mcep-10q_20180930.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2018

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File No.: 1-35374

 

Mid-Con Energy Partners, LP

(Exact name of registrant as specified in its charter)

 

 

Delaware

45-2842469

(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer
Identification Number)

 

2431 East 61st Street, Suite 850

Tulsa, Oklahoma 74136

(Address of principal executive offices and zip code)

(918) 743-7575

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes    No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

Smaller reporting company

 

 

 

 

 

Emerging Growth Company

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes      No  

As of November 5, 2018, the registrant had 30,436,124 common units outstanding.

 

 

 

 


TABLE OF CONTENTS

 

PART I

FINANCIAL INFORMATION

 

 

 

FORWARD-LOOKING STATEMENTS

 

3

ITEM 1. FINANCIAL STATEMENTS

 

5

Unaudited Condensed Consolidated Balance Sheets

 

5

Unaudited Condensed Consolidated Statements of Operations

 

6

Unaudited Condensed Consolidated Statements of Cash Flows

 

7

Unaudited Condensed Consolidated Statements of Changes in Equity

 

8

Notes to Unaudited Condensed Consolidated Financial Statements

 

9

 

 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

23

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

30

ITEM 4. CONTROLS AND PROCEDURES

 

30

 

 

 

PART II

OTHER INFORMATION

 

 

 

ITEM 1. LEGAL PROCEEDINGS

 

32

ITEM 1A. RISK FACTORS

 

32

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

32

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

32

ITEM 4. MINE SAFETY DISCLOSURES

 

32

ITEM 5. OTHER INFORMATION

 

32

ITEM 6. EXHIBITS

 

33

 

 

 

Signatures

 

34

 

2


 

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (“Form 10-Q”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (each a “forward-looking statement”). These forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond our control, which may include statements about our:

 

volatility of commodity prices;

 

revisions to oil and natural gas reserves estimates as a result of changes in commodity prices;

 

effectiveness of risk management activities;

 

business strategies;

 

future financial and operating results;

 

our ability to pay distributions;

 

ability to replace the reserves we produce through acquisitions and the development of our properties;

 

technology;

 

realized oil and natural gas prices;

 

production volumes;

 

lease operating expenses;

 

general and administrative expenses;

 

cash flow and liquidity;

 

availability of production equipment;

 

availability of oil field labor;

 

capital expenditures;

 

future capital requirements and availability and terms of capital;

 

marketing of oil and natural gas;

 

general economic conditions;

 

competition in the oil and natural gas industry;

 

environmental liabilities;

 

counterparty credit risk;

 

governmental regulation and taxation;

 

developments in oil producing and natural gas producing countries; and

 

plans, objectives, expectations and intentions.

All of these types of statements, other than statements of historical fact included in this Form 10-Q, are forward-looking statements. These forward-looking statements may be found in Item 1. “Financial Statements,” Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other items within this Form 10-Q. In some cases, forward-looking statements can be identified by terminology such as “may,” “will,” “could,” “should,” “expect,” “plan,” “project,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “pursue,” “target,” “continue,” “goal,” “forecast,” “guidance,” “might,” “scheduled” and the negative of such terms or other comparable terminology.

3


 

The forward-looking statements contained in this Form 10-Q are largely based on our expectations, which reflect estimates and assumptions made by our management. These estimates and assumptions reflect our best judgment based on currently known market conditions and other factors. Although we believe such estimates and assumptions to be reasonable, they are inherently uncertain and involve a number of risks and uncertainties that are beyond our control. In addition, management’s assumptions about future events may prove to be inaccurate. All readers are cautioned that the forward-looking statements contained in this Form 10-Q are not guarantees of future performance and we cannot assure any reader that such statements will be realized or that the forward-looking events will occur. Actual results may differ materially from those anticipated or implied in the forward-looking statements due to factors described in the “Risk Factors” section included in Item 1A. of our Annual Report on Form 10-K for the year ended December 31, 2017 (“Annual Report”) and Part II - Item 1A. in this Form 10-Q. All forward-looking statements speak only as of the date made, and other than as required by law, we do not intend to update or revise any forward-looking statements as a result of new information, future events or otherwise. These cautionary statements qualify all forward-looking statements attributable to us or persons acting on our behalf.

