mcep-10q_20190331.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 March 31, 2019

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 of this chapter) 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 April 26, 2019, the registrant had 30,785,958 common units outstanding.

 

 

 

 


TABLE OF CONTENTS

 

PART I

FINANCIAL INFORMATION

 

 

 

CAUTIONARY STATEMENT REGARDING 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

 

22

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

30

ITEM 4. CONTROLS AND PROCEDURES

 

30

 

 

 

PART II

OTHER INFORMATION

 

 

 

ITEM 1. LEGAL PROCEEDINGS

 

30

ITEM 1A. RISK FACTORS

 

30

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

 

31

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

31

ITEM 4. MINE SAFETY DISCLOSURES

 

31

ITEM 5. OTHER INFORMATION

 

31

ITEM 6. EXHIBITS

 

32

 

 

 

Signatures

 

33

 

2


 

CAUTIONARY STATEMENT REGARDING 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. 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:

 

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;

 

future capital requirements and availability of financing;

 

technology and cybersecurity;

 

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;

 

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, 2018 (“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)

 

 

 

 

 

 

March 31, 2019

 

 

December 31, 2018

 

ASSETS

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

185

 

 

$

467

 

Accounts receivable

 

 

 

 

 

 

 

 

Oil and natural gas sales

 

 

5,035

 

 

 

3,691

 

Other

 

 

179

 

 

 

503

 

Derivative financial instruments

 

 

 

 

 

5,666

 

Prepaid expenses and other

 

 

487

 

 

 

118

 

Assets held for sale, net

 

 

430

 

 

 

430

 

Total current assets

 

 

6,316

 

 

 

10,875

 

Property and equipment

 

 

 

 

 

 

 

 

Oil and natural gas properties, successful efforts method

 

 

 

 

 

 

 

 

Proved properties

 

 

276,389

 

 

 

379,441

 

Unproved properties

 

 

3,371

 

 

 

2,928

 

Other property and equipment

 

 

1,551

 

 

 

427

 

Accumulated depletion, depreciation, amortization and impairment

 

 

(90,710

)

 

 

(175,948

)

Total property and equipment, net

 

 

190,601

 

 

 

206,848

 

Derivative financial instruments

 

 

 

 

 

2,418

 

Other assets

 

 

1,385

 

 

 

1,563

 

Total assets

 

$

198,302

 

 

$

221,704

 

 

 

 

 

 

 

 

 

 

LIABILITIES, CONVERTIBLE PREFERRED UNITS AND EQUITY

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

 

 

 

 

 

 

 

Trade

 

$

804

 

 

$

141

 

Related parties

 

 

1,176

 

 

 

3,732

 

Derivative financial instruments

 

 

2,928

 

 

 

 

Accrued liabilities

 

 

590

 

 

 

2,024

 

Other current liabilities

 

 

408

 

 

 

 

Total current liabilities

 

 

5,906

 

 

 

5,897

 

Derivative financial instruments

 

 

1,329

 

 

 

 

Long-term debt

 

 

68,000

 

 

 

93,000

 

Other long-term liabilities

 

 

782

 

 

 

47

 

Asset retirement obligations

 

 

29,780

 

 

 

26,001

 

Commitments and contingencies

 

 

 

 

 

 

 

 

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

 

 

22,016

 

 

 

21,715

 

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

 

 

14,683

 

 

 

14,635

 

Equity, per accompanying statements

 

 

 

 

 

 

 

 

General partner

 

 

(831

)

 

 

(786

)

Limited partners - 30,785,958 and 30,436,124 units issued and outstanding, respectively

 

 

56,637

 

 

 

61,195

 

Total equity

 

 

55,806

 

 

 

60,409

 

Total liabilities, convertible preferred units and equity

 

$

198,302

 

 

$

221,704

 

 

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

 

 

 

March 31,

 

 

 

2019

 

 

2018

 

Revenues

 

