mcep-10q_20170930.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, 2017

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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. (Check one):

 

Large accelerated filer

 

Accelerated filer

 

 

 

 

 

Non-accelerated filer

(Do not check if a smaller reporting company)

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 14, 2017, the registrant had 30,091,463 common units.

 

 

 

 


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

 

24

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

31

ITEM 4. CONTROLS AND PROCEDURES

 

32

 

 

 

PART II

OTHER INFORMATION

 

 

 

ITEM 1. LEGAL PROCEEDINGS

 

33

ITEM 1A. RISK FACTORS

 

33

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

 

33

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

33

ITEM 4. MINE SAFETY DISCLOSURES

 

33

ITEM 5. OTHER INFORMATION

 

33

ITEM 6. EXHIBITS

 

34

 

 

 

Signatures

 

35

 

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 or continued low or further declining 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;

 

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, 2016 (“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. We also make available on our website the Interactive Data Files required to be submitted and posted pursuant to Rule 405 of Regulation S-T.

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, 2017

 

 

December 31, 2016

 

ASSETS

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

2,588

 

 

$

2,359

 

Accounts receivable

 

 

 

 

 

 

 

 

Oil and natural gas sales

 

 

4,605

 

 

 

5,302

 

Other

 

 

83

 

 

 

233

 

Derivative financial instruments

 

 

42

 

 

 

 

Prepaids and other

 

 

149

 

 

 

512

 

Total current assets

 

 

7,467

 

 

 

8,406

 

Property and equipment

 

 

 

 

 

 

 

 

Proved oil and natural gas properties, successful efforts method

 

 

454,566

 

 

 

441,479

 

Other property and equipment

 

 

852

 

 

 

289

 

Accumulated depletion, depreciation, amortization and impairment

 

 

(212,922

)

 

 

(176,551

)

Total property and equipment, net

 

 

242,496

 

 

 

265,217

 

Derivative financial instruments

 

 

187

 

 

 

 

Other assets

 

 

1,640

 

 

 

2,663

 

Total assets

 

$

251,790

 

 

$

276,286

 

 

 

 

 

 

 

 

 

 

LIABILITIES, CONVERTIBLE PREFERRED UNITS AND EQUITY

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

 

 

 

 

 

 

 

Trade

 

$

532

 

 

$

256

 

Related parties

 

 

3,759

 

 

 

3,431

 

Derivative financial instruments

 

 

784

 

 

 

5,314

 

Accrued liabilities

 

 

897

 

 

 

146

 

Total current liabilities

 

 

5,972

 

 

 

9,147

 

Derivative financial instruments

 

 

 

 

 

2,495

 

Long-term debt

 

 

122,000

 

 

 

122,000

 

Other long term liabilities

 

 

75

 

 

 

93

 

Asset retirement obligations

 

 

12,384

 

 

 

11,331

 

Commitments and contingencies

 

 

 

 

 

 

 

 

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

 

 

20,253

 

 

 

19,570

 

Equity, per accompanying statements

 

 

 

 

 

 

 

 

Partnership equity

 

 

 

 

 

 

 

 

General partner interest

 

 

(470

)

 

 

(248

)

Limited partners - 30,091,463 and 29,912,230 units issued and outstanding,

   respectively

 

 

91,576

 

 

 

111,898

 

Total equity

 

 

91,106

 

 

 

111,650

 

Total liabilities, convertible preferred units and equity

 

$

251,790

 

 

$

276,286

 

 

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,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Oil sales

 

$

13,731

 

 

$

14,012

 

 

$

42,343

 

 

$

39,565

 

Natural gas sales

 

 

233

 

 

 

398

 

 

 

917

 

 

 

891

 

(Loss) gain on derivatives, net

 

 

(2,749

)

 

 

(444

)

 

 

2,916

 

 

 

(7,964

)

Total revenues

 

 

11,215

 

 

 

13,966

 

 

 

46,176

 

 

 

32,492

 

Operating costs and expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lease operating expenses

 

 

6,122

 

 

 

5,709

 

 

 

16,695

 

 

 

17,551

 

Oil and natural gas production taxes

 

 

857

 

 

 

753

 

 

 

2,366

 

 

 

2,077

 

Impairment of proved oil and natural gas properties

 

 

4,850

 

 

 

 

 

 

22,522

 

 

 

895

 

Impairment of proved oil and natural gas properties sold

 

 

 

 

 

 

 

 

 

 

 

3,578

 

Depreciation, depletion and amortization

 

 

4,350

 

 

 

5,665

 

 

 

13,850

 

 

 

17,550

 

