Mid-Con Energy Partners: A Much Better Place To Be

Mar. 18, 2019 10:12 AM ETMid-Con Energy Partners, LP (MCEP)18 Comments

Summary

  • With new data out showing the financial performance of Mid-Con over its latest quarter and guidance out for 2019, it's time to take a look.
  • Based on the data provided, it looks like the business is in a much better spot than it otherwise had been.
  • The fact that production will likely be flat compared to the fourth quarter and with lower capex is a positive development.
  • This firm makes a great prospect for investors to consider.
  • Looking for a community to discuss ideas with? Crude Value Insights features a chat room of like-minded investors sharing investing ideas and strategies. Start your free trial today »

It certainly looks like things are starting to look up for Mid-Con Energy Partners (NASDAQ:MCEP). Due not only to rising oil prices but, likely, because of the company’s financial performance during the latest quarter, shares of its stock popped on March 14th. Management, in the company’s earnings release, surprised investors, especially, I think, when it comes to the company’s guidance for 2019. No, we are not likely to see a real change in output, but the data provided does give us a glimpse at what the firm thinks 2019 has in store for it and despite higher costs for parts of the company, we should see a good year for investors that will set Mid-Con on the road to create real value for investors.

A veil lifted

Perhaps the best news for Mid-Con and its shareholders relates to what management expects this year to look like. In the past, I figured that management would be able to grow output nicely from the exit rate of 3.663 thousand boe (barrels of oil equivalent) per day, or 1.337 million boe over the course of the year (up from 1.188 million boe averaged for 2018). However, it appears I was wrong. As you can see in the image below, the company expects mid-point production for 2019 to come out to around 1.314 million boe, or down slightly from the fourth quarter.

*Taken from Mid-Con Energy Partners

This may seem scary to investors, but consider that the picture was obscured and prospects were thrown into doubt when management decided, earlier this year, to sell off significant assets in Texas in exchange for $60 million, and then used $27.5 million to acquire assets producing nearly as much. The assumption here was that we might see some troubles associated with EBITDA, cash flow generation, and/or output in general because the price disparities between the two assets suggested one or more of these issues might exist.

Fortunately, it appears that the big problem here is not production, but that doesn’t mean that the company is off the hook entirely. Based on current guidance, lease operating expenses for 2019 should come out to around $22.50 per boe. This represents a rather large increase compared to the $19.71 per boe seen in the fourth quarter of 2018, and at least some of that change is likely attributable to changes in the firm’s asset base.

Even with that difference though, as well as the other differences I estimated for Mid-Con, the picture for the company shouldn’t be all that bad for 2019. As you can see in my model’s table, illustrated below, EBITDA for this year should be around $26.9 million. It’s worth mentioning that this excludes the roughly $3.2 million that will be paid out to preferred shareholders. Factoring this into the equation would push EBITDA down to $23.7 million. As the table also illustrates, the business will also be operating cash flow and free cash flow positive for the year. That’s rare, especially for such a small company, in this space these days.

*Created by Author

Even with EBITDA in this range, the implied leverage for Mid-Con looks like it will be fairly low. Net debt, I calculated, should be around $66.5 million following the completion of its major transaction on March 28th. That would mean a net debt/EBITDA ratio of between 2.47 (if we ignore the preferred distributions) and 2.81 (with the distributions). Though not as low as some might want, it’s well below the nearly 4 handle the company was at under some circumstances I calculated had the deal not gone through.

We had a glimpse at asset values

One way to look at the possible value of oil and gas E&P firms is to look at their standardized measure. Back in 2017, the company calculated that this measure, which was the value of all its proved reserves, was $207.2 million. By the end of 2018, this figure ballooned to $348.3 million. Great though this news is (and it really is great news), what’s problematic is that these figures exclude the recently-acquired assets on Mid-Con’s books and need to be adjusted for its $60 million divestiture. Sadly, because these figures are rarely calculated more than once per year, we might have to wait until 2020 to get a more detailed look for all of this.

*Taken from Mid-Con Energy Partners

Even in spite of the fact that this is out of date, the fact that such growth occurred suggests that, with properties of similar reserves, Mid-Con’s standardized measure might not be too far away from what it was for the end of 2018. If that’s the case, this figure is well above the EV of $134.37 million I calculated for Mid-Con (this EV assumes the firm’s current market cap, plus the par value of preferred convertible stock, plus net debt after factoring in its effective asset swap). In short, this leaves a lot of wiggle room, especially when you consider that the high likelihood of additional oil and gas discoveries means that its standardized measure (as is the likelihood with all companies in this space) is probably lower than what it actually should be if all oil and gas were accounted for.

Takeaway

Right now, the market seems to hate anything and everything tied to the oil and gas space. That much is apparent when you look at the fundamentals of companies like Mid-Con. Because of this, investors should not be surprised to see continued pressure in this space, but in the long run, the important thing to remember is that fundamentals should bring investors back to reality. Even if energy prices don’t rise further (and I believe they will), I believe the upside for companies like Mid-Con is material.

Crude Value Insights is an exclusive community of investors who have a taste for oil and natural gas firms. Our main interest is on cash flow and the value and growth prospects that generate the strongest potential for investors. You get access to a 50+ stock model account, in-depth cash flow analyses of E&P firms, and a Live Chat where members can share their knowledge and experiences with one another. Sign up now and your first two weeks are free!

This article was written by

Daniel Jones profile picture
24.59K Followers
Robust cash flow analyses of oil and gas companies

Daniel is currently the manager of Avaring Capital Advisors, LLC, a registered investment advisor that oversees one hedge fund, and 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.

Disclosure: I am/we are long MCEP. 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.

Recommended For You

Comments (18)

To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.