 

 

 

 

 

 

 

Oil sales

 

$

14,594

 

 

$

14,544

 

Natural gas sales

 

 

250

 

 

 

168

 

Other operating revenues

 

 

372

 

 

 

 

Loss on derivatives, net

 

 

(12,198

)

 

 

(3,382

)

Total revenues

 

 

3,018

 

 

 

11,330

 

Operating costs and expenses

 

 

 

 

 

 

 

 

Lease operating expenses

 

 

6,830

 

 

 

4,640

 

Production and ad valorem taxes

 

 

1,282

 

 

 

1,033

 

Other operating expenses

 

 

473

 

 

 

 

Impairment of proved oil and natural gas properties

 

 

 

 

 

8,751

 

Depreciation, depletion and amortization

 

 

3,098

 

 

 

3,441

 

Dry holes and abandonments of unproved properties

 

 

 

 

 

88

 

Accretion of discount on asset retirement obligations

 

 

328

 

 

 

153

 

General and administrative

 

 

2,662

 

 

 

1,894

 

Total operating costs and expenses

 

 

14,673

 

 

 

20,000

 

Gain (loss) on sales of oil and natural gas properties, net

 

 

9,469

 

 

 

(400

)

Loss from operations

 

 

(2,186

)

 

 

(9,070

)

Other (expense) income

 

 

 

 

 

 

 

 

Interest income

 

 

8

 

 

 

2

 

Interest expense

 

 

(1,615

)

 

 

(1,339

)

Other income

 

 

5

 

 

 

 

Loss on settlements of asset retirement obligations

 

 

 

 

 

(11

)

Total other expense

 

 

(1,602

)

 

 

(1,348

)

Net loss

 

 

(3,788

)

 

 

(10,418

)

Less: Distributions to preferred unitholders

 

 

1,149

 

 

 

1,016

 

Less: General partner's interest in net loss

 

 

(45

)

 

 

(123

)

Limited partners' interest in net loss

 

$

(4,892

)

 

$

(11,311

)

Limited partners' interest in net loss per unit

 

 

 

 

 

 

 

 

Basic and diluted

 

$

(0.16

)

 

$

(0.37

)

Weighted average limited partner units outstanding

 

 

 

 

 

 

 

 

Limited partner units (basic and diluted)

 

 

30,630

 

 

 

30,176

 

 

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) 

 

 

 

Three Months Ended

March 31,

 

 

 

2019

 

 

2018

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(3,788

)

 

$

(10,418

)

Adjustments to reconcile net loss to net cash (used in) provided by operating activities

 

 

 

 

 

 

 

 

Depreciation, depletion and amortization

 

 

3,098

 

 

 

3,441

 

Debt issuance costs amortization

 

 

178

 

 

 

154

 

Accretion of discount on asset retirement obligations

 

 

328

 

 

 

153

 

Impairment of proved oil and natural gas properties

 

 

 

 

 

8,751

 

Dry holes and abandonments of unproved properties

 

 

 

 

 

88

 

Loss on settlements of asset retirement obligations

 

 

 

 

 

11

 

Cash paid for settlements of asset retirement obligations

 

 

 

 

 

(27

)

Mark to market on derivatives

 

 

 

 

 

 

 

 

Loss on derivatives, net

 

 

12,198

 

 

 

3,382

 

Cash settlements received (paid) for matured derivatives

 

 

143

 

 

 

(1,324

)

(Gain) loss on sales of oil and natural gas properties

 

 

(9,469

)

 

 

400

 

Non-cash equity-based compensation

 

 

334

 

 

 

239

 

Changes in operating assets and liabilities

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(1,344

)

 

 

234

 

Other receivables

 

 

127

 

 

 

(280

)

Prepaids and other

 

 

(369

)

 

 

(331

)

Accounts payable - trade and accrued liabilities

 

 

432

 

 

 

319

 

Accounts payable - related parties

 

