mcep-10q_20200331.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, 2020

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)

 

 

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading symbol

Name of each exchange on which registered

Common Units Representing Limited Partner Interests

MCEP

NASDAQ Global Select Market

Securities registered pursuant to Section 12(g) of the Act: None

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 June 8, 2020, the registrant had 14,311,522 common units outstanding.

 

 

 


EXPLANATORY NOTE

 

Extended Filing Deadline

On March 25, 2020, the SEC issued an order (SEC Release No. 34-88465) granting conditional relief to public companies that are unable to timely comply with their SEC filing obligations as a result of the coronavirus (“COVID-19”) pandemic (the “Order”). We relied on the Order to delay the filing of this Form 10-Q for the quarter ended March 31, 2020, (the “Quarterly Report”) due to circumstances related to COVID-19. Our operations and business have experienced disruption due to the unprecedented conditions surrounding the COVID-19 pandemic, which has resulted in reduced availability of our accounting, financial, legal and other key personnel required to assist in the preparation of the Quarterly Report due to recommended and mandated social quarantining and work from home orders. We have also had to modify our business practices, including employee work locations, travel restrictions and cancellation of physical participation in meetings. These restrictions slowed the preparation and review of our Quarterly Report.


2


 

TABLE OF CONTENTS

 

PART I

FINANCIAL INFORMATION

 

 

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

4

ITEM 1. FINANCIAL STATEMENTS

 

6

Unaudited Condensed Consolidated Balance Sheets

 

6

Unaudited Condensed Consolidated Statements of Operations

 

7

Unaudited Condensed Consolidated Statements of Cash Flows

 

8

Unaudited Condensed Consolidated Statements of Changes in Equity

 

9

Notes to Unaudited Condensed Consolidated Financial Statements

 

10

 

 

 

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

 

25

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

33

ITEM 4. CONTROLS AND PROCEDURES

 

34

 

 

 

PART II

OTHER INFORMATION

 

 

 

ITEM 1. LEGAL PROCEEDINGS

 

34

ITEM 1A. RISK FACTORS

 

34

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

 

37

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

37

ITEM 4. MINE SAFETY DISCLOSURES

 

37

ITEM 5. OTHER INFORMATION

 

37

ITEM 6. EXHIBITS

 

38

 

 

 

Signature

 

40

 

3


 

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:

 

our ability to continue as a going concern;

 

volatility of commodity prices;

 

supply and demand of oil and natural gas;

 

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;

 

our 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;

 

world-wide epidemics, including COVID-19, and the related effects of sheltering in place;

 

competition in the oil and natural gas industry;

 

environmental liabilities;

 

counterparty credit risk;

 

governmental regulation and taxation;

 

compliance with NASDAQ listing requirements;

 

developments in oil and natural gas producing countries, including increases and decreases in supply from Russia and OPEC; 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.

4


 

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, 2019 (“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.

5


 

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, 2020

 

 

December 31, 2019

 

ASSETS

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

213

 

 

$

255

 

Accounts receivable

 

 

4,780

 

 

 

6,853

 

Derivative financial instruments

 

 

15,731

 

 

 

 

Prepaid expenses

 

 

202

 

 

 

87

 

Assets held for sale

 

 

 

 

 

365

 

Total current assets

 

 

20,926

 

 

 

7,560

 

Property and equipment

 

 

 

 

 

 

 

 

Oil and natural gas properties, successful efforts method

 

 

 

 

 

 

 

 

Proved properties

 

 

264,490

 

 

 

261,375

 

Unproved properties

 

 

4,266

 

 

 

3,125

 

Other property and equipment

 

 

1,220

 

 

 

1,262

 

Accumulated depletion, depreciation, amortization and impairment

 

 

(93,472

)

 

 

(72,303

)

Total property and equipment, net

 

 

176,504

 

 

 

193,459

 

Derivative financial instruments

 

 

6,225

 

 

 

730

 

Other assets

 

 

870

 

 

 

1,020

 

Total assets

 

$

204,525

 

 

$

202,769

 

 

 

 

 

 

 

 

 

 

LIABILITIES, CONVERTIBLE PREFERRED UNITS AND EQUITY

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

 