INFORMATION AVAILABLE ON OUR WEBSITE

We make available, free of charge on our website (www.midconenergypartners.com), copies of our Annual Reports, Form 10-Qs, Current Reports on Form 8-K, amendments to those reports filed or furnished to the Securities and Exchange Commission (“SEC”) pursuant to Section 13(a) or 15(d) of the Exchange Act and reports of holdings of our securities filed by our officers and directors under Section 16 of the Exchange Act as soon as reasonably practicable after filing such material electronically or otherwise furnishing it to the SEC. Copies of our Code of Business Conduct and the written charter of our Audit Committee are also available on our website and we will provide copies of these documents upon request. Our website and any contents thereof are not incorporated by reference into this report.

4


 

PART I

FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Mid-Con Energy Partners, LP and subsidiaries

Condensed Consolidated Balance Sheets

(in thousands, except number of units)

(Unaudited)

 

 

 

 

 

 

September 30, 2018

 

 

December 31, 2017

 

ASSETS

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

126

 

 

$

1,832

 

Accounts receivable

 

 

 

 

 

 

 

 

Oil and natural gas sales

 

 

7,725

 

 

 

5,262

 

Other

 

 

1,617

 

 

 

103

 

Prepaid expenses and other

 

 

242

 

 

 

166

 

Assets held for sale, net

 

 

430

 

 

 

2,058

 

Total current assets

 

 

10,140

 

 

 

9,421

 

Property and equipment

 

 

 

 

 

 

 

 

Oil and natural gas properties, successful efforts method

 

 

 

 

 

 

 

 

Proved properties

 

 

391,560

 

 

 

335,796

 

Unproved properties

 

 

1,564

 

 

 

369

 

Other property and equipment

 

 

427

 

 

 

427

 

Accumulated depletion, depreciation, amortization and impairment

 

 

(149,393

)

 

 

(129,101

)

Total property and equipment, net

 

 

244,158

 

 

 

207,491

 

Other assets

 

 

1,599

 

 

 

2,451

 

Total assets

 

$

255,897

 

 

$

219,363

 

 

 

 

 

 

 

 

 

 

LIABILITIES, CONVERTIBLE PREFERRED UNITS AND EQUITY

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

 

 

 

 

 

 

 

Trade

 

$

1,048

 

 

$

593

 

Related parties

 

 

4,507

 

 

 

1,631

 

Derivative financial instruments

 

 

10,644

 

 

 

4,252

 

Accrued liabilities

 

 

2,011

 

 

 

603

 

Liabilities related to assets held for sale

 

 

 

 

 

77

 

Total current liabilities

 

 

18,210

 

 

 

7,156

 

Derivative financial instruments

 

 

7,326

 

 

 

666

 

Long-term debt

 

 

96,000

 

 

 

99,000

 

Other long-term liabilities

 

 

52

 

 

 

70

 

Asset retirement obligations

 

 

39,192

 

 

 

10,249

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Class A convertible preferred units - 11,627,906 issued and outstanding, respectively

 

 

21,411

 

 

 

20,534

 

Class B convertible preferred units - 9,803,921 and 0 issued and outstanding, respectively

 

 

14,587

 

 

 

 

Equity, per accompanying statements

 

 

 

 

 

 

 

 

General partner

 

 

(815

)

 

 

(572

)

Limited partners - 30,436,124 and 30,090,463 units issued and outstanding, respectively

 

 

59,934

 

 

 

82,260

 

Total equity

 

 

59,119

 

 

 

81,688

 

Total liabilities, convertible preferred units and equity

 

$

255,897

 

