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Edited Transcript of MCEP earnings conference call or presentation 1-Aug-19 1:00pm GMT

Q2 2019 Mid-Con Energy Partners LP Earnings Call

Tulsa Aug 6, 2019 (Thomson StreetEvents) -- Edited Transcript of Mid-Con Energy Partners LP earnings conference call or presentation Thursday, August 1, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jeffrey R. Olmstead

Mid-Con Energy Partners, LP - CEO, President & Director of Mid-Con Energy GP LLC

* Philip R. Houchin

Mid-Con Energy Partners, LP - CFO of Mid-Con Energy GP LLC

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Conference Call Participants

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* Noel Augustus Parks

Coker & Palmer Investment Securities, Inc., Research Division - Senior Analyst Exploration, Production and MLP’s

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the second quarter 2019 earnings conference call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Jeff Olmstead, CEO.

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Jeffrey R. Olmstead, Mid-Con Energy Partners, LP - CEO, President & Director of Mid-Con Energy GP LLC [2]

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Thank you, Sylvia, and good morning, everyone. Thank you for your participation on the call today. Before we get started, I'd like to remind you that today's call will include forward-looking statements related to future and not past events within the meaning of the federal securities law. These forward-looking statements are based on our current expectations and include any statement that does not directly relate to our current or historical facts. For further explanations, please refer to our SEC filings.

Joining me on the call today are Randy Olmstead, our Executive Chairman; Sherry Morgan, our Chief Accounting Officer; Chad McLawhorn, our General Counsel; Chad Roller, our COO; Ryan Logsdon, our VP of Acquisition and Divestiture; and Philip Houchin, our CFO.

Last night, we posted our earnings release and 10-Q for the quarter ending June 30, 2019. We also posted a presentation to go along with this call. If you'd like to follow along, please go to our website, www.midconenergypartners.com, and you can find the presentation under Investor Relations in the Events & Presentations.

I want to start this call by taking a minute to look at how we have transformed the partnership since the downturn of oil prices at the end of 2014 and how we're now positioned to take advantage of the significant growth opportunities going forward. Since 2015, we have turned over approximately 2/3 of our assets. Prior to 2015, we created substantial value through new waterflood development and through waterflood optimization in our Southern Oklahoma and Hugoton assets.

From 2019 -- 2015 through 2019, we were again able to create value in our Eastern Shelf asset through operational excellence, primary development and waterflood development. All these assets provided cash flow when we owned them, and they ultimately provided divestment options to both help support the balance sheet and also redeploy capital into new assets with low decline and growth opportunities as we transformed the portfolio.

As you can see on the right side of Slide 3, we are now concentrated in 2 core areas of Oklahoma and Wyoming, with assets that have a low decline rate and scalable growth opportunities. We also have substantially less debt and greater reserves than we had at the end of 2014.

We've accomplished this transformation through a strategy of making immediately accretive acquisitions of assets that match well with MCEP's core operational skill set as well as opportunistic divestitures of premium valuations. We have and will remain focused on our core strengths. We excel at waterflooding and managing mature fields with complex histories by optimizing cash flow through production enhancements, lifting cost reductions and operational efficiencies. This has helped us navigate the downturn in oil prices and reduce debt by almost $140 million at the beginning of 2015.

While significantly reducing our debt, we transitioned to a low decline production base that is now less than 5%. This provides a sustainable production stream that requires minimal CapEx to maintain and the flexibility to manage our costs. We're able to react quickly to changes in commodity prices by turning wells on or off to manage cash flow. This also provides flexibility on when and where we spend our excess capital. For the near future, our excess capital will be focused on our growth opportunities in Wyoming.

We entered Wyoming in 2018 through acquisitions from large independents that no longer see value in unconventional development. These assets provide us growth opportunities on a scope and scale that our Texas and Oklahoma assets inherently could not provide. This transformation has led to a very successful first half of 2019.

I think the highlight in the most recent quarter was definitely our team in the field. Northern Oklahoma experienced seemingly endless heavy rains leading to some historic flooding and Wyoming experienced quite a bit of late-season winter weather. In spite of the weather, we still managed a 2% production increase compared to the previous quarter, and we're able to significantly lower our operating costs in our newly acquired Oklahoma assets.

I want to say a big thank you to our team in the field in both Wyoming and Oklahoma as their efforts during some pretty miserable weather conditions resulted in production increases and the operating cost efficiencies we saw this quarter.

Because of this, we're able to continue reducing our debt to $66 million at the end of June. This is down from $93 million at the beginning of the year, and we now have $43 million of availability on our revolver. And the resulting debt-to-EBITDA covenant, as calculated by our banks, was 3.24x. We did have some nonrecurring onetime G&A costs related to our transaction activity. And without those costs, our leverage would have been closer to 2.79x for the quarter.