 

 

 

 

 

 

Trade

 

$

630

 

 

$

320

 

Related parties

 

 

1,914

 

 

 

6,902

 

Derivative financial instruments

 

 

 

 

 

1,944

 

Accrued liabilities

 

 

187

 

 

 

795

 

Other current liabilities

 

 

438

 

 

 

430

 

Current debt

 

 

74,000

 

 

 

 

Total current liabilities

 

 

77,169

 

 

 

10,391

 

Long-term debt

 

 

 

 

 

68,000

 

Other long-term liabilities

 

 

344

 

 

 

457

 

Asset retirement obligations

 

 

31,296

 

 

 

30,265

 

Commitments and contingencies

 

 

 

 

 

 

 

 

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

 

 

23,287

 

 

 

22,964

 

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

 

 

14,877

 

 

 

14,829

 

Equity, per accompanying statements

 

 

 

 

 

 

 

 

General partner

 

 

(762

)

 

 

(793

)

Limited partners - 1,557,851 and 1,541,215 units issued and outstanding, respectively

 

 

58,314

 

 

 

56,656

 

Total equity

 

 

57,552

 

 

 

55,863

 

Total liabilities, convertible preferred units and equity

 

$

204,525

 

 

$

202,769

 

 

 

See accompanying notes to condensed consolidated financial statements

6


 

Mid-Con Energy Partners, LP and subsidiaries

Condensed Consolidated Statements of Operations

(in thousands, except per unit data)

(Unaudited)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2020

 

 

2019

 

Revenues

 

 

 

 

 

 

 

 

Oil sales

 

$

12,982

 

 

$

14,594

 

Natural gas sales

 

 

283

 

 

 

250

 

Other operating revenues

 

 

238

 

 

 

372

 

Gain (loss) on derivatives, net

 

 

24,952

 

 

 

(12,198

)

Total revenues

 

 

38,455

 

 

 

3,018

 

Operating costs and expenses

 

 

 

 

 

 

 

 

Lease operating expenses

 

 

8,138

 

 

 

6,830

 

Production and ad valorem taxes

 

 

1,070

 

 

 

1,282

 

Other operating expenses

 

 

584

 

 

 

473

 

Impairment of proved oil and natural gas properties

 

 

18,332

 

 

 

 

Depreciation, depletion and amortization

 

 

2,836

 

 

 

3,098

 

Accretion of discount on asset retirement obligations

 

 

399

 

 

 

328

 

General and administrative

 

 

3,052

 

 

 

2,662

 

Total operating costs and expenses

 

 

34,411

 

 

 

14,673

 

Gain on sales of oil and natural gas properties, net

 

 

 

 

 

9,469

 

Income (loss) from operations

 

 

4,044

 

 

 

(2,186

)

Other (expense) income

 

 

 

 

 

 

 

 

Interest income

 

 

1

 

 

 

8

 

Interest expense

 

 

(1,274

)

 

 

(1,615

)

Other income

 

 

12

 

 

 

5

 

Total other expense

 

 

(1,261

)

 

 

(1,602

)

Net income (loss)

 

 

2,783

 

 

 

(3,788

)

Less: Distributions to preferred unitholders

 

 

1,172

 

 

 

1,149

 

Less: General partner's interest in net income (loss)

 

 

31

 

 

 

(45

)

Limited partners' interest in net income (loss)

 

$

1,580

 

 

$

(4,892

)

Limited partners' interest in net income (loss) per unit

 

 

 

 

 

 

 

 

Basic

 

$

1.02

 

 

$

(3.19

)

Diluted

 

$

0.07

 

 

$

(3.19

)

 

 

 

 

 

 

 

 

 

Weighted average limited partner units outstanding

 

 

 

 

 

 

 

 

Limited partner units (basic)

 

 

1,550

 

 

 

1,532

 

Limited partner units (diluted)

 

 

23,020

 

 

 

1,532

 

 

See accompanying notes to condensed consolidated financial statements

7


 

Mid-Con Energy Partners, LP and subsidiaries

Condensed Consolidated Statements of Cash Flows

(in thousands)

(Unaudited) 

 

 

 

Three Months Ended

March 31,

 