 

$

219,363

 

 

See accompanying notes to condensed consolidated financial statements

5


 

Mid-Con Energy Partners, LP and subsidiaries

Condensed Consolidated Statements of Operations

(in thousands, except per unit data)

(Unaudited)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Oil sales

 

$

18,765

 

 

$

13,731

 

 

$

49,240

 

 

$

42,343

 

Natural gas sales

 

 

380

 

 

 

233

 

 

 

812

 

 

 

917

 

Other operating revenues

 

 

320

 

 

 

 

 

 

320

 

 

 

 

(Loss) gain on derivatives, net

 

 

(6,358

)

 

 

(2,749

)

 

 

(19,240

)

 

 

2,916

 

Total revenues

 

 

13,107

 

 

 

11,215

 

 

 

31,132

 

 

 

46,176

 

Operating costs and expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lease operating expenses

 

 

6,654

 

 

 

6,122

 

 

 

16,706

 

 

 

16,695

 

Oil and natural gas production taxes

 

 

1,157

 

 

 

857

 

 

 

2,992

 

 

 

2,366

 

Other operating expenses

 

 

288

 

 

 

 

 

 

288

 

 

 

 

Impairment of proved oil and natural gas properties

 

 

 

 

 

4,850

 

 

 

9,710

 

 

 

22,522

 

Depreciation, depletion and amortization

 

 

4,812

 

 

 

4,350

 

 

 

11,646

 

 

 

13,850

 

Dry holes and abandonments of unproved properties

 

 

10

 

 

 

 

 

 

195

 

 

 

 

Accretion of discount on asset retirement obligations

 

 

404

 

 

 

142

 

 

 

748

 

 

 

386

 

General and administrative

 

 

1,494

 

 

 

1,188

 

 

 

4,746

 

 

 

4,485

 

Total operating costs and expenses

 

 

14,819

 

 

 

17,509

 

 

 

47,031

 

 

 

60,304

 

Loss on sales of oil and natural gas properties, net

 

 

(1

)

 

 

 

 

 

(389

)

 

 

 

Loss from operations

 

 

(1,713

)

 

 

(6,294

)

 

 

(16,288

)

 

 

(14,128

)

Other (expense) income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

1

 

 

 

3

 

 

 

3

 

 

 

8

 

Interest expense

 

 

(1,620

)

 

 

(1,626

)

 

 

(4,369

)

 

 

(4,615

)

Other income

 

 

20

 

 

 

4

 

 

 

20

 

 

 

70

 

(Loss) gain on settlements of asset retirement obligations

 

 

(37

)

 

 

(8

)

 

 

12

 

 

 

(13

)

Total other expense

 

 

(1,636

)

 

 

(1,627

)

 

 

(4,334

)

 

 

(4,550

)

Net loss

 

 

(3,349

)

 

 

(7,921

)

 

 

(20,622

)

 

 

(18,678

)

Less: Distributions to preferred unitholders

 

 

1,148

 

 

 

783

 

 

 

3,303

 

 

 

2,275

 

Less: General partner's interest in net loss

 

 

(39

)

 

 

(94

)

 

 

(243

)

 

 

(222

)

Limited partners' interest in net loss

 

$

(4,458

)

 

$

(8,610

)

 

$

(23,682

)

 

$

(20,731

)

Limited partners' interest in net loss per unit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

$

(0.14

)

 

$

(0.29

)

 

$

(0.78

)

 

$

(0.69

)

Weighted average limited partner units outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Limited partner units (basic and diluted)

 

 

30,392

 

 

 

30,042

 

 

 

30,292

 

 

 

29,972

 

 

See accompanying notes to condensed consolidated financial statements

6


 

Mid-Con Energy Partners, LP and subsidiaries

Condensed Consolidated Statements of Cash Flows

(in thousands)

(Unaudited) 

 

 

 

Nine Months Ended

September 30,

 

 

 

2018

 