 

(2,999

)

 

 

(357

)

Net cash (used in) provided by operating activities

 

 

(1,131

)

 

 

4,435

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

Acquisitions of oil and natural gas properties

 

 

(2,796

)

 

 

(8,899

)

Additions to oil and natural gas properties

 

 

(3,057

)

 

 

(1,465

)

Proceeds from sales of oil and natural gas properties

 

 

32,502

 

 

 

1,151

 

Net cash provided by (used in) investing activities

 

 

26,649

 

 

 

(9,213

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

Proceeds from line of credit

 

 

7,000

 

 

 

2,000

 

Payments on line of credit

 

 

(32,000

)

 

 

(11,762

)

Debt issuance costs

 

 

 

 

 

(651

)

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

 

 

 

 

 

14,971

 

Distributions to Class A convertible preferred units

 

 

(500

)

 

 

(1,000

)

Distributions to Class B convertible preferred units

 

 

(300

)

 

 

 

Net cash (used in) provided by financing activities

 

 

(25,800

)

 

 

3,558

 

Net decrease in cash and cash equivalents

 

 

(282

)

 

 

(1,220

)

Beginning cash and cash equivalents

 

 

467

 

 

 

1,832

 

Ending cash and cash equivalents

 

$

185

 

 

$

612

 

 

 

 

 

 

 

 

 

 

 

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, 2018

 

$

(786

)

 

 

30,436

 

 

$

61,195

 

 

$

60,409

 

Equity-based compensation

 

 

 

 

 

350

 

 

 

334

 

 

 

334

 

Distributions to Class A convertible preferred units

 

 

 

 

 

 

 

 

(500

)

 

 

(500

)

Distributions to Class B convertible preferred units

 

 

 

 

 

 

 

 

(300

)

 

 

(300

)

Accretion of beneficial conversion feature of Class A convertible preferred units

 

 

 

 

 

 

 

 

(301

)

 

 

(301

)

Accretion of beneficial conversion feature of Class B convertible preferred units

 

 

 

 

 

 

 

 

(48

)

 

 

(48

)

Net loss

 

 

(45

)

 

 

 

 

 

(3,743

)

 

 

(3,788

)

Balance, March 31, 2019

 

$

(831

)

 

 

30,786

 

 

$

56,637

 

 

$

55,806

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2017

 

$

(572

)

 

 

30,091

 

 

$

82,260

 

 

$

81,688

 

Equity-based compensation

 

 

 

 

 

215

 

 

 

239

 

 

 

239

 

Distributions to Class A convertible preferred units

 

 

 

 

 

 

 

 

(500

)

 

 

(500

)

Distributions to Class B convertible preferred units

 

 

 

 

 

 

 

 

(200

)

 

 

(200

)

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

 

 

 

 

 

 

 

 

(285

)

 

 

(285

)

Accretion of beneficial conversion feature of Class B convertible preferred units

 

 

 

 

 

 

 

 

(31

)

 

 

(31

)

Net loss

 

 

(123

)

 

 

 

 

 

(10,295

)

 

 

(10,418

)

Balance, March 31, 2018

 

$

(695

)

 

 

30,306

 

 

$

71,874

 

 

$

71,179

 

 

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, 2018, 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.

Reclassifications

The unaudited condensed consolidated statements of operations for the prior year period presented includes reclassifications from lease operating expenses (“LOE”) to production and ad valorem taxes to conform to the current presentation. Such reclassifications have no impact on previously reported net loss.