Accretion of discount on asset retirement obligations

 

 

142

 

 

 

127

 

 

 

386

 

 

 

443

 

General and administrative

 

 

1,188

 

 

 

1,715

 

 

 

4,485

 

 

 

5,281

 

Total operating costs and expenses

 

 

17,509

 

 

 

13,969

 

 

 

60,304

 

 

 

47,375

 

Loss on sales of oil and natural gas properties, net

 

 

 

 

 

(530

)

 

 

 

 

 

(517

)

Loss from operations

 

 

(6,294

)

 

 

(533

)

 

 

(14,128

)

 

 

(15,400

)

Other (expense) income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

3

 

 

 

4

 

 

 

8

 

 

 

9

 

Interest expense

 

 

(1,626

)

 

 

(1,728

)

 

 

(4,615

)

 

 

(5,981

)

Other income (expense)

 

 

4

 

 

 

(164

)

 

 

70

 

 

 

(131

)

Loss on settlements of asset retirement obligations

 

 

(8

)

 

 

 

 

 

(13

)

 

 

 

Total other expense

 

 

(1,627

)

 

 

(1,888

)

 

 

(4,550

)

 

 

(6,103

)

Net loss

 

 

(7,921

)

 

 

(2,421

)

 

 

(18,678

)

 

 

(21,503

)

Less: Distributions to preferred unitholders

 

 

783

 

 

 

440

 

 

 

2,275

 

 

 

440

 

Less: General partner's interest in net loss

 

 

(94

)

 

 

(29

)

 

 

(222

)

 

 

(256

)

Limited partners' interest in net loss

 

$

(8,610

)

 

$

(2,832

)

 

$

(20,731

)

 

$

(21,687

)

Limited partners' interest in net loss per unit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

$

(0.29

)

 

$

(0.09

)

 

$

(0.69

)

 

$

(0.73

)

Weighted average limited partner units outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Limited partner units (basic and diluted)

 

 

30,042

 

 

 

29,868

 

 

 

29,972

 

 

 

29,807

 

 

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,

 

 

 

2017

 

 

2016

 

Cash Flows from Operating Activities

 

 

 

 

 

 

 

 

Net loss

 

$

(18,678

)

 

$

(21,503

)

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

 

 

 

 

 

 

 

 

Depreciation, depletion and amortization

 

 

13,850

 

 

 

17,550

 

Debt issuance costs amortization

 

 

1,023

 

 

 

1,019

 

Accretion of discount on asset retirement obligations

 

 

386

 

 

 

443

 

Impairment of proved oil and natural gas properties

 

 

22,522

 

 

 

895

 

Impairment of proved oil and natural gas properties sold

 

 

 

 

 

3,578

 

Loss on settlements of asset retirement obligations

 

 

13

 

 

 

 

Cash paid for settlements of asset retirement obligations

 

 

(30

)

 

 

 

Mark to market on derivatives

 

 

 

 

 

 

 

 

(Gain) loss on derivatives, net

 

 

(2,916

)

 

 

7,964

 

Cash settlements received for matured derivatives

 

 

524

 

 

 

18,467

 

Cash settlements received from early termination of derivatives

 

 

147

 

 

 

5,820

 

Cash premiums paid for derivatives

 

 

(5,009

)

 

 

(3,766

)

Loss on sale of oil and natural gas properties

 

 

 

 

 

517

 

Non-cash equity-based compensation

 

 

409

 

 

 

961

 

Changes in operating assets and liabilities

 

 

 

 

 

 

 

 

Accounts receivable

 

 

697

 

 

 

(160

)

Other receivables

 

 

150

 

 

 

4,805

 

Prepaids and other

 

 

363

 

 

 

326

 

Accounts payable - trade and accrued liabilities

 

 

1,009

 

 

 

80

 

Accounts payable - related parties

 

 

(557

)

 

 

(1,368

)

Net cash provided by operating activities

 

 

13,903

 

 

 

35,628

 

Cash Flows from Investing Activities

 

 

 

 

 

 

 

 

Acquisitions of oil and natural gas properties

 

 

(4,668

)

 

 

(19,055

)

Additions to oil and natural gas properties

 

 

(7,281

)

 

 

(5,111

)

Additions to other property and equipment

 

 

(133

)

 

 

(124

)

Proceeds from sale of oil and natural gas properties

 

 

 

 

 

17,312

 

Net cash used in investing activities

 

 

(12,082

)

 

 

(6,978

)

Cash Flows from Financing Activities

 

 

 

 

 

 

 

 

Proceeds from line of credit

 

 

6,000

 

 

 

 

Payments on line of credit

 