 

 

2020

 

 

2019

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net income (loss)

 

$

2,783

 

 

$

(3,788

)

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

 

 

 

 

 

 

 

 

Depreciation, depletion and amortization

 

 

2,836

 

 

 

3,098

 

Debt issuance costs amortization

 

 

150

 

 

 

178

 

Accretion of discount on asset retirement obligations

 

 

399

 

 

 

328

 

Impairment of proved oil and natural gas properties

 

 

18,332

 

 

 

 

Mark to market on derivatives

 

 

 

 

 

 

 

 

(Gain) loss on derivatives, net

 

 

(24,952

)

 

 

12,198

 

Cash settlements received for matured derivatives, net

 

 

1,783

 

 

 

143

 

Gain on sales of oil and natural gas properties

 

 

 

 

 

(9,469

)

Non-cash equity-based compensation

 

 

78

 

 

 

334

 

Changes in operating assets and liabilities

 

 

 

 

 

 

 

 

Accounts receivable

 

 

2,072

 

 

 

(1,217

)

Prepaid expenses and other assets

 

 

(115

)

 

 

(369

)

Accounts payable - trade and accrued liabilities

 

 

(304

)

 

 

432

 

Accounts payable - related parties

 

 

(3,818

)

 

 

(2,999

)

Net cash used in operating activities

 

 

(756

)

 

 

(1,131

)

Cash flows from investing activities

 

 

 

 

 

 

 

 

Acquisitions of oil and natural gas properties

 

 

(111

)

 

 

(2,796

)

Additions to oil and natural gas properties

 

 

(4,682

)

 

 

(3,057

)

Additions to other property and equipment

 

 

(58

)

 

 

 

Proceeds from sales of oil and natural gas properties

 

 

 

 

 

32,502

 

Proceeds from sale of other assets

 

 

365

 

 

 

 

Net cash (used in) provided by investing activities

 

 

(4,486

)

 

 

26,649

 

Cash flows from financing activities

 

 

 

 

 

 

 

 

Proceeds from line of credit

 

 

6,000

 

 

 

7,000

 

Payments on line of credit

 

 

 

 

 

(32,000

)

Distributions to Class A convertible preferred units

 

 

(500

)

 

 

(500

)

Distributions to Class B convertible preferred units

 

 

(300

)

 

 

(300

)

Net cash provided by (used in) financing activities

 

 

5,200

 

 

 

(25,800

)

Net decrease in cash and cash equivalents

 

 

(42

)

 

 

(282

)

Beginning cash and cash equivalents

 

 

255

 

 

 

467

 

Ending cash and cash equivalents

 

$

213

 

 

$

185

 

 

 

 

 

 

 

 

 

 

See accompanying notes to condensed consolidated financial statements

8


 

Mid-Con Energy Partners, LP and subsidiaries

Condensed Consolidated Statements of Changes in Equity

(in thousands)

(Unaudited)

 

 

 

General

 

 

Limited Partners

 

 

Total

 

Three Months Ended March 31, 2020

 

Partner

 

 

Units

 

 

Amount

 

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2019

 

$

(793

)

 

 

1,541

 

 

$

56,656

 

 

$

55,863

 

Equity-based compensation

 

 

 

 

 

17

 

 

 

78

 

 

 

78

 

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

 

 

 

 

 

 

 

 

(323

)

 

 

(323

)

Accretion of beneficial conversion feature of Class B convertible preferred units

 

 

 

 

 

 

 

 

(49

)

 

 

(49

)

Net income

 

 

31

 

 

 

 

 

 

2,752

 

 

 

2,783

 

Balance, March 31, 2020

 

$

(762

)

 

 

1,558

 

 

$

58,314

 

 

$

57,552

 

 

 

 

 

General

 

 

Limited Partners

 

 

Total

 

Three Months Ended March 31, 2019

 

Partner

 

 

Units

 

 

Amount

 

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2018

 

$

(786

)

 

 

1,522

 

 

$

61,195

 

 

$

60,409

 

Equity-based compensation

 

 

 

 

 

19

 

 

 

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

)

 

 

1,541

 

 

$

56,637

 

 

$

55,806

 

 

See accompanying notes to condensed consolidated financial statements.

