Mid-Con Energy Partners: Potential Borrowing Base Reduction Could Leave It With Minimal Liquidity (NASDAQ:MCEP)

Via SeekingAlpha.com

Mid-Con Energy Partners (MCEP) appears likely to be stuck in a minimal capex, debt reduction mode for the foreseeable future. It may be able to achieve modestly positive cash flow in 2020 due to its hedges and cost reduction efforts. However, its credit facility lenders are likely to further reduce its borrowing base due to low oil prices.

Mid-Con’s common units continue to require much higher oil prices to have any intrinsic value, and the longer a low oil price situation continues, the harder it will be for the common units to regain value.

Reverse Split And Delayed Quarterly Filing

Mid-Con completed its 1 for 20 reverse split after market close on April 9. This reduced Mid-Con’s outstanding common units from 31 million to 1.55 million.

Mid-Con’s Q1 2020 report has been delayed due to the COVID-19 pandemic, with the new deadline date becoming June 29. It anticipates adding a couple of related risk factors to the quarterly report, discussing the impact of COVID-19 on its operations and on oil and gas prices.

2020 Outlook At $35 WTI Oil

I am assuming that Mid-Con temporarily shut-in some wells due to low oil prices. The price of oil was low enough that Mid-Con would have negative well level margins (on average) for most of mid-March to mid-May.

Thus, Mid-Con may end up averaging 3,300 BOEPD in 2020 now. At an average of $35 WTI oil in 2020, Mid-Con would end up with $50.6 million in revenue after hedges.

Barrels/Mcf $ Per Unit $ Million
Oil 1,084,050 $32.00 $34.7
Natural Gas 722,700 $1.60 $1.2
Hedge Value $14.7
Total $50.6
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I have assumed that Mid-Con’s lease operating expenses end up a bit lower at $24 per BOE now, reflecting the impact of temporarily shutting in higher-cost wells. Combined with other cost-cutting measures, this may allow Mid-Con to reduce its cash expenditures to $48.1 million.

$ Million
Lease Operating Expenses $28.9
Production Taxes $3.0
Cash G&A $6.0
Interest Expense $3.0
Preferred Distributions $3.2
Capital Expenditures $4.0
Total $48.1

This would result in Mid-Con generating $2.5 million in positive cash flow during 2020.

Credit Facility Situation

Mid-Con started 2020 with $68 million in credit facility debt, and the positive cash flow would reduce its credit facility debt to $65.5 million. Mid-Con’s borrowing base was reduced to $95 million in December 2019 (with an $85 million borrowing cap).

Given the sharp decrease in oil prices since then, Mid-Con’s borrowing base is likely to see a significant further reduction. Mid-Con’s reserves had a PV-10 of $241 million (PDP representing around 74% of that) at the end of 2019 based on $55.69 WTI oil. At the current strip, Mid-Con’s reserve value is likely less than half of that.

Mid-Con’s credit facility currently matures in May 2021, while the preferred unit redemption date is in August 2021. The credit facility lenders will likely want to avoid the cost of a bankruptcy filing and should be fine with allowing Mid-Con to continue operating as long as it doesn’t increase its credit facility borrowings. The preferred distributions are a relatively significant outflow of cash that is not going towards paying down the credit facility though, so there may be some pressure for Mid-Con to make PIK distributions on its preferred units instead.

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Mid-Con appears to be capable of generating a bit of positive cash flow at $35 WTI oil in 2020, with the help of its hedges and cost reductions. Mid-Con’s 2020 production is likely to end up noticeably lower than 2019 production due to shut-in production and minimal capex though.

At strip prices, Mid-Con’s reserves may have a PV-10 that is less than 50% of its PV-10 based on 2019 SEC pricing. This is likely to result in a significant borrowing base reduction. Mid-Con should be able to avoid restructuring as long as it can keep its credit facility debt stable or declining. The preferred unit distributions seem likely to be paid-in-kind rather than in cash going forward though.

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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.