Non-cash Investing and Supplemental Cash Flow Information

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

 

 

 

Three Months Ended

March 31,

 

(in thousands)

 

2019

 

 

2018

 

Non-cash investing information

 

 

 

 

 

 

 

 

Change in oil and natural gas properties - assets received in exchange

 

$

38,533

 

 

$

 

Change in oil and natural gas properties - accrued capital expenditures

 

$

58

 

 

$

132

 

Change in oil and natural gas properties - accrued acquisitions

 

$

(954

)

 

$

(86

)

Change in oil and natural gas properties - acquisition deposit paid in prior year

 

$

 

 

$

1,000

 

Supplemental cash flow information

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

1,677

 

 

$

892

 

 

 

9


 

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 business combinations or asset acquisitions. The guidance provides a screen to determine when an integrated set of assets and activities is not a business. The screen requires that when substantially all of the fair value of the acquired assets is concentrated in a single asset or a group of similar assets, the set is not a business. If the screen is not met, to be considered a business, the set must include an input and substantive process that together significantly contribute to the ability to create output.

Acquisitions – Business Combinations

The assets and liabilities assumed in acquisitions accounted for as business combinations 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, 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

 

 

 

 

Proved oil and natural gas properties

 

$

8,833

 

Total assets acquired

 

 

8,833

 

Fair value of net liabilities assumed

 

 

 

 

Asset retirement obligation

 

 

463

 

Net assets acquired

 

$

8,370

 

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

 

 

 

Three Months Ended

March 31,

 

(in thousands)

 

2019

 

 

2018

 

Oil and natural gas sales

 

$

222

 

 

$

130

 

Expenses(1)

 

$

208

 

 

$

120

 

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

Divestitures

Effective at closing, the operations and cash flows of the following divested properties were eliminated from our ongoing operations, and we have no continuing involvement in these properties.

Strategic Transaction

In March 2019, we simultaneously closed the previously announced definitive agreements to sell substantially all of our oil and natural gas properties located in Texas for a purchase price of $60.0 million and to purchase certain oil and natural gas properties located in Osage, Grady and Caddo Counties in Oklahoma for an aggregate purchase price of $27.5 million, both agreements subject to customary purchase price adjustments. We received net proceeds of $32.5 million at the close of this Strategic Transaction (“Strategic Transaction”) of which $32.0 million was used to reduce borrowings outstanding on our

10


 

revolving credit facility. The acquired properties were accounted for as an asset acquisition. A gain on the sale of oil and natural gas properties of $9.5 million was reported in the unaudited condensed consolidated statements of operations.

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

 

 

 

Three Months Ended

March 31,

 

(in thousands)

 

2019

 

 

2018

 

Oil and natural gas sales

 

$

4,650

 

 

$

6,968

 

Expenses(1)

 

$

3,374

 

 

$

4,418

 

(1) Expenses include LOE, production and ad valorem taxes, dry hole and abandonment, accretion and depletion.

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.

Assets Held for Sale

Land in Southern Oklahoma met held-for-sale criteria as of March 31, 2019, and December 31, 2018. The carrying value of $0.4 million was presented as “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.

The following table shows the number of existing awards and awards available under the Long-Term Incentive Program at March 31, 2019:

 

 

 

Number of

Common Units

 

Approved and authorized awards

 

 

3,514,000

 

Unrestricted units granted

 

 

(1,350,538

)

Restricted units granted, net of forfeitures

 

 

(399,424

)

Equity-settled phantom units granted, net of forfeitures

 

 

(1,493,669

)

Awards available for future grant

 

 

270,369

 

 

We recognized $0.3 million and $0.2 million of total equity-based compensation expense for the three months ended March 31, 2019 and 2018, 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 three months ended March 31, 2019, we granted 50,000 unrestricted units with an average grant date fair value of $1.04 per unit. During the three months ended March 31, 2018, we granted 87,832 unrestricted units with an average grant date fair value of $1.79 per unit.

11


 

Equity-Settled Phantom Unit Awards

Equity-settled phantom units vest over a period of two or three years. During the three months ended March 31, 2019, we granted 510,000 equity-settled phantom units with a two-year vesting period and 63,000 equity-settled phantom units with a three-year vesting period. During the three months ended March 31, 2018, we granted 381,000 equity-settled phantom units with a two-year vesting period and 8,500 equity-settled phantom units with a three-year vesting period. As of March 31, 2019, there were $0.7 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 nineteen months.