 

2017

 

Cash Flows from Operating Activities

 

 

 

 

 

 

 

 

Net loss

 

$

(20,622

)

 

$

(18,678

)

Adjustments to reconcile net loss to net cash provided by operating activities

 

 

 

 

 

 

 

 

Depreciation, depletion and amortization

 

 

11,646

 

 

 

13,850

 

Debt issuance costs amortization

 

 

503

 

 

 

1,023

 

Accretion of discount on asset retirement obligations

 

 

748

 

 

 

386

 

Impairment of proved oil and natural gas properties

 

 

9,710

 

 

 

22,522

 

Dry holes and abandonments of unproved properties

 

 

195

 

 

 

 

(Gain) loss on settlements of asset retirement obligations

 

 

(12

)

 

 

13

 

Cash paid for settlements of asset retirement obligations

 

 

(102

)

 

 

(30

)

Mark to market on derivatives

 

 

 

 

 

 

 

 

Loss (gain) on derivatives, net

 

 

19,240

 

 

 

(2,916

)

Cash settlements (paid) received for matured derivatives

 

 

(5,988

)

 

 

524

 

Cash settlements received from early termination of derivatives

 

 

 

 

 

147

 

Cash premiums paid for derivatives

 

 

(200

)

 

 

(5,009

)

Loss on sales of oil and natural gas properties

 

 

389

 

 

 

 

Non-cash equity-based compensation

 

 

670

 

 

 

409

 

Changes in operating assets and liabilities

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(2,463

)

 

 

697

 

Other receivables

 

 

(646

)

 

 

150

 

Prepaids and other

 

 

(76

)

 

 

363

 

Accounts payable - trade and accrued liabilities

 

 

689

 

 

 

1,009

 

Accounts payable - related parties

 

 

2,452

 

 

 

(557

)

Net cash provided by operating activities

 

 

16,133

 

 

 

13,903

 

Cash Flows from Investing Activities

 

 

 

 

 

 

 

 

Acquisitions of oil and natural gas properties

 

 

(21,626

)

 

 

(4,668

)

Additions to oil and natural gas properties

 

 

(6,072

)

 

 

(7,281

)

Additions to other property and equipment

 

 

 

 

 

(133

)

Proceeds from sales of oil and natural gas properties

 

 

1,163

 

 

 

 

Net cash used in investing activities

 

 

(26,535

)

 

 

(12,082

)

Cash Flows from Financing Activities

 

 

 

 

 

 

 

 

Proceeds from line of credit

 

 

20,000

 

 

 

6,000

 

Payments on line of credit

 

 

(23,000

)

 

 

(6,000

)

Offering costs

 

 

 

 

 

(92

)

Debt issuance costs

 

 

(651

)

 

 

 

Proceeds from sale of Class B convertible preferred units, net of offering costs

 

 

14,847

 

 

 

 

Distributions to Class A convertible preferred units

 

 

(2,000

)

 

 

(1,500

)

Distributions to Class B convertible preferred units

 

 

(500

)

 

 

 

Net cash provided by (used in) financing activities

 

 

8,696

 

 

 

(1,592

)

Net (decrease) increase in cash and cash equivalents

 

 

(1,706

)

 

 

229

 

Beginning cash and cash equivalents

 

 

1,832

 

 

 

2,359

 

Ending cash and cash equivalents

 

$

126

 

 

$

2,588

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to condensed consolidated financial statements

7


 

Mid-Con Energy Partners, LP and subsidiaries

Condensed Consolidated Statements of Changes in Equity

(in thousands)

(Unaudited)

 

 

 

General

 

 

Limited Partners

 

 

Total

 

 

 

Partner

 

 

Units

 

 

Amount

 

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2017

 

$

(572

)

 

 

30,091

 

 

$

82,260

 

 

$

81,688

 

Equity-based compensation

 

 

 

 

 

345

 

 

 

670

 

 

 

670

 

