mcep-10q_20200630.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 June 30, 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 800

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 August 10, 2020, the registrant had 14,311,522 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

 

10

 

 

 

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

 

24

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

33

ITEM 4. CONTROLS AND PROCEDURES

 

33

 

 

 

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

 

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

 

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:

 

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 Global Select Market (“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.

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, 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.

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)

 

 

 

 

 

 

June 30, 2020

 

 

December 31, 2019

 

ASSETS

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

987

 

 

$

255

 

Accounts receivable

 

 

4,026

 

 

 

6,853

 

Derivative financial instruments

 

 

8,924

 

 

 

 

Prepaid expenses

 

 

261

 

 

 

87

 

Assets held for sale

 

 

 

 

 

365

 

Total current assets

 

 

14,198

 

 

 

7,560

 

Property and equipment

 

 

 

 

 

 

 

 

Oil and natural gas properties, successful efforts method

 

 

 

 

 

 

 

 

Proved properties

 

 

264,755

 

 

 

261,375

 

Unproved properties

 

 

4,290

 

 

 

3,125

 

Other property and equipment

 

 

1,060

 

 

 

1,262

 

Accumulated depletion, depreciation, amortization and impairment

 

 

(96,505

)

 

 

(72,303

)

Total property and equipment, net

 

 

173,600

 

 

 

193,459

 

Derivative financial instruments

 

 

3,320

 

 

 

730

 

Other assets

 

 

1,932

 

 

 

1,020

 

Total assets

 

$

193,050

 

 

$

202,769

 

 

 

 

 

 

 

 

 

 

LIABILITIES, CONVERTIBLE PREFERRED UNITS AND EQUITY

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

 

 

 

 

 

 

 

Trade

 

$

1,018

 

 

$

320

 

Related parties

 

 

2,029

 

 

 

6,902

 

Derivative financial instruments

 

 

 

 

 

1,944

 

Accrued liabilities

 

 

2,599

 

 

 

795

 

Other current liabilities

 

 

446

 

 

 

430

 

Current debt

 

 

73,250

 

 

 

 

Total current liabilities

 

 

79,342

 

 

 

10,391

 

Long-term debt

 

 

 

 

 

68,000

 

Other long-term liabilities

 

 

230

 

 

 

457

 

Asset retirement obligations

 

 

31,734

 

 

 

30,265

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Class A convertible preferred units - 0 and 11,627,906 issued and outstanding, respectively

 

 

 

 

 

22,964

 

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

 

 

 

 

 

14,829

 

Equity, per accompanying statements

 

 

 

 

 

 

 

 

General partner

 

 

 

 

 

(793

)

Limited partners - 14,311,522 and 1,541,215 units issued and outstanding, respectively

 

 

81,744

 

 

 

56,656

 

Total equity

 

 

81,744

 

 

 

55,863

 

Total liabilities, convertible preferred units and equity

 

$

193,050

 

 

$

202,769

 

 

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

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Oil sales

 

$

5,639

 

 

$

16,792

 

 

$

18,621

 

 

$

31,386

 

Natural gas sales

 

 

81

 

 

 

397

 

 

 

364

 

 

 

647

 

Other operating revenues

 

 

83

 

 

 

340

 

 

 

321

 

 

 

712

 

(Loss) gain on derivatives, net

 

 

(4,511

)

 

 

3,396

 

 

 

20,441

 

 

 

(8,802

)

Total revenues

 

 

1,292

 

 

 

20,925

 

 

 

39,747

 

 

 

23,943

 

Operating costs and expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lease operating expenses

 

 

5,378

 

 

 

7,587

 

 

 

13,516

 

 

 

14,417

 

Production and ad valorem taxes

 

 

178

 

 

 

1,469

 

 

 

1,248

 

 

 

2,751

 

Other operating expenses

 

 

292

 

 

 

417

 

 

 

876

 

 

 

890

 

Impairment of proved oil and natural gas properties

 

 

1,215

 

 

 

204

 

 

 

19,547

 

 

 

204

 

Depreciation, depletion and amortization

 

 