From a growth standpoint, we've started injection in our Pine Tree field in Wyoming and expect final approval for the waterflood unit during the third quarter. We also initiated a recompletion program in our House Creek field with positive initial results, providing a scalable development program in the second half of this year.

During the first quarter, we expect to drill and core several wells in some of our new Oklahoma fields as these fields appear to have a sand similar to our Cleveland field. And assuming positive results from our core studies, we could start development here by the end of the year as well.

Taking a closer look at Pine Tree. This field has produced over 11 million barrels of oil under primary, and analogy suggests we could produce approximately the same amount under waterflooding. This is the largest waterflood we've ever undertaken, and Mid-Con currently owns approximately 40% working interest in the unit.

This field has had some of the most prolific vertical Shannon sand producers in all the Powder River Basin. Wells in the north half of the field have had average EURs greater than 290,000 barrels. When compared to other Shannon sand reservoirs, these cumulative primary recoveries are rivaled only by the nearby Hartzog Draw-Heldt units. This means we expect to achieve higher injection rates and a greater potential oil response to injections in similar fields nearby.

Our first injection was achieved this past month at rates greater than we had initially hoped for. We are currently injecting approximately 550 barrels of water per day and now expect to be able to increase that rate in the near future. This is significant in that we have the opportunity to efficiently flood at least the northern half of the field on existing spacing. This potentially eliminates the need to drill infill wells, reducing both the capital cost and ongoing operating costs to achieve the growth potential here. Conventional oil response to first injection is expected in 2020.

The nearby House Creek Sussex Unit was one of our first acquisitions in Wyoming in early 2018. Previous operators stopped working on this field when oil prices crashed in late '14. We have revitalized the field, returning wells to production and injection, restoring electrical services in the north half of the field and increased production back to where it was at the end of 2014.

In the first half of this year, we've been retesting -- sorry, we've been testing restimulations with positive results in the south half of the field, where we have significantly higher [well tests]. This field is over 24,000 acres with the opportunity to expand this program over a wide area and expect to see some production growth in the second half of 2019.

Finally, we've seen success at lowering operating costs and increasing cash flow of our newly acquired Oklahoma assets. These assets were acquired with operating costs that are significantly higher than our legacy field in the same area. We have lowered operating costs by almost 30% in the first 3 months since taking over operations. And cash flow off these fields is now close to the same amount we were producing in our Texas assets that we sold as part of the same transaction in the first quarter, and we have $27 million less debt due to that transaction. This is a great example of how we can drive growth in mature fields by matching our technical and field team's expertise with the right assets. This is what we do best.

With that, I'll turn it over to our CFO, Philip Houchin.

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Philip R. Houchin, Mid-Con Energy Partners, LP - CFO of Mid-Con Energy GP LLC [3]

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Thanks, Jeff. Second quarter of 2019 was a positive one from a financial perspective. This is the first quarter in which we are able to fully realize the impact of the work that has been achieved since 2014. With the closing of the strategic transaction at the end of the first quarter of 2019, the transition to a low decline production base, coupled with growth opportunities, was finally achieved. The low decline profile allows the partnership to show a modest increase in production over the first quarter of 2019 even in the face of historic flooding in Oklahoma that impacted a couple of our fields.

From a growth perspective, the return to production of shut-in wells and restimulation programs in Wyoming provided enough new production to offset the impact of the Oklahoma flooding and resulted in a net increase for the quarter. The wells that were impacted by the flooding are expected to be back to production status during the third quarter.

Capital expenditures is another area where the impact of the new asset profile is evident. During the quarter, the partnership spent approximately $1.8 million in CapEx, which is less than in the previous 4 quarters. The majority of the CapEx spend was used on returning wells to production in Oklahoma and the restimulation programs in Wyoming. We do expect our capital spend for growth projects to increase from the second quarter as we continue with the restimulation program, convert additional wells to injectors at Pine Tree and explore other opportunities within the portfolio.

A very important development for the second quarter of 2019 was the reduction in lease operating expenses in the acquired Oklahoma properties. When we were evaluating these assets during the due diligence process, we were convinced that our operating teams would be able to significantly reduce LOE in these fields due to our history in the area and knowledge of operating similar assets. Their ability to lower operating expenses and slightly increase production has helped offset lost cash flow and value from the Texas properties that we divested.

From a leverage standpoint, our strategy is to use excess cash flow to reduce debt. The balance on the revolver was reduced by $2 million during the quarter and by $27 million for the first half of 2019. At quarter end, Mid-Con had $43 million in availability under the revolver, and it is our intention to continue to reduce debt and increase liquidity in order for the partnership to have control over its options in the coming quarters and years.