Distributions to Class A convertible preferred units

 

 

 

 

 

 

 

 

(1,500

)

 

 

(1,500

)

Distributions to Class B convertible preferred units

 

 

 

 

 

 

 

 

(800

)

 

 

(800

)

Allocation of value to beneficial conversion feature of Class B convertible preferred units

 

 

 

 

 

 

 

 

686

 

 

 

686

 

Accretion of beneficial conversion feature of Class A convertible preferred units

 

 

 

 

 

 

 

 

(876

)

 

 

(876

)

Accretion of beneficial conversion feature of Class B convertible preferred units

 

 

 

 

 

 

 

 

(127

)

 

 

(127

)

Net loss

 

 

(243

)

 

 

 

 

 

(20,379

)

 

 

(20,622

)

Balance, September 30, 2018

 

$

(815

)

 

 

30,436

 

 

$

59,934

 

 

$

59,119

 

 

See accompanying notes to condensed consolidated financial statements

8


 

Mid-Con Energy Partners, LP and subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

Note 1. Organization and Nature of Operations

Nature of Operations

Mid-Con Energy Partners, LP (“we,” “our,” “us,” the “Partnership,” or the “Company”) is a publicly held Delaware limited partnership formed in July 2011 that engages in the ownership, acquisition and development of producing oil and natural gas properties in North America, with a focus on enhanced oil recovery (“EOR”). Our limited partner units (“common units”) are listed under the symbol “MCEP” on the NASDAQ. Our general partner is Mid-Con Energy GP, LLC, a Delaware limited liability company.

Basis of Presentation

Our unaudited condensed consolidated financial statements are prepared pursuant to the rules and regulations of the SEC. These financial statements have not been audited by our independent registered public accounting firm, except that the condensed consolidated balance sheet at December 31, 2017, is derived from the audited financial statements. Accordingly, certain information and footnote disclosures normally included in the financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted in this Form 10-Q. We believe that the presentations and disclosures made are adequate to make the information not misleading.

The unaudited condensed consolidated financial statements include all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the interim periods. The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the full year. These interim financial statements should be read in conjunction with our Annual Report. All intercompany transactions and account balances have been eliminated.

Non-cash Investing and Supplemental Cash Flow Information

The following presents the non-cash investing and supplemental cash flow information for the periods presented:

 

 

 

Nine Months Ended

September 30,

 

(in thousands)

 

2018

 

 

2017

 

Non-cash investing information

 

 

 

 

 

 

 

 

Change in oil and natural gas properties - accrued capital expenditures

 

$

315

 

 

$

885

 

Change in oil and natural gas properties - accrued acquisitions

 

$

1,897

 

 

$

 

Supplemental cash flow information

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

3,567

 

 

$

3,566

 

 

 

Note 2. Acquisitions, Divestitures and Assets Held for Sale

Acquisitions

We adopted ASU No. 2017-01, “Business Combinations (Topic 805)” effective January 1, 2018. We now evaluate all acquisitions to determine whether they should be accounted for as a business combination or an asset acquisition. The assets acquired and liabilities assumed in the acquisitions were recorded in our unaudited condensed consolidated balance sheets at their estimated fair values as of the acquisition date using assumptions that represent Level 3 fair value measurement inputs. See Note 5 in this section for additional discussion of our fair value measurements. Results of operations attributable to the acquisition subsequent to the closing were included in our unaudited condensed consolidated statements of operations.

Pine Tree

In January 2018, we acquired multiple oil and natural gas properties located in Campbell and Converse Counties,

9


 

Wyoming. The Pine Tree acquisition (“Pine Tree”) was accounted for as a business combination. We acquired Pine Tree for cash consideration of $8.4 million, after final post-closing purchase price adjustments.

