Mid-Con Energy Partners’ (MCEP) Q2 2020 report noted that it had shut-in around 400 wells due to economic reasons and that most of these wells remained shut-in as of mid August. Mid-Con appears capable of continuing to pay down its credit facility debt at low-$40s WTI oil as its fixed costs have been significantly reduced from the conversion of preferred units into common units and the savings from the management agreement with Contango.

Mid-Con’s current unit price (at $2.58) looks reasonable as a speculative entry point, although it realistically needs $50s oil to generate some value. Thus I’m neutral toward it now, compared to being bearish on it when its price spiked up a few months ago.

Shut-In Production

Mid-Con noted in its Q2 2020 report that it shut-in approximately 250 uneconomical wells in March 2020 and 150 uneconomical in April 2020. It returned 30 net wells to production by Aug. 10, 2020. At the end of 2019, Mid-Con had an average 89% working interest in its producing wells (1,471 net and 1,662 gross). Thus only a modest percentage of shut-in wells were returned to production by mid August.

Mid-Con’s production may remain constrained until there’s a sustained period of higher than low-$40s WTI oil, as the shut-in wells appear to have lease operating costs averaging in the 30s per BOE. Mid-Con may want to save those higher-cost oil reserves for when it’s more confident that it can generate sustained decent margins.

2021 Outlook

The current WTI strip for 2021 is approximately $42. This may result in Mid-Con continuing to shut-in its higher-cost wells. In this scenario, Mid-Con may average 2,700 BOEPD in production during 2021.

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Mid-Con would then be expected to generate $43 million in revenues after hedges.

Barrels/Mcf $ Per Unit $ Million
Oil 906,660 $40.00 $36.3
Natural Gas 474,040 $2.00 $0.9
Hedge Value $5.8
Total $43.0

I’ve assumed that Mid-Con’s lease operating expenses are reduced to $19 per BOE in 2021 due to the shut-in of higher cost wells plus savings from its management agreement with Contango.

This results in a projection that Mid-Con could generate $13.4 million in positive cash flow in 2021 with a minimal capex budget.

$ Million
Lease Operating Expenses $18.7
Production Taxes $3.0
Cash G&A $3.0
Interest Expense $2.9
Capital Expenditures $2.0
Total $29.6

This may reduce Mid-Con’s credit facility borrowings to around $50 million by the end of 2021.

Reduced Fixed Costs

Mid-Con’s value may be significantly improved in the long run if the targeted savings from the Contango management agreement can be achieved.

Mid-Con’s proved developed producing reserves had a PV-10 of $182 million at the end of 2019. This used SEC pricing of $55.69 per barrel of oil. However, even at that mid-$50s oil price there may not have been much value left over from the PDP reserves for the common equity given that around $12 million per year in payments were going toward G&A, interest and preferred unit distributions.

Going forward, Mid-Con may have less than $6 million per year going toward G&A and interest, along with reduced lease operating costs. This improves the chances of there being value left over for the common equity in the end, although Mid-Con probably requires $50s WTI oil for that to occur.

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Conclusion

Mid-Con obviously was overpriced in mid June when its common units reached more than $5. At a bit over $2.50 per unit there’s a reasonable case to be made that Mid-Con may have some longer-term upside though.

At mid-$50s WTI oil, Mid-Con may be worth around $100 million based on a 4.0x EV/EBITDA multiple. If it can pay its debt down to $50 million, that would leave around $3.50 per unit value for its common equity. The main risk is that Mid-Con could still need an additional capital infusion (such as to reduce its credit facility debt) before oil reaches the $50s again. This could add (if structured the same way as before) preferred units ahead of the common units again, and result in some cash flow going toward the new preferred units.

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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.



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