9


 

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, 2019, 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.

Liquidity and Going Concern

These financial statements have been prepared on a going concern basis, which contemplates the continuity of normal business activities and the realization of assets and settlement of liabilities in the normal course of business. At March 31, 2020, the Partnership was not in compliance with the leverage ratio covenant of our credit agreement. On June 4, 2020, Amendment 15 to the credit agreement was executed, decreasing the borrowing base of the credit agreement from $95.0 million to $64.0 million, establishing a repayment schedule for the borrowing base deficiency and waiving the March 31, 2020, leverage ratio noncompliance. However, we did not receive a waiver for more than one year from the balance sheet date, resulting in borrowings payable of $74.0 million being classified as current liabilities at March 31, 2020. See Note 14 in this section for additional information on Amendment 15 to the credit agreement. The Partnership’s total current liabilities of $77.2 million exceeded our total current assets of $20.9 million at March 31, 2020. Our ability to continue as a going concern is dependent on the re-negotiation of our revolving credit facility, or other measures such as the sale of assets or raising additional capital. There is no assurance, however, that such discussions will result in a refinancing of the credit facility on acceptable terms, if at all, or provide any specific amount of additional liquidity. These factors raise substantial doubt over the Partnership’s ability to continue as a going concern for at least one year from the date that these financial statements are issued, and therefore, whether we will realize our assets and extinguish our liabilities in the normal course of business and at the amounts stated in the unaudited condensed consolidated financial statements. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty, nor do they include adjustments to reflect the possible future effects of the recoverability and classification of recorded asset amounts and classifications of liabilities that might be necessary should the Partnership be unable to continue as a going concern.

10


 

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)

 

2020

 

 

2019

 

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

 

$

(1,530

)

 

$

58

 

Change in oil and natural gas properties - accrued acquisitions

 

$

360

 

 

$

(954

)

Supplemental cash flow information

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

1,057

 

 

$

1,677

 

 

 

Note 2. Acquisitions, Divestitures and Assets Held for Sale

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.

Assets and liabilities assumed in acquisitions accounted for as business combinations 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. The operations and cash flows of divested properties are eliminated from our ongoing operations.

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 $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 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 for the three months ended March 31, 2019.

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)

 

2020

 

 

2019

 

Oil and natural gas sales

 

$

 

 

$

4,650

 

Expenses(1)

 

$

 

 

$

3,374

 

(1) Expenses include lease operating expenses ("LOE"), production and ad valorem taxes, accretion and depletion.

 

11


 

Assets Held for Sale

On January 23, 2020, we closed the sale of land in Southern Oklahoma for a net cash settlement of $0.4 million. At December 31, 2019, the carrying value of $0.4 million was presented in “Assets held for sale” 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 the voting members of our general partner, 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, 2020:

 

 

 

Number of

Common

Units(1)

 

Approved and authorized awards

 

 

3,514,000

 

Unrestricted units granted

 

 

(1,383,204

)

Restricted units granted, net of forfeitures

 

 

(399,424

)

Equity-settled phantom units granted, net of forfeitures

 

 

(1,445,003

)

Awards available for future grant

 

 

286,369

 

(1) The common units presented above do not reflect the reverse stock split effective April 9, 2020. At March 31, 2020, awards available for future grant on a pro forma adjusted basis were 14,318. See Note 14 in this section for further information regarding the reverse stock split.

 

    

We recognized $0.1 million and $0.3 million of total equity-based compensation expense for the three months ended March 31, 2020 and 2019, 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, 2020, we granted 32,666 unrestricted units with an average grant date fair value of $0.26 per unit. 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.

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, 2020, we did not grant any equity-settled phantom units. 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. As of March 31, 2020, there were $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 twelve months.

