Midstates Petroleum Company, Inc. (MPO) Q4 2018 Earnings Conference Call March 14, 2019 9:00 AM ET

Company Participants

Jason McGlynn - Investor Relations
David Sambrooks - President and Chief Executive Officer, Director

Conference Call Participants

Operator

Welcome to the Midstates Petroleum Fourth Quarter and Year End 2018. My name is Kanacia, and I will be facilitating the audio portion of today's interactive broadcast. [Operator Instructions]

At this time, I would like to turn the show over to Jason McGlynn. Private Investor. This event also features streaming audio which allows you to listen to your show through the PC.

Jason McGlynn

Thank you, Kanacia. Good morning, everyone, and welcome to Midstates Petroleum's fourth quarter and year end 2018 earnings conference call. Joining me on the call today is David Sambrooks, our President and Chief Executive Officer. On today's call, David will begin with an overview of our operational and financial highlights. I will then provide additional details on our on financials. And finally, David will make some closing remarks.

Before we get started, let me read our Safe Harbor statement. This conference call contains forward-looking statements and assumptions, which are subject to risks and uncertainties, and actual results, may differ materially from those projected in these forward-looking statements.

Please refer to Midstates' Form 10-K that will be filed shortly with the SEC for a discussion of these risks. Also, please note that any non-GAAP financial measures discussed on this call are defined and reconciled to the most directly comparable GAAP measure in the table in yesterday's earnings release.

Now I'll turn the call over to David for his comments.

David Sambrooks

Thanks Jason, and good morning, everyone. Thank you for joining us today and thank you for your interest in Midstates. We performed very well in 2018, illustrated by our $50 million of net income for the year. Importantly, as has been our strategy since late 2017, we generated operating cash flow of approximately $20 million during the year with adjusted EBITDA of approximately $116 million and capital expense items at $96 million.

In 2018, we delivered on our market focus strategy. We've enhanced the value of our Miss Lime assets through our substantial workover program. The optimization of drilling and completion program and improving efficiencies throughout the company. There are several key examples of our accomplishments this year aligned with our strategy. We reduced G&A to align our overhead with our forward strategy with two workforce reductions. One in January of 2018 and the other in January of this year. All-in, we have cut our G&A approximately at half since late 2017.

We rationalize our portfolio with the sale of our Anadarko Basin producing properties in early 2018 with net proceeds of approximately $54 million. We drilled and completed Midstates first four two-mile lateral wells in the Miss Lime achieving improved economics over one-mile laterals. We executed a significant workover program that grew base production during the year and reduced well downtime. We paid down our RBL by $105 million during the year, exiting the year with net debt of only $12 million. We amended our RBL to allow us to return capital to shareholders. And finally we aggressively but selectively pursued strategic opportunities to increase shareholder value.

I am very pleased with our efforts during 2018. Midstates in 2019 is set to generate significant free cash flow due to optimized per Boe margins driven by our cost reduction efforts and our base production work. On the operational front, we continue to evaluate our two-mile lateral wells brought online in late 2018 and they continue to economically outperform our single-mile wells. As we previously noted, we dropped our drilling rig at the end of the third quarter in 2018 in order to further study production results from our two-mile lateral wells and to reformat our development inventory towards two-mile laterals.

We will continue to our pause in drilling at through mid-year 2019 to maximize free cash flow generation from our producing properties and full explore strategic alternatives. This change in our drilling program affected our yearend reserves bookings. We re-formatted our forward development strategy from a plan based on one-mile wells to plan based primarily on two-mile laterals. This effort simplistically speaking replaced two one-mile wells with one two-mile wells. Thus reducing our PUD count.

We further reduced our PUD bookings to account for our pause in drilling. These efforts reduced our PUD bookings to 48 locations at yearend 2018 or three years worth of PUDs to be developed within the SEC five year development window. All-in, we ended 2018 with a proved SEC reserved case of $72 million Boe having a PV-10 value of $580 million. Utilizing flat pricing of $60 WTI and $3 gas the PV-10 of our proved reserve case is approximately $506 million demonstrating the value proposition in Midstates.

In summary, I'm proud of both our financial and operational performance during 2018. We delivered on our market focused strategy of reducing costs, generating free cash flow, improving liquidity and focusing activity to maximize optionality. With that I will turn the call over to Jason to run through the financials.

Jason McGlynn

Thanks, David. During the fourth quarter, we generated a net income of $35.8 million or $1.38 per share. For the full year 2018, net income came in at $49.8 million or a $1.91 per share. We generated approximately $27.8 million in adjusted EBITDA during the fourth quarter, down from $31.9 million in the third quarter of 2018.

Full year 2018 adjusted EBITDA came in at $116.4 million compared with $128.2 million in 2017. For production, we reported average daily production of 16,351 Boe per day during the fourth quarter of 2018, down from 17,996 Boe per day in the third quarter of 2018. The decrease in production quarter-over-quarter was due to the cessation of our drilling and completion activities at the end of the third quarter and our expanded workover program being largely complete by the end of the second quarter of 2018.

Full year 2018 production from Miss Lime assets came in at 16,747 Boe per day. This excludes 3,579 Boe per day from now divested Anadarko Basin assets. The production mix during the fourth quarter was 27%, 26% NGLs and 47% natural gas, roughly in line with previous quarters.

Turning to expenses. Fourth quarter adjusted cash operating expenses which include LOE production taxes and cash G&A but exclude restructuring and advisory costs, employee severance costs, totaled $16.6 million or $11.02 per Boe, down from $18.6 million or $11.21 per Boe in the third quarter of 2018. The decreased quarter-over-quarter was primarily due to reduction of workover expenses in the fourth quarter as our expanded workover program was completed earlier in 2018.

Full year 2018 adjusted cash operating expenses totaled $79.7 million or $11.97 per Boe, down from a $103.5 million or $12.80 per Boe in 2017. Our combined lease operating and workover expenses for the fourth quarter totaled $10.6 million or $7.05 per Boe down from $11.9 million or $7.16 per Boe in the prior quarter. Expense workover cost came down in the fourth quarter to $0.78 per Boe from a $1.35 per Boe in the third quarter of 2018.

Full year 2018 combined LOE and workover expenses totaled $54.2 million or $8.14 per Boe compared to $63.3 million or $7.83 per Boe in 2017. Full year 2018 LOE per Boe decreased $0.38 compared to the prior year, primarily due to the sale the Anadarko Basin producing properties in May of 2018. Full year 2018 workover expenses increased $0.69 per Boe from the prior year due the expanded workover program in the Miss Lime during the year.

Severance and other taxes were down this quarter to $2.7 million or a $1.78 per Boe compared to $3.4 million or $2.03 per Boe in the third quarter. As previously noted, severance tax rates have increased from prior quarters and prior years due to new legislation that's been signed in Oklahoma over the last number of months.

With respect to adjusted cash G&A which is measure of G&A before any capitalization to oil and gas properties and excludes non-cash compensation and certain non-recurring items, the fourth-quarter totaled $3.3 million or $2.17 per Boe compared to $3.9 million or $2.33 per Boe in the third quarter of 2018.

For the full year 2018, adjusted cash G&A decreased to $15.5 million or $2.32 per Boe from $20.1 million or $2.48 per Boe in 2017. Onto the balance sheet. At the end of the fourth quarter of 2018, we had approximately $11.3 million in cash and net debt of approximately $11.8 million. Liquidity at the end of the fourth quarter was approximately $156.3 million consisting of $11.3 million in cash and $145 million worth of