 

(6,000

)

 

 

(52,100

)

Offering costs

 

 

(92

)

 

 

(16

)

Debt issuance costs

 

 

 

 

 

(9

)

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

 

 

 

 

 

24,975

 

Distributions to Class A convertible preferred units

 

 

(1,500

)

 

 

 

Net cash used in financing activities

 

 

(1,592

)

 

 

(27,150

)

Net increase in cash and cash equivalents

 

 

229

 

 

 

1,500

 

Beginning cash and cash equivalents

 

 

2,359

 

 

 

615

 

Ending cash and cash equivalents

 

$

2,588

 

 

$

2,115

 

 

 

 

 

 

 

 

 

 

 

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, 2016

 

$

(248

)

 

 

29,912

 

 

$

111,898

 

 

$

111,650

 

Equity-based compensation

 

 

 

 

 

179

 

 

 

409

 

 

 

409

 

Distributions to Class A convertible preferred units

 

 

 

 

 

 

 

 

(1,500

)

 

 

(1,500

)

Accretion of beneficial conversion feature of Class A convertible preferred units

 

 

 

 

 

 

 

 

(775

)

 

 

(775

)

Net loss

 

 

(222

)

 

 

 

 

 

(18,456

)

 

 

(18,678

)

Balance, September 30, 2017

 

$

(470

)

 

 

30,091

 

 

$

91,576

 

 

$

91,106

 

 

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, exploitation and development of producing oil and natural gas properties in North America, with a focus on enhanced oil recovery (“EOR”). Our common units representing limited partner interests in us (“common units”) are listed on the National Association of Securities Dealers Automated Quotation System Global Select Market (“NASDAQ”) under the symbol “MCEP.” 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, 2016, 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

Certain amounts in the financial statements for the prior years have been reclassified to conform to the 2017 presentation. These reclassifications have no impact on previously reported total assets, total liabilities, net income (loss) or total operating cash flows.

Non-cash Investing, Financing and Supplemental Cash Flow Information

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

 

 

 

Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

 

 

(in thousands)

 

Non-cash investing information

 

 

 

 

 

 

 

 

Change in oil and natural gas properties - accrued

 

$

885

 

 

$

(513

)

Change in oil and natural gas properties - accrued receivable, acquisition post-close

 

$

 

 

$

(419

)

Change in oil and natural gas properties - accrued receivable, divestiture post-close

 

$

 

 

$

(354

)

Change in other property and equipment - accrued

 

$

 

 

$

14

 

Change in other property and equipment - tenant improvement allowance

 

$

 

 

$

124

 

Non-cash financing information

 

 

 

 

 

 

 

 

Change in Class A Preferred Units - accrued offering costs

 

$

 

 

$

(302

)

Supplemental cash flow information

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

3,566

 

 

$

5,063

 

 

 

9


Note 2. Acquisitions and Divestitures

Acquisitions

Acquisitions are accounted for under the acquisition method of accounting. The assets acquired and liabilities assumed in acquisitions are 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 are included in our unaudited condensed consolidated statements of operations.

Permian Bolt-On

In August 2016, we acquired multiple oil and natural gas properties located in Nolan County, Texas (the “Permian Bolt-On”) for cash consideration of approximately $18.7 million, after post-closing purchase price adjustments. The transaction was funded by a private offering of $25.0 million Class A Convertible Preferred Units (“Class A Preferred Units”). See Note 9 in this section for additional information regarding the issuance of the Class A Preferred Units. For the three months and nine months ended September 30, 2017, our unaudited condensed consolidated statements of operations included revenues of approximately $2.0 million and approximately $6.2 million, respectively, and expenses of approximately $1.4 million and approximately $4.3 million, respectively, related to the oil and natural gas properties acquired. For the three and nine months ended September 30, 2016, our unaudited condensed consolidated statements of operations included revenues of approximately $0.8 million and expenses of approximately $0.7 million related to the oil and natural gas properties acquired. 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

 

$

19,323

 

Total assets acquired

 

 

19,323

 

Fair value of net liabilities assumed

 

 

 

 

Asset retirement obligation

 

 

622

 

Net assets acquired

 

$

18,701

 

Wheatland

In June 2017, we acquired multiple oil and natural gas properties located in Oklahoma County and Cleveland County, Oklahoma (“Wheatland”) for cash consideration of approximately $4.2 million, prior to post-closing purchase price adjustments. For the three months ended September 30, 2017, our unaudited condensed consolidated statements of operations included revenues of approximately $0.6 million and expenses of approximately $0.4 million related to the oil and natural gas properties acquired. For the nine months ended September 30, 2017, our unaudited condensed consolidated statements of operations included revenues of approximately $0.7 million and expenses of approximately $0.5 million related to the oil and natural gas properties acquired. 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