12


 

A summary of our equity-settled phantom unit awards for the three months ended March 31, 2020, is presented below:

 

 

 

Number of

Equity-Settled

Phantom Units(1)

 

 

Average Grant Date

Fair Value per Unit

 

Outstanding at December 31, 2019

 

 

570,999

 

 

$

1.25

 

Units vested

 

 

(300,000

)

 

 

1.33

 

Units forfeited

 

 

(45,666

)

 

 

1.16

 

Outstanding at March 31, 2020

 

 

225,333

 

 

$

1.15

 

(1) The equity-settled phantom units presented above do not reflect the reverse stock split effective April 9, 2020. At March 31, 2020, the outstanding number of equity-settled phantom units on a pro forma adjusted basis were 11,267. See Note 14 in this section for further information regarding the reverse stock split.

 

 

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 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, 2020, our commodity derivative contracts were in a net asset position with a fair value of $22.0 million, whereas at December 31, 2019, our commodity derivative contracts were in a net liability position with a fair value of $1.2 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, 2020, all of our counterparties have performed pursuant to the terms of their commodity derivative contracts.

13


 

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, 2020, and December 31, 2019:

 

(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, 2020

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

Derivative financial instruments - current asset

 

$

15,767

 

 

$

(36

)

 

$

15,731

 

Derivative financial instruments - long-term asset

 

 

6,398

 

 

 

(173

)

 

 

6,225

 

Total

 

 

22,165

 

 

 

(209

)

 

 

21,956

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Derivative financial instruments - current liability

 

 

(36

)

 

 

36

 

 

 

 

Derivative financial instruments - long-term liability

 

 

(173

)

 

 

173

 

 

 

 

Total

 

 

(209

)

 

 

209

 

 

 

 

Net asset

 

$

21,956

 

 

$

 

 

$

21,956

 

 

(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, 2019

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

Derivative financial instruments - long-term asset

 

$

1,635

 

 

$

(905

)

 

$

730

 

Total

 

 

1,635

 

 

 

(905

)

 

 

730

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Derivative financial instruments - current liability

 

 

(1,944

)

 

 

 

 

 

(1,944

)

Derivative financial instruments - long-term liability

 

 

(905

)

 

 

905

 

 

 

 

Total

 

 

(2,849

)

 

 

905

 

 

 

(1,944

)

Net liability

 

$

(1,214

)

 

$

 

 

$

(1,214

)

 

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)

 

2020

 

 

2019

 

Net settlements on matured derivatives

 

$

1,783

 

 

$

143

 

Net change in fair value of derivatives

 

 

23,169

 

 

 

(12,341

)

Total gain (loss) on derivatives, net

 

$

24,952

 

 

$

(12,198

)

 

14


 

At March 31, 2020, and December 31, 2019, our commodity derivative contracts had maturities at various dates through December 2021 and were comprised of commodity price swap and collar contracts. At March 31, 2020, we had the following oil derivatives net positions:

 

Period Covered

 

Weighted Average Fixed Price

 

 

Weighted Average Floor Price

 

 

Weighted Average Ceiling Price

 

 

Total Bbls

Hedged/day

 

 

Index

Swaps - 2020

 

$

55.87

 

 

$

 

 

$

 

 

 

1,882

 

 

NYMEX-WTI

Swaps - 2021

 

$

55.78

 

 

$

 

 

$

 

 

 

672

 

 

NYMEX-WTI

Collars - 2021

 

$

 

 

$

52.00

 

 

$

58.80

 

 

 

672

 

 

NYMEX-WTI

 

At December 31, 2019, we had the following oil derivatives net positions:

 

Period Covered

 

Weighted Average Fixed Price

 

 

Weighted Average Floor Price

 

 

Weighted Average Ceiling Price

 

 

Total Bbls

Hedged/day

 

 

Index

Swaps - 2020

 

$

55.81

 

 

$

 

 

$

 

 

 

1,931

 

 

NYMEX-WTI

Swaps - 2021

 

$

55.78

 

 

$

 

 

$

 

 

 

672

 

 

NYMEX-WTI

Collars - 2021

 

$

 

 

$

52.00

 

 

$

58.80

 

 

 

672

 

 

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 assets or liabilities. We had no transfers in or out of Levels 1, 2 or 3 for the three months ended March 31, 2020, and for the year ended December 31, 2019.

15


 

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, 2020, and for the year ended December 31, 2019.