A summary of our equity-settled phantom unit awards for the three months ended March 31, 2019, is presented below:

 

 

 

Number of

Equity-Settled

Phantom Units

 

 

Average Grant Date

Fair Value per Unit

 

Outstanding at December 31, 2018

 

 

351,166

 

 

$

1.73

 

Units granted

 

 

573,000

 

 

 

1.04

 

Units vested

 

 

(299,834

)

 

 

1.35

 

Units forfeited

 

 

(12,000

)

 

 

1.75

 

Outstanding at March 31, 2019

 

 

612,332

 

 

$

1.27

 

 

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 (commodity price and differential 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 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 March 31, 2019, our commodity derivative contracts were in a net liability position with a fair value of $4.3 million, whereas at December 31, 2018, our commodity derivative contracts were in a net asset position with a fair value of $8.1 million. 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 March 31, 2019, all of our counterparties have performed pursuant to the terms of their commodity derivative contracts.

12


 

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 March 31, 2019, and December 31, 2018:

 

(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

 

March 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

Derivative financial instruments - long-term asset

 

$

1,360

 

 

$

(1,360

)

 

$

 

Total

 

 

1,360

 

 

 

(1,360

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Derivative financial instruments - current liability

 

 

(2,928

)

 

 

 

 

 

(2,928

)

Derivative financial instruments - long-term liability

 

 

(2,689

)

 

 

1,360

 

 

 

(1,329

)

Total

 

 

(5,617

)

 

 

1,360

 

 

 

(4,257

)

Net Liability

 

$

(4,257

)

 

$

 

 

$

(4,257

)

 

(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, 2018

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

Derivative financial instruments - current asset

 

$

5,705

 

 

$

(39

)

 

$

5,666

 

Derivative financial instruments - long-term asset

 

 

2,418

 

 

 

 

 

 

2,418

 

Total

 

 

8,123

 

 

 

(39

)

 

 

8,084

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Derivative financial instruments - current liability

 

 

(39

)

 

 

39

 

 

 

 

Total

 

 

(39

)

 

 

39

 

 

 

 

Net Asset

 

$

8,084

 

 

$

 

 

$

8,084

 

 

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

 

 

 

Three Months Ended

March 31,

 

(in thousands)

 

2019

 

 

2018

 

Net settlements on matured derivatives(1)

 

$

143

 

 

$

(1,324

)

Net change in fair value of derivatives

 

 

(12,341

)

 

 

(2,058

)

Total loss on derivatives, net

 

$

(12,198

)

 

$

(3,382

)

(1) The settlement amount does not include premiums paid attributable to contracts that matured during the respective period.

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At March 31, 2019, and December 31, 2018, our commodity derivative contracts had maturities at various dates through December 2021 and were comprised of commodity price and differential swaps and collar contracts. At March 31, 2019, we had the following oil derivatives net positions:

 

Period Covered

 

Differential Fixed Price

 

 

Weighted Average Fixed Price

 

 

Weighted Average Floor Price

 

 

Weighted Average Ceiling Price

 

 

Total Bbls

Hedged/day

 

 

Index

Swaps - 2019

 

$

 

 

$

56.10

 

 

$

 

 

$

 

 

 

1,727

 

 

NYMEX-WTI

Swaps - 2019

 

$

(20.15

)

 

$

 

 

$

 

 

$

 

 

 

150

 

 

WCS-CRUDE-OIL

Swaps - 2020

 

$

 

 

$

55.81

 

 

$

 

 

$

 

 

 

1,931

 

 

NYMEX-WTI

Swaps - 2021

 

$

 

 

$

55.78

 

 

$

 

 

$

 

 

 

672

 

 

NYMEX-WTI

Collars - 2021

 

$

 

 