 

$

4,465

 

Other property and equipment

 

 

127

 

Total assets acquired

 

 

4,592

 

Fair value of net liabilities assumed

 

 

 

 

Asset retirement obligation

 

 

407

 

Net assets acquired

 

$

4,185

 

 

Divestitures

Hugoton

In July 2016, we sold the properties located in our Hugoton core area for cash proceeds of approximately $17.6 million, including post-closing purchase price adjustments and recognized a loss of approximately $0.6 million. Additionally, we recorded impairment of proved oil and natural gas properties of approximately $3.6 million when these properties were originally reported as held for sale. For the three months ended September 30, 2016, our unaudited condensed consolidated statements of operations included revenues of approximately $0.6 million and expenses of approximately $0.6 million related to the oil and natural gas properties sold. For the nine months ended September 30, 2016, our unaudited condensed consolidated statements of operations included revenues of approximately $3.6 million and expenses of approximately $7.7

10


million related to the oil and natural gas properties sold. Effective at closing, the operations and cash flows of these properties were eliminated from the ongoing operations of the Partnership and the Partnership has no continuing involvement in these properties. This divestiture did not represent a strategic shift and did not have a major effect on the Partnership’s operations or financial results.

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”). We account for unrestricted, restricted and equity-settled phantom unit awards as equity awards since they are settled by issuing common units. 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.

On January 1, 2017, we adopted ASU 2016-09 Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”) and elected to recognize forfeitures of equity awards as they occur. The cumulative effect of adopting ASU 2016-09 was determined to be immaterial and no adjustment to retained earnings was made.

The following table shows the number of existing awards and awards available under the Long-Term Incentive Program at September 30, 2017:

 

 

 

Number of

Common Units

 

Approved and authorized awards

 

 

3,514,000

 

Unrestricted units granted

 

 

(1,212,706

)

Restricted units granted, net of forfeitures

 

 

(400,424

)

Equity-settled phantom units granted, net of forfeitures

 

 

(483,000

)

Awards available for future grant

 

 

1,417,870

 

 

We recognized approximately $0.1 million and $0.4 million of total equity-based compensation expense for the three and nine months ended September 30, 2017, respectively, and we recognized approximately $0.3 million and $1.0 million of total equity-based compensation expense for the three and nine months ended September 30, 2016, 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, 2017, we granted 25,400 unrestricted units with an average grant date fair value of $2.65 per unit. During the nine months ended September 30, 2016, we granted 73,932 unrestricted units with an average grant date fair value of $1.20 per unit.

11


Restricted Unit Awards

Restricted units vest over a two- or three-year period. As of September 30, 2017, there were approximately $0.01 million of unrecognized compensation costs related to non-vested restricted units. These costs are expected to be recognized over a weighted average period of approximately four months.

A summary of our restricted unit awards for the nine months ended September 30, 2017, is presented below:

 

 

 

Number of

Restricted Units

 

 

Average Grant Date

Fair Value per Unit

 

Outstanding at December 31, 2016

 

 

76,922

 

 

$

5.67

 

Units granted

 

 

 

 

 

 

Units vested

 

 

(69,560

)

 

 

5.76

 

Units forfeited

 

 

 

 

 

 

Outstanding at September 30, 2017

 

 

7,362

 

 

$

4.88

 

Equity-Settled Phantom Unit Awards

Equity-settled phantom units vest over a two- or three-year period 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, 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. During the nine months ended September 30, 2016, we granted 347,500 equity-settled phantom units with one-third vesting immediately and the other two-thirds vesting over two years and 27,000 equity-settled phantom awards with a three-year vesting period. As of September 30, 2017, there were approximately $0.2 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 approximately thirteen months.

A summary of our equity-settled phantom unit awards for the nine months ended September 30, 2017, is presented below:

 

 

 

Number of

Equity-

Settled

Phantom Units

 

 

Average

Grant Date

Fair Value per

Unit

 

Outstanding at December 31, 2016

 

 

287,659

 

 

$

1.64

 

Units granted

 

 

41,500

 

 

 

1.60

 

Units vested

 

 

(153,833

)

 

 

1.70

 

Units forfeited

 

 

(16,000

)

 

 

2.83

 

Outstanding at September 30, 2017

 

 

159,326

 

 

$

1.48

 

 

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 and specific delivery points. 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. These contracts are presented as derivative financial instruments on our unaudited condensed consolidated financial statements. 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.