1,819

 

 

 

2,369

 

 

 

4,655

 

 

 

5,467

 

Accretion of discount on asset retirement obligations

 

 

439

 

 

 

417

 

 

 

838

 

 

 

745

 

General and administrative

 

 

2,728

 

 

 

2,348

 

 

 

5,780

 

 

 

5,010

 

Total operating costs and expenses

 

 

12,049

 

 

 

14,811

 

 

 

46,460

 

 

 

29,484

 

Gain on sales of oil and natural gas properties, net

 

 

 

 

 

223

 

 

 

 

 

 

9,692

 

(Loss) income from operations

 

 

(10,757

)

 

 

6,337

 

 

 

(6,713

)

 

 

4,151

 

Other (expense) income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

 

 

 

1

 

 

 

1

 

 

 

9

 

Interest expense

 

 

(1,094

)

 

 

(1,229

)

 

 

(2,368

)

 

 

(2,844

)

Other (expense) income

 

 

(59

)

 

 

44

 

 

 

(47

)

 

 

49

 

Loss on settlements of asset retirement obligations

 

 

(15

)

 

 

(56

)

 

 

(15

)

 

 

(56

)

Total other expense

 

 

(1,168

)

 

 

(1,240

)

 

 

(2,429

)

 

 

(2,842

)

Net (loss) income

 

 

(11,925

)

 

 

5,097

 

 

 

(9,142

)

 

 

1,309

 

Less: Distributions to preferred unitholders

 

 

 

 

 

1,157

 

 

 

1,172

 

 

 

2,306

 

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

 

 

(31

)

 

 

60

 

 

 

 

 

 

15

 

Limited partners' interest in net (loss) income

 

$

(11,894

)

 

$

3,880

 

 

$

(10,314

)

 

$

(1,012

)

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(2.29

)

 

$

2.53

 

 

$

(3.06

)

 

$

(0.66

)

Diluted

 

$

(2.29

)

 

$

1.47

 

 

$

(3.06

)

 

$

(0.66

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average limited partner units outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Limited partner units (basic)

 

 

5,202

 

 

 

1,539

 

 

 

3,376

 

 

 

1,535

 

Limited partner units (diluted)

 

 

5,202

 

 

 

2,659

 

 

 

3,376

 

 

 

1,535

 

 

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) 

 

 

 

Six Months Ended

June 30,

 

 

 

2020

 

 

2019

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(9,142

)

 

$

1,309

 

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

 

 

 

 

 

 

 

 

Depreciation, depletion and amortization

 

 

4,655

 

 

 

5,467

 

Debt issuance costs amortization

 

 

328

 

 

 

356

 

Accretion of discount on asset retirement obligations

 

 

838

 

 

 

745

 

Impairment of proved oil and natural gas properties

 

 

19,547

 

 

 

204

 

Loss on settlements of asset retirement obligations

 

 

15

 

 

 

56

 

Cash paid for settlements of asset retirement obligations

 

 

(21

)

 

 

(72

)

Mark to market on derivatives

 

 

 

 

 

 

 

 

(Gain) loss on derivatives, net

 

 

(20,441

)

 

 

8,802

 

Cash settlements received (paid) for matured derivatives, net

 

 

6,984

 

 

 

(586

)

Gain on sales of oil and natural gas properties

 

 

 

 

 

(9,692

)

Non-cash equity-based compensation

 

 

271

 

 

 

456

 

Changes in operating assets and liabilities

 

 

 

 

 

 

 

 

Accounts receivable

 

 

2,827

 

 

 

(2,441

)

Prepaid expenses and other assets

 

 

(1,103

)

 

 

(254

)

Accounts payable - trade and accrued liabilities

 

 

319

 

 

 

434

 

Accounts payable - related parties

 

 

(3,143

)

 

 

(293

)

Net cash provided by operating activities

 

 

1,934

 

 

 

4,491

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

Acquisitions of oil and natural gas properties

 

 

(111

)

 

 

(3,262

)

Additions to oil and natural gas properties

 

 

(5,526

)

 

 

(5,085

)