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 our 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, 2020, and December 31, 2019:

 

(in thousands)

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Fair Value

 

March 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative financial instruments - asset

 

$

 

 

$

22,165

 

 

$

 

 

$

22,165

 

Derivative financial instruments - liability

 

$

 

 

$

209

 

 

$

 

 

$

209

 

December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative financial instruments - asset

 

$

 

 

$

1,635

 

 

$

 

 

$

1,635

 

Derivative financial instruments - liability

 

$

 

 

$

2,849

 

 

$

 

 

$

2,849

 

Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis

Asset Retirement Obligations

We estimate the fair value of our asset retirement obligations (“ARO”) based on discounted cash flow projections using numerous estimates, assumptions and judgments regarding such factors as the existence of a legal obligation for ARO, amounts and timing of settlements, the credit-adjusted risk-free rate to be used and inflation rates. See Note 6 in this section for a summary of changes in ARO.

Acquisitions

The estimated fair values of proved oil and natural gas properties acquired in business combinations are based on a discounted cash flow model and market assumptions as to future commodity prices, projections of estimated quantities of oil and natural gas reserves, expectations for timing and amount of future development and operating costs, projections of future rates of production, expected recovery rates and risk-adjusted discount rates at the acquisition date. Based on the unobservable nature of certain of the inputs, the estimated fair value of the oil and natural gas properties acquired is deemed to use Level 3 inputs. See Note 2 in this section for further discussion of our acquisitions.

Reserves

We calculate the estimated fair values of reserves and properties using valuation techniques consistent with the income approach, converting future cash flows to a single discounted amount. Significant inputs used to determine the fair values of proved properties include estimates of reserves, future operating and developmental costs, future commodity prices, a market-based weighted average cost of capital rate and the rate at which future cash flows are discounted to estimate present value. We discount future values by a per annum rate of 10% because we believe this amount approximates our long-term cost of capital and accordingly, is well aligned with our internal business decisions. The underlying commodity prices embedded in our estimated cash flows begin with Level 1 NYMEX-WTI forward curve pricing, less Level 3 assumptions that include location, pricing adjustments and quality differentials.

Impairment

The need to test oil and natural gas assets for impairment may result from significant declines in sales prices or downward revisions in estimated quantities of oil and natural gas reserves. If the carrying value of the long-lived assets exceeds the estimated undiscounted future net cash flows, an impairment expense is recognized for the difference between the estimated

16


 

fair value and the carrying value of the assets. Due to the unprecedented decline in oil prices, we recorded impairment expense of $18.3 million for the three months ended March 31, 2020. There was no impairment expense for the three months ended March 31, 2019.

Note 6. Asset Retirement Obligations

We have obligations under our lease agreements and federal regulations to remove equipment and restore land at the end of oil and natural gas operations. These ARO are primarily associated with plugging and abandoning wells. We typically incur this liability upon acquiring or successfully drilling a well and determine our ARO by calculating the present value of estimated cash flow related to the estimated future liability. Determining the removal and future restoration obligation requires management to make estimates and judgments, including the ultimate settlement amounts, inflation factors, credit-adjusted risk-free rates, timing of settlement and changes in the legal, regulatory, environmental and political environments. We are required to record the fair value of a liability for the ARO in the period in which it is incurred with a corresponding increase in the carrying amount of the related long-lived asset. We review our assumptions and estimates of future ARO on an annual basis, or more frequently, if an event or circumstances occur that would impact our assumptions. To the extent future revisions to these assumptions impact the present value of the abandonment liability, management will make corresponding adjustments to both the ARO and the related oil and natural gas property asset balance. The liability is accreted each period toward its future value and is recorded in our unaudited condensed consolidated statements of operations. The discounted capitalized cost is amortized to expense through the depreciation calculation over the life of the assets based on proved developed reserves. Upon settlement of the liability, a gain or loss is recognized to the extent the actual costs differ from the recorded liability.