12


At September 30, 2017, our commodity derivative contracts were in a net liability position with a fair value of approximately $0.6 million and at December 31, 2016, a net liability position with a fair value of approximately $7.8 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 September 30, 2017, 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, 2017, and December 31, 2016:

 

 

 

Gross

Amounts

Recognized

 

 

Gross Amounts

Offset in the

Unaudited

Condensed

Consolidated

Balance Sheets

 

 

Net Amounts

Presented in

the Unaudited

Condensed

Consolidated

Balance Sheets

 

 

 

(in thousands)

 

September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

Derivative financial instruments - current asset

 

$

266

 

 

$

(224

)

 

$

42

 

Derivative financial instruments - long-term asset

 

 

627

 

 

 

(440

)

 

 

187

 

Total

 

 

893

 

 

 

(664

)

 

 

229

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Derivative financial instruments - current liability

 

 

(769

)

 

 

(15

)

 

 

(784

)

Derivative deferred premium - current liability

 

 

(239

)

 

 

239

 

 

 

 

Derivative financial instruments - long-term liability

 

 

(239

)

 

 

239

 

 

 

 

Derivative deferred premium - long-term liability

 

 

(201

)

 

 

201

 

 

 

 

Total

 

 

(1,448

)

 

 

664

 

 

 

(784

)

Net Liability

 

$

(555

)

 

$

 

 

$

(555

)

 

 

 

Gross

Amounts

Recognized

 

 

Gross Amounts

Offset in the

Unaudited

Condensed

Consolidated

Balance Sheets

 

 

Net Amounts

Presented in

the Unaudited

Condensed

Consolidated

Balance Sheets

 

 

 

(in thousands)

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

Derivative financial instruments - current asset

 

$

1,570

 

 

$

(1,570

)

 

$

 

Derivative financial instruments - long-term asset

 

 

406

 

 

 

(406

)

 

 

 

Total

 

 

1,976

 

 

 

(1,976

)

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Derivative financial instruments - current liability

 

 

(1,836

)

 

 

(3,478

)

 

 

(5,314

)

Derivative deferred premium - current liability

 

 

(5,048

)

 

 

5,048

 

 

 

 

Derivative financial instruments - long-term liability

 

 

(2,500

)

 

 

5

 

 

 

(2,495

)

Derivative deferred premium - long-term liability

 

 

(401

)

 

 

401

 

 

 

 

Total

 

 

(9,785

)

 

 

1,976

 

 

 

(7,809

)

Net Liability

 

$

(7,809

)

 

$

 

 

$

(7,809

)

 

13


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

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

 

(in thousands)

 

Net settlements on matured derivatives(1)

 

$

323

 

 

$

1,182

 

 

$

524

 

 

$

18,467

 

Net settlements on early terminations of derivatives(1)

 

 

147

 

 

 

5,820

 

 

 

147

 

 

 

5,820

 

Net change in fair value of derivatives

 

 

(3,219

)

 

 

(7,446

)

 

 

2,245

 

 

 

(32,251

)

Total (loss) gain on derivatives, net

 

$

(2,749

)

 

$

(444

)

 

$

2,916

 

 

$

(7,964

)

 

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

At September 30, 2017, and December 31, 2016, our commodity derivative contracts had maturities at various dates through December 2019 and were comprised of commodity price swap, put and collar contracts. At September 30, 2017, we had the following oil derivatives net positions:

 

Period Covered

 

Weighted

Average

Floor Price

 

 

Weighted

Average

Ceiling Price

 

 

Total Bbls

Hedged/day

 

 

NYMEX

Index

Swaps - 2017

 

$

51.54

 

 

$

-

 

 

 

1,957

 

 

WTI

Collars - 2017

 

$

45.00

 

 

$

52.35

 

 

 

652

 

 

WTI

Swaps - 2018

 

$

50.00

 

 

$

-

 

 

 

164

 

 

WTI

Collars - 2018

 

$

44.38

 

 

$

55.52

 

 

 

1,315

 

 

WTI

Puts - 2018

 

$

45.00

 

 

$

-

 

 

 

164

 

 

WTI

Collars - 2019

 

$

50.00

 

 

$

60.52

 

 

 

427

 

 

WTI

 

At December 31, 2016, we had the following oil derivatives net positions:

 

Period Covered

 

Weighted

Average

Floor Price

 

 

Weighted

Average

Ceiling Price

 

 

Total Bbls

Hedged/day

 

 

NYMEX

Index

Collars - 2017

 

$

43.75

 

 

$

50.68

 

 

 

658

 

 

WTI

Puts - 2017

 

$

50.00