Additions to other property and equipment

 

 

(69

)

 

 

 

Proceeds from sales of oil and natural gas properties

 

 

 

 

 

32,514

 

Proceeds from sale of other assets

 

 

365

 

 

 

 

Net cash (used in) provided by investing activities

 

 

(5,341

)

 

 

24,167

 

Cash flows from financing activities

 

 

 

 

 

 

 

 

Proceeds from line of credit

 

 

6,000

 

 

 

7,000

 

Payments on line of credit

 

 

(750

)

 

 

(34,000

)

Debt issuance costs

 

 

(311

)

 

 

 

Distributions to Class A convertible preferred units

 

 

(500

)

 

 

(1,000

)

Distributions to Class B convertible preferred units

 

 

(300

)

 

 

(600

)

Net cash provided by (used in) financing activities

 

 

4,139

 

 

 

(28,600

)

Net increase in cash and cash equivalents

 

 

732

 

 

 

58

 

Beginning cash and cash equivalents

 

 

255

 

 

 

467

 

Ending cash and cash equivalents

 

$

987

 

 

$

525

 

 

 

 

 

 

 

 

 

 

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, 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

 

Equity-based compensation

 

 

 

 

 

11

 

 

 

193

 

 

 

193

 

Distributions to Class A convertible preferred units

 

 

 

 

 

 

 

 

(333

)

 

 

(333

)

Distributions to Class B convertible preferred units

 

 

 

 

 

 

 

 

(200

)

 

 

(200

)

Accretion of beneficial conversion feature of Class A convertible preferred units

 

 

 

 

 

 

 

 

(219

)

 

 

(219

)

Accretion of beneficial conversion feature of Class B convertible preferred units

 

 

 

 

 

 

 

 

(32

)

 

 

(32

)

Conversion of Preferred Units Class A and Class B to common units

 

 

 

 

 

12,725

 

 

 

36,708

 

 

 

36,708

 

Conversion of General Partner to common units

 

 

762

 

 

 

18

 

 

 

(762

)

 

 

 

Net income

 

 

 

 

 

 

 

 

(11,925

)

 

 

(11,925

)

Balance, June 30, 2020

 

$

 

 

 

14,312

 

 

$

81,744

 

 

$

81,744

 

 

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

 

 

 

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

 

Equity-based compensation

 

 

 

 

 

 

 

 

 

122

 

 

 

122

 

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

 

 

 

 

 

 

 

 

(309

)

 

 

(309

)

Accretion of beneficial conversion feature of Class B convertible preferred units

 

 

 

 

 

 

 

 

(48

)

 

 

(48

)

Net income

 

 

60

 

 

 

 

 

 

5,037

 

 

 

5,097

 

Balance, June 30, 2019

 

$

(771

)

 

 

1,541

 

 

$

60,639

 

 

$

59,868

 

 

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.

On June 5, 2020, the Partnership announced the completion of the strategic recapitalization transactions (the “Recapitalization Transactions”), that resulted in significant changes to our capital structure and governance, strengthened our balance sheet, created alignment across all unitholders, reduced costs and streamlined operations and created immediate and sustainable value for all unitholders. In connection with these Recapitalization Transactions, the limited partnership agreement of the Partnership was amended and restated, and the Partnership entered into a Management Services Agreement (“MSA”) with Contango Resources, Inc. (“Contango Resources”) effective as of July 1, 2020. Under the MSA, Contango Resources will provide management and administrative services and serve as the operator of the Partnership’s assets for a flat fee arrangement of $4.0 million annually, plus a maximum $2.0 million termination fee, which is expected to generate pro forma annual cash savings of approximately $6.5 million compared with 2019.