$

 

 

$

52.00

 

 

$

58.80

 

 

 

672

 

 

NYMEX-WTI

 

At December 31, 2018, we had the following oil derivatives net positions:

 

Period Covered

 

Differential Fixed Price

 

 

Weighted Average Fixed Price

 

 

Total Bbls

Hedged/day

 

 

Index

Swaps - 2019

 

$

 

 

$

56.14

 

 

 

1,779

 

 

NYMEX-WTI

Swaps - 2019

 

$

(20.15

)

 

$

 

 

 

137

 

 

WCS-CRUDE-OIL

Swaps - 2020

 

$

 

 

$

54.81

 

 

 

1,199

 

 

NYMEX-WTI

 

Note 5. Fair Value Disclosures

Fair Value of Financial Instruments

The carrying amounts reported in our unaudited condensed consolidated balance sheets for cash, accounts receivable and accounts payable approximate their fair values. The carrying amount of debt under our revolving credit facility approximates fair value because the revolving credit facility’s variable interest rate resets frequently and approximates current market rates available to us. We account for our commodity derivative contracts at fair value as discussed in “Assets and Liabilities Measured at Fair Value on a Recurring Basis” below.

Fair Value Measurements

Fair value is the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. GAAP establishes a three-tier fair value hierarchy that is intended to increase consistency and comparability in fair value measurements and related disclosures. The hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). Assets and liabilities recorded in the balance sheet are categorized based on the inputs to the valuation technique as follows:

Level 1 - Financial assets and liabilities for which values are based on unadjusted quoted prices for identical assets or liabilities in an active market that management has the ability to access. We consider active markets to be those in which transactions for the assets or liabilities occur in sufficient frequency and volume to provide pricing information on an on-going basis.

Level 2 - Financial assets and liabilities for which values are based on quoted prices in markets that are not active or model inputs that are observable either directly or indirectly for substantially the full term of the asset or liability. Level 2 instruments primarily include swap, call, put and collar contracts.

Level 3 - Financial assets and liabilities for which values are based on prices or valuation approaches that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect management’s own assumptions about the assumptions a market participant would use in pricing the asset or liability.

When the inputs used to measure fair value fall within different levels of the hierarchy in a liquid environment, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement in its entirety. Changes in the observability of valuation inputs may result in a reclassification for certain financial

14


 

assets or liabilities. We had no transfers in or out of Levels 1, 2 or 3 for the three months ended March 31, 2019, and for the year ended December 31, 2018.

Our estimates of fair value have been determined at discrete points in time based on relevant market data. These estimates involve uncertainty and cannot be determined with precision. There were no material changes in valuation approach or related inputs for the three months ended March 31, 2019, and for the year ended December 31, 2018.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

We account for commodity derivative contracts and their corresponding deferred premiums at fair value on a recurring basis utilizing certain pricing models. Inputs to the pricing models include publicly available prices from a compilation of data gathered from third parties and brokers. We validate the data provided by third parties by understanding the pricing models used, obtaining market values from other pricing sources, analyzing pricing data in certain situations and confirming that those securities trade in active markets. Any deferred premiums associated with its commodity derivative contracts are categorized as Level 3, as we utilize a net present value calculation to determine the valuation. See Note 4 in this section for a summary of our derivative financial instruments.

The following sets forth, by level within the hierarchy, the fair value of our assets and liabilities measured at fair value on a recurring basis as of March 31, 2019, and December 31, 2018:

 

(in thousands)

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Fair Value

 

March 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative financial instruments - asset

 

$

 

 

$

1,360

 

 

$

 

 

$

1,360

 

Derivative financial instruments - liability

 

$

 

 

$

5,617

 

 

$

 

 

$

5,617

 

December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative financial instruments - asset

 

$

 

 

$

8,123

 

 

$

 

 

$

8,123

 

Derivative financial instruments - liability

 

$

 

 

$

39