A quick note on guidance. We are reaffirming the guidance for the year and have not made any changes to what was previously provided.

Second half of 2019 will be another exciting time for the partnership as it executes on its growth plans at Pine Tree, House Creek and other projects that are expected to begin shortly. We will continue to look for acquisition opportunities as they become available and fit within the overall strategy that has been laid out today.

Hopefully, our cash presentation and comments today provided greater clarity on the direction of the partnership and the difficulty and hard work that it took from our employees to get to this point. We're excited about the future and look forward to sharing additional updates on our growth plans as they come to fruition.

With that, I'll turn it back over to Jeff.

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Jeffrey R. Olmstead, Mid-Con Energy Partners, LP - CEO, President & Director of Mid-Con Energy GP LLC [4]

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Thanks, Phil. Again, I want to thank our team in the field for all their efforts this last quarter. There was some really -- through some bad weather at times, they were able to keep things going and resulted in a production increase for the quarter. Again, I think we're positioned well for the second half of the year. We have a low decline rate that really sets us up to focus on our growth opportunities. And with Pine Tree and House Creek and potentially some of those new fields in Oklahoma, we've got some nice growth opportunities for the remainder of this year and over the next couple of years to continue reducing debt, increasing cash flow.

With that, Sylvia, we'll open up to any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Noel Parks from Coker & Palmer.

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Noel Augustus Parks, Coker & Palmer Investment Securities, Inc., Research Division - Senior Analyst Exploration, Production and MLP’s [2]

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With Pine Tree, you mentioned it's the largest waterflood you've undertaken. The injectors, are you going to be able to use all existing producers and convert those? Or will you have any significant drilling to do for -- to place new injectors?

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Jeffrey R. Olmstead, Mid-Con Energy Partners, LP - CEO, President & Director of Mid-Con Energy GP LLC [3]

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Yes. Maybe my comments weren't clear. Especially for the first part of this field in the north half, the expectation is we'll be able to just use all existing producers to convert to injection. If we're able to continue getting these type of rates in the ground, it does appear we'll be able to flood, to get at least the north half of the field, on existing spacing with existing wellbores and significantly reduce the CapEx that we had originally forecasted.

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Noel Augustus Parks, Coker & Palmer Investment Securities, Inc., Research Division - Senior Analyst Exploration, Production and MLP’s [4]

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Great. And could you just talk a bit about the geology of the field, just the target, is it a particular zone? Or do you have anything -- do you have to do anything in particular to attack various zones in the field?

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Jeffrey R. Olmstead, Mid-Con Energy Partners, LP - CEO, President & Director of Mid-Con Energy GP LLC [5]

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Nothing out of the ordinary. I mean, it's the Shannon sandstone, which is basically -- you've seen there's quite a few Shannon waterfloods in the Powder River Basin that you could see for analogy, again, especially the Hartzog Draw-Heldt nearby is probably one of the largest and the one that's produced the most oil. The Culp Draw field that we also own an interest in is also somewhat similar, that we operate and has good production out of. So it's a well-known reservoir. It's a well-known geology. There's nothing in particular that's really special that needs to be done.

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Noel Augustus Parks, Coker & Palmer Investment Securities, Inc., Research Division - Senior Analyst Exploration, Production and MLP’s [6]

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Great. And just a little bit of a clarification on the ownership. So you have a 40% interest in the unit. Can you just talk about the remaining partner? Is that just one other partner, a group of partners, large or small?

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Jeffrey R. Olmstead, Mid-Con Energy Partners, LP - CEO, President & Director of Mid-Con Energy GP LLC [7]

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There's one other large partner that's of similar size to us. There's another one that's significant, 10%, 12%. And then there's just a handful of small owners.

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Noel Augustus Parks, Coker & Palmer Investment Securities, Inc., Research Division - Senior Analyst Exploration, Production and MLP’s [8]

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Okay. Everyone involved likely to participate further interest?

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Jeffrey R. Olmstead, Mid-Con Energy Partners, LP - CEO, President & Director of Mid-Con Energy GP LLC [9]

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Yes.

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Operator [10]

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(Operator Instructions) And I show no further questions at this time.

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Jeffrey R. Olmstead, Mid-Con Energy Partners, LP - CEO, President & Director of Mid-Con Energy GP LLC [11]

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Okay. Again, thank you, everyone, for listening in to -- once you get through the data and the numbers we put out last night and some of the comments this morning, please feel free to give us a call.

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Operator [12]

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Ladies and gentlemen, this does conclude today's second quarter 2019 earnings conference call. Thank you for your participation. You may now disconnect.