The recognized fair values of the Pine Tree assets acquired and liabilities assumed are as follows:

 

(in thousands)

 

 

 

 

Fair value of net assets acquired

 

 

 

 

Oil and natural gas properties

 

$

9,232

 

Total assets acquired

 

 

9,232

 

Fair value of net liabilities assumed

 

 

 

 

Asset retirement obligation

 

 

862

 

Net assets acquired

 

$

8,370

 

The following table presents revenues and expenses of the acquired oil and natural gas properties included in the accompanying consolidated statements of operations for the periods presented:

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

(in thousands)

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Oil and natural gas sales

 

$

325

 

 

$

 

 

$

809

 

 

$

 

Expenses(1)

 

$

235

 

 

$

 

 

$

516

 

 

$

 

(1) Expenses include lease operating expenses (“LOE”), production taxes, accretion and depletion.

Wheatland

In June 2017, we acquired multiple oil and natural gas properties located in Oklahoma and Cleveland Counties, Oklahoma, for cash consideration of $4.0 million, after final post-closing purchase price adjustments. The Wheatland acquisition was accounted for as a business combination.

The recognized fair values of the assets acquired and liabilities assumed are as follows:

 

(in thousands)

 

 

 

 

Fair value of net assets acquired

 

 

 

 

Oil and natural gas properties

 

$

4,305

 

Other property and equipment

 

 

132

 

Total assets acquired

 

 

4,437

 

Fair value of net liabilities assumed

 

 

 

 

Asset retirement obligation

 

 

407

 

Net assets acquired

 

$

4,030

 

The following table presents revenues and expenses of the acquired oil and natural gas properties included in the accompanying consolidated statements of operations for the periods presented:

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

(in thousands)

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Oil and natural gas sales

 

$

681

 

 

$

601

 

 

$

2,179

 

 

$

743

 

Expenses(1)

 

$

485

 

 

$

381

 

 

$

1,608

 

 

$

464

 

(1) Expenses include LOE, production taxes, accretion and depletion.

10


 

Divestitures

Effective at closing, the operations and cash flows of the following divested properties were eliminated from the ongoing operations of the Partnership, and the Partnership has no continuing involvement in these properties. The divestitures did not represent a strategic shift and did not have a major effect on the Partnership’s operations or financial results.

Nolan County

In January 2018, we completed the sale of certain oil and natural gas proved properties in Nolan County, Texas, for $1.5 million, after final post-closing purchase price adjustments. These properties were deemed to meet held-for-sale accounting criteria as of December 31, 2017, and impairment of $0.3 million was recorded to reduce the carrying value of these assets to their estimated fair value of $1.5 million at December 31, 2017; therefore, no gain or loss was realized on the sale in 2018.

The following table presents revenues and expenses of the divested oil and natural gas properties that were included in the accompanying consolidated statements of operations for the periods presented:

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

(in thousands)

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Oil and natural gas sales

 

$

 

 

$

123

 

 

$

 

 

$

438

 

Expenses(1)

 

$

 

 

$

74

 

 

$

 

 

$

377

 

(1) Expenses include LOE, production taxes, accretion and depletion.

Southern Oklahoma

In December 2017, we sold the properties located in Southern Oklahoma for cash proceeds, net of expenses, of $21.7 million, prior to final post-closing purchase price adjustments, and we recognized a loss of $4.6 million.

The following table presents revenues and expenses of the oil and natural gas properties sold included in the accompanying consolidated statements of operations for the periods presented:

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

(in thousands)

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Oil and natural gas sales

 

$

 

 

$

2,161

 

 

$

(5

)

 

$

7,124

 

Expenses(1)

 

$

 

 

$

1,757

 

 

$

(17

)

 

$

5,813

 

(1) Expenses include LOE, production taxes, accretion and depletion.

Assets Held for Sale

Land in Southern Oklahoma met held-for-sale criteria as of September 30, 2018, and December 31, 2017. The carrying value of $0.4 million was presented in “Assets held for sale, net” in our unaudited condensed consolidated balance sheets.