As of March 31, 2020, and December 31, 2019, our ARO were reported as asset retirement obligations in our unaudited condensed consolidated balance sheets. Changes in our ARO for the periods indicated are presented in the following table:

 

(in thousands)

 

Three Months Ended

March 31, 2020

 

 

Year Ended

December 31, 2019

 

Asset retirement obligations - beginning of period

 

$

30,265

 

 

$

26,001

 

Liabilities incurred for new wells and interest

 

 

632

 

 

 

8,840

 

Liabilities settled upon plugging and abandoning wells

 

 

 

 

 

(24

)

Liabilities removed upon sale of wells

 

 

 

 

 

(5,795

)

Revision of estimates

 

 

 

 

 

(353

)

Accretion expense

 

 

399

 

 

 

1,596

 

Asset retirement obligations - end of period

 

$

31,296

 

 

$

30,265

 

 

Note 7. Debt

We had outstanding borrowings under our revolving credit facility of $74.0 million and $68.0 million at March 31, 2020, and December 31, 2019, respectively. Our current revolving credit facility matures in May 2021. Borrowings under the facility are secured by liens on not less than 90% of the value of our proved reserves. As of March 31, 2020, we were not in compliance with our leverage ratio covenant, which was waived in Amendment 15 to the credit agreement, executed June 4, 2020. See Note 14 in this section for further information on Amendment 15 to the credit agreement.

The borrowing base of our revolving credit facility is collectively determined by our lenders based on the value of our proved oil and natural gas reserves using assumptions regarding future prices, costs and other variables. The borrowing base is subject to scheduled redeterminations in the spring and fall of each year with an additional redetermination, either at our request or at the request of the lenders, during the period between each scheduled borrowing base redetermination. An additional borrowing base redetermination may be made at the request of the lenders in connection with a material disposition of our properties or a material liquidation of a hedge contract. Our spring 2020 redetermination was finalized in June 2020. The next regularly scheduled semi-annual redetermination is expected to be completed in the fall of 2020.

At March 31, 2020, borrowings under the revolving credit facility bore interest at a floating rate based on, at our election, the greater of the prime rate of Wells Fargo Bank, National Association, the federal funds effective rate plus 0.50% and the one month adjusted London Interbank Offered Rate (“LIBOR”) plus 1.0%, all of which are subject to a margin that varies from 1.75% to 2.75% per annum according to the borrowing base usage (which is the ratio of outstanding borrowings and letters of credit to the borrowing base then in effect), or the applicable LIBOR plus a margin that varies from 2.75% to 3.75% per annum according to the borrowing base usage. For the three months ended March 31, 2020, the average effective rate was 5.19%. Any

17


 

unused portion of the borrowing base is subject to a commitment fee of 0.50% per annum. Letters of credit are subject to a letter of credit fee that varies from 2.75% to 3.75% according to usage.

We may use borrowings under the revolving credit facility for acquiring and developing oil and natural gas properties, for working capital purposes, for general partnership purposes and for funding distributions to our unitholders. The revolving credit facility includes customary affirmative and negative covenants, such as limitations on the creation of new indebtedness and on certain liens, and restrictions on certain transactions and payments, including distributions, and requires us to maintain hedges covering projected production. If we fail to perform our obligations under these and other covenants, the revolving credit commitments may be terminated and any outstanding indebtedness under the credit agreement, together with accrued interest, could be declared immediately due and payable.

On March 28, 2019, in conjunction with closing the Strategic Transaction and serving as our spring redetermination, Amendment 13 to the credit agreement was executed, decreasing our borrowing base to $110.0 million. The amendment also required that the leverage ratio be calculated on a building, period-annualized basis, beginning the second quarter of 2019. See Note 2 in this section for further discussion of the Strategic Transaction.

On December 6, 2019, Amendment 14 to the credit agreement was executed, decreasing the borrowing base of the Partnership’s revolving credit facility to $95.0 million. The amendment also extended the maturity date of the revolving credit facility to May 1, 2021, and provided for a benchmark rate replacement to address the transition of LIBOR in 2021. Under the terms of the amendment, the Partnership is required to have a Consolidated Funded Indebtedness to Consolidated EBITDAX of less than 3.0 to 1.0 to make any borrowings above the borrowing cap of $85.0 million, and must maintain a maximum Leverage Ratio of Consolidated Funded Indebtedness to Consolidated EBITDAX that does not exceed:

 

4.0 to 1.0 for the quarter ending December 31, 2019,

 

3.75 to 1.0 for the quarter ending March 31, 2020, and