Earlier this month, the management team at Mid-Con Energy Partners (NASDAQ:MCEP) revealed some new data pertaining to the company that I didn’t expect would come out until sometime early next year: the present value of cash flows that should be generated by its acquired assets in Oklahoma. This realization gives investors an ability to get a better view of what the company on the whole might be worth. Upon looking at the data, it appears quite clear that Mid-Con is quite appealing as an investment prospect, and that while management does still have some work cut out for it, the upside for shareholders from this point is material.
In a filing made on the SEC’s EDGAR Database earlier this month, the management team at Mid-Con announced the standardized measure (which is the discounted cash flow in aggregate) of its acquired Oklahoma assets. This transaction was announced in February of this year, and because oil and gas E&P (exploration and production) firms are only required to reveal standardized measure calculations once per annum, I did not think we would see any hint of this figure until sometime in early 2020, when the company announced fourth-quarter results for its 2019 fiscal year.
*Taken from Mid-Con Energy Partners
As you can see in the image above, the standardized measure of these assets as of the end of 2018 came out to $58.74 million. The company managed to acquire these for only $27.50 million, which came from the $60 million sale of its Texas-based assets at the same time. The rest of the proceeds from its strategic transaction went toward reducing debt for the company. To put all of this in perspective, the $60 million it received from its sale of Texas assets was also mis-priced relative to its standardized measure, which came out to about $84 million at the end of last year.
This particular transaction aimed to reduce leverage, which it did, and the other purpose of the deal was to allow Mid-Con to focus more on its core assets, which are located primarily in Oklahoma, but with some in Wyoming as well. One downside, it appears, was that the lease operating expenses for Mid-Con rose as a result of the transaction, but besides that, knowing what we know now about the standardized measure differences alone, the transaction was even more logical.
In its 10-K, Mid-Con revealed that its standardized measure last year ended up at $348 million. As of the time of this writing, common shares, trading at $0.41 apiece, are valuing the company’s market cap at about $12 million. On top of this, the firm has $68 million in debt under its credit facility, and it has convertible preferred shares that, if its common stock does not rise considerably, will be redeemable in cash in about two years. Those preferred shares, if you treat them like debt, would be worth $40 million. In all, this brings us to an EV (enterprise value) of $120 million, meaning that Mid-Con is trading at a little more than a third of its EV. While not the lowest valuation on this basis that I have seen, it’s certainly not far off.
*Taken from Mid-Con Energy Partners
Keep in mind now that it’s important to adjust for the company's strategic transaction. This requires some assumptions made, so it’s not an exact science, but we can probably get fairly close. Stripping out the $84 million in standardized measure from its Texas divestiture and adding in the measure associated with its acquired Oklahoma assets will give investors a reading on the business of around $323 million. Even that, however, will require some adjustments to be made.
While it’s tempting to perform a simple comparison and then move on, that would be a mistake. This is because of the fact that oil and gas prices aren’t what they were at the time. Crude prices, for instance, were assumed for the acquired assets to be $64.18 per barrel, NGL prices were assumed to be $22.62 per barrel, and natural gas prices were assumed to be $1.72 per Mcf. Adjusting for today’s prices, with crude at $52.51 per barrel and natural gas at $2.388 (down from $3.10 on an un-adjusted basis used by the acquired assets), I estimated that the standardized measure for the acquired assets in this environment is closer to $19.33 million. That’s quite a haircut.
Using the same method, I made a similar calculation for the other assets on Mid-Con’s books. Excluding the acquired assets, this figure came to about $234 million net of its asset sale, while with the acquired assets added on it came out to just north of $253 million. What this means is that, in theory, an investor could buy up the company, continue drilling, and so long as they kept their other non-field expenses low, could more or less double their money on a real-time basis over the course of Mid-Con’s life.
It is true that many companies in this space today are trading at discounts to their standardized measure. Some are trading substantially lower. Part of this might be due to the fact that there are always uncertainties when it comes to drilling, ranging from operational performance to pricing fluctuations, but since reserves don’t count future discoveries that might be made, in a healthy market you should expect for a firm’s EV to be at least what its standardized measure is, if not more. The fact that this isn’t happening throughout much of the industry is a testament to how pessimistic the space is, and that pessimism (so long as energy prices don’t tank) will eventually have to reverse.
Right now, Mid-Con is an interesting long-term prospect in the oil and gas space. It’s certainly one of my favorites, because I believe that with positive free cash flow for this year and next, management can grow output (through M&A activity mostly) enough to bring leverage down and to establish the company as an attractive and relatively safe prospect. This data provided by management further bolsters my thinking here, but only time will tell what awaits the company and its shareholders down the road.
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This article was written by
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.