Note 3. Equity Awards

We have a long-term incentive program (the “Long-Term Incentive Program”) for employees, officers, consultants and directors of our general partner and its affiliates, including Mid-Con Energy Operating, LLC (“Mid-Con Energy Operating”) and ME3 Oilfield Service, LLC (“ME3 Oilfield Service”), who perform services for us. The Long-Term Incentive Program allows for the award of unit options, unit appreciation rights, unrestricted units, restricted units, phantom units, distribution equivalent rights granted with phantom units and other types of awards. The Long-Term Incentive Program is administered by Charles R. Olmstead, Executive Chairman of the Board, and Jeffrey R. Olmstead, President and Chief Executive Officer, and approved by the Board of Directors of our general partner (the “Board”). If an employee terminates employment prior to the restriction lapse date, the awarded units are forfeited and canceled and are no longer considered issued and outstanding.

11


 

The following table shows the number of existing awards and awards available under the Long-Term Incentive Program at September 30, 2018:

 

 

 

Number of

Common Units

 

Approved and authorized awards

 

 

3,514,000

 

Unrestricted units granted

 

 

(1,300,538

)

Restricted units granted, net of forfeitures

 

 

(399,424

)

Equity-settled phantom units granted, net of forfeitures

 

 

(932,669

)

Awards available for future grant

 

 

881,369

 

 

We recognized $0.3 million and $0.6 million of total equity-based compensation expense for the three and nine months ended September 30, 2018, respectively, and we recognized $0.1 million and $0.4 million of total equity-based compensation expense for the three and nine months ended September 30, 2017, respectively. These costs are reported as a component of general and administrative expenses (“G&A”) in our unaudited condensed consolidated statements of operations.  

Unrestricted Unit Awards

During the nine months ended September 30, 2018, we granted 87,832 unrestricted units with an average grant date fair value of $1.79 per unit. During the nine months ended September 30, 2017, we granted 25,400 unrestricted units with an average grant date fair value of $2.65 per unit.

Restricted Unit Awards

All restricted units were vested as of September 30, 2018. A summary of our restricted unit awards for the nine months ended September 30, 2018, is presented below:

 

 

 

Number of

Restricted Units

 

 

Average Grant Date

Fair Value per Unit

 

Outstanding at December 31, 2017

 

 

6,362

 

 

$

5.42

 

Units granted

 

 

 

 

 

 

Units vested

 

 

(6,362

)

 

 

5.42

 

Units forfeited

 

 

 

 

 

 

Outstanding at September 30, 2018

 

 

 

 

$

 

Equity-Settled Phantom Unit Awards

Equity-settled phantom units vest over a period of two or three years and do not have any rights or privileges of a common unitholder, including right to distributions, until vesting and the resulting conversion into common units. During the nine months ended September 30, 2018, we granted 450,000 equity-settled phantom units with a two-year vesting period and 44,500 equity-settled phantom units with a three-year vesting period. During the nine months ended September 30, 2017, we granted 27,000 equity-settled phantom units with a two-year vesting period and 14,500 equity-settled phantom units with a three-year vesting period. As of September 30, 2018, there were $0.5 million of unrecognized compensation costs related to non-vested equity-settled phantom units. These costs are expected to be recognized over a weighted average period of twenty months.

A summary of our equity-settled phantom unit awards for the nine months ended September 30, 2018, is presented below:

 

 

 

Number of

Equity-

Settled

Phantom Units

 

 

Average

Grant Date

Fair Value per

Unit

 

Outstanding at December 31, 2017

 

 

117,495

 

 

$

1.45

 

Units granted

 

 

494,500

 

 

 

1.74

 

Units vested

 

 

(257,829

)

 

 

1.63

 

Units forfeited

 

 

(3,000

)

 

 

1.31

 

Outstanding at September 30, 2018

 

 

351,166

 

 

$

1.73

 

12


 

 

Note 4. Derivative Financial Instruments

Our risk management program is intended to reduce our exposure to commodity price volatility and to assist with stabilizing cash flows. Accordingly, we utilize commodity derivative contracts (swaps, calls, puts and collars) to manage a portion of our exposure to commodity prices. We enter into commodity derivative contracts or modify our portfolio of existing commodity derivative contracts when we believe market conditions or other circumstances suggest that it is prudent to do so, or as required by our lenders. We account for our commodity derivative contracts at fair value. See Note 5 in this section for a description of our fair value measurements.

