as of Q3 2018) were around $15 higher per BOE than the divested properties.

Source: Mid-Con Energy Partners

2019 Outlook

At 3,600 BOEPD in average production (93% oil), Mid-Con may be able to generate around $68.7 million in oil and gas revenue at current strip prices (high-$50s WTI oil). After factoring in hedges, Mid-Con would generate around $67.4 milion in revenue.

Barrels/Mcf $ Per Unit $ Million
Oil 1,222,020 $55.00 $67.2
Natural Gas 551,880 $2.70 $1.5
Hedge Value -$1.3
Total $67.4

Mid-Con's cash expenditures are estimated at $57.1 million in this scenario, including $9 million in capital expenditures and lease operating expenses of $22.50 per BOE.

$ Million
Lease Operating Expenses $29.6
Production Taxes $6.0
Cash G&A $6.0
Interest Expense $3.3
Preferred Distributions $3.2
Capital Expenditures $9.0
Total $57.1

Thus Mid-Con may be able to generate $10.3 million in positive cash flow in 2019, outside of the impact of any divestitures and acquisitions. This may allow Mid-Con to pay its credit facility down to around $61 million at the end of 2019, although it also mentioned that it paid to acquire additional Wyoming interests in 2019.

Leverage

Mid-Con's adjusted EBITDA for 2019 would be around $25.8 million (after hedges) in this scenario of approximately $58 WTI oil during 2019. The $61 million in credit facility debt would be 2.4x that adjusted EBITDA number, leaving Mid-Con easily in compliance with that credit facility covenant.

Mid-Con's credit facility debt plus preferred units still equal 3.9x adjusted EBITDA (with hedges) and 3.7x adjusted EBITDA (without hedges). This is still higher than ideal in the current market environment.

Mid-Con appears to be primarily focused on keeping production levels relatively stable and working on paying down its debt some more. Mid-Con's credit facility currently matures in November 2020 and its preferred units become due in August 2021 (if not converted into common units at the election of the holder). Debt reduction will likely continue to be a focus as those maturities near.

Conclusion

Mid-Con's production growth appears to be minimal right now, with the midpoint of its 2019 guidance calling for a slight production drop from Q4 2018 levels. At current strip prices it may be able to generate around $10 million in positive cash flow after its $9 million in capital expenditures is accounted for. Mid-Con theoretically should be able to spend more on capital expenditures and grow production while still producing positive cash flow. However, its primary focus is deleveraging via debt reduction at the moment and working toward putting itself in a good position to deal with its August 2021 preferred unit maturity and getting its credit facility extended beyond November 2020.

Thus Mid-Con's common unit value will likely remain relatively constrained for now, until there's more comfort about its credit facility and preferred unit situation.

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.