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 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 unaudited condensed consolidated 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 revolving credit facility 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. See Note 7 in this section for additional information on Amendment 15 to the credit agreement. At June 30, 2020, the Partnership was in compliance with the financial covenants required by the credit agreement. Our ability to continue as a going concern is dependent on the re-negotiation of our revolving credit agreement that matures May 1, 2021, or other measures such as the sale of assets or raising additional capital. There can be 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:

 

 

 

Six Months Ended

June 30,

 

(in thousands)

 

2020

 

 

2019

 

Non-cash investing information

 

 

 

 

 

 

 

 

Conversion of preferred equity to common units

 

$

(36,708

)

 

$

 

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

 

$

 

 

$

38,533

 

Change in oil and natural gas properties - accrued capital expenditures

 

$

(2,090

)

 

$

(74

)

Change in oil and natural gas properties - accrued acquisitions

 

$

360

 

 

$

(1,428

)

Supplemental cash flow information

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

1,940

 

 

$

2,619

 

Reverse Unit Split

On April 9, 2020, the Partnership effected a 1-for-20 reverse common unit split. For presentation purposes, the unaudited condensed consolidated financial statements and footnotes have been adjusted to reflect this reverse unit split as if it had occurred at the beginning of the periods presented.

 

Note 2. Acquisitions, Divestitures and Assets Held for Sale

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 under 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 six months ended June 30, 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

June 30,

 

 

Six Months Ended

June 30,

 

(in thousands)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Oil and natural gas sales

 

$

 

 

$

39

 

 

$

 

 

$

4,689

 

Expenses(1)

 

$

 

 

$

(4

)

 

$

 

 

$

3,370

 

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

 

Divestiture

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. No gain or loss on the transaction was recorded during the six months ended June 30, 2020.

11


 

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 former affiliates, including Mid-Con Energy Operating, LLC (“Mid-Con Energy Operating”) and ME3 Oilfield Service, LLC (“ME3 Oilfield Service”), who performed 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 June 30, 2020:

 

 

 

Number of

Common

Units

 

Approved and authorized awards

 

 

175,700

 

Unrestricted units granted

 

 

(69,160

)

Restricted units granted, net of forfeitures

 

 

(19,971

)

Equity-settled phantom units granted, net of forfeitures

 

 

(72,251

)

Awards available for future grant

 

 

14,318

 

    

We recognized $0.2 million and $0.3 million of total equity-based compensation expense for the three and six months ended June 30, 2020, respectively. We recognized $0.1 million and $0.4 million of total equity-based compensation expense for the three and six months ended June 30, 2019. 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 six months ended June 30, 2020, we granted 1,633 unrestricted units with an average grant date fair value of $5.20, as adjusted for the reverse unit split. During the six months ended June 30, 2019, we granted 2,500 unrestricted units with an average grant date fair value of $20.80 per unit, as adjusted for the reverse unit split.

Equity-Settled Phantom Unit Awards

Equity-settled phantom units vest over a period of two or three years. During the six months ended June 30, 2020, we did not grant any equity-settled phantom units. During the six months ended June 30, 2019, we granted 25,500 equity-settled phantom units with a two-year vesting period and 3,150 equity-settled phantom units with a three-year vesting period, as adjusted for the reverse split.

A summary of our equity-settled phantom unit awards for the six months ended June 30, 2020, is presented below:

 

 

 

Number of

Equity-Settled

Phantom Units

 

 

Average Grant Date

Fair Value per Unit

 

Outstanding at December 31, 2019

 

 

28,550

 

 

$

25.00

 

Units vested

 

 

(26,267

)

 

 

15.73

 

Units forfeited

 

 

(2,283

)

 

 

23.24

 

Outstanding at June 30, 2020

 

 

-

 

 

$

-

 

 

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

12


 

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 June 30, 2020, our commodity derivative contracts were in a net asset position with a fair value of $12.2 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 June 30, 2020, 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 June 30, 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

 

June 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

Derivative financial instruments - current asset

 

$

9,032

 

 

$

(108

)

 

$

8,924

 

Derivative financial instruments - long-term asset

 

 

3,497

 

 

 

(177

)

 

$

3,320

 

Total

 

 

12,529

 

 

 

(285

)

 

 

12,244

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Derivative financial instruments - current liability

 

 

(108

)

 

 

108

 

 

 

 

Derivative financial instruments - long-term liability

 

 

(177

)

 

 

177

 

 

 

 

Total

 

 

(285

)

 

 

285