We do not designate derivatives as hedges for accounting purposes; therefore, the mark-to-market adjustment reflecting the change in the fair value of our commodity derivative contracts is recorded in current period earnings. When prices for oil are volatile, a significant portion of the effect of our hedging activities consists of non-cash gains or losses due to changes in the fair value of our commodity derivative contracts. In addition to mark-to-market adjustments, gains or losses arise from net amounts paid or received on monthly settlements, proceeds from or payments for termination of contracts prior to their expiration and premiums paid or received for new contracts. Any deferred premiums are recorded as a liability and recognized in earnings as the related contracts mature. Gains and losses on derivatives are included in cash flows from operating activities. Pursuant to the accounting standard that permits netting of assets and liabilities where the right of offset exists, we present the fair value of commodity derivative contracts on a net basis.

At September 30, 2018, and at December 31, 2017, our commodity derivative contracts were in a net liability position with a fair value of $18.0 million and $4.9 million, respectively. All of our commodity derivative contracts are with major financial institutions that are also lenders under our revolving credit facility. Should one of these financial counterparties not perform, we may not realize the benefit of some of our commodity derivative contracts under lower commodity prices and we could incur a loss. As of September 30, 2018, all of our counterparties have performed pursuant to the terms of their commodity derivative contracts.

The following tables summarize the gross fair value by the appropriate balance sheet classification, even when the derivative financial instruments are subject to netting arrangements and qualify for net presentation, in our unaudited condensed consolidated balance sheets at September 30, 2018, and December 31, 2017:

 

(in thousands)

 

Gross

Amounts

Recognized

 

 

Gross Amounts

Offset in the

Unaudited

Condensed

Consolidated

Balance Sheets

 

 

Net Amounts

Presented in

the Unaudited

Condensed

Consolidated

Balance Sheets

 

September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Derivative financial instruments - current liability

 

 

(10,443

)

 

 

(201

)

 

 

(10,644

)

Derivative deferred premium - current liability

 

 

(201

)

 

 

201

 

 

 

 

Derivative financial instruments - long-term liability

 

 

(7,326

)

 

 

 

 

 

(7,326

)

Total

 

 

(17,970

)

 

 

 

 

 

(17,970

)

Net Liability

 

$

(17,970

)

 

$

 

 

$

(17,970

)

13


 

 

(in thousands)

 

Gross

Amounts

Recognized

 

 

Gross Amounts

Offset in the

Unaudited

Condensed

Consolidated

Balance Sheets

 

 

Net Amounts

Presented in

the Unaudited

Condensed

Consolidated

Balance Sheets

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

Derivative financial instruments - current asset

 

$

39

 

 

$

(39

)

 

$

 

Total

 

 

39

 

 

 

(39

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Derivative financial instruments - current liability

 

 

(3,890

)

 

 

(362

)

 

 

(4,252

)

Derivative deferred premium - current liability

 

 

(401

)

 

 

401

 

 

 

 

Derivative financial instruments - long-term liability

 

 

(666

)

 

 

 

 

 

(666

)

Total

 

 

(4,957

)

 

 

39

 

 

 

(4,918

)

Net Liability

 

$

(4,918

)

 

$

 

 

$

(4,918

)

 

The following table presents the impact of derivative financial instruments and their location within the unaudited condensed consolidated statements of operations:

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

(in thousands)

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net settlements on matured derivatives(1)

 

$

(2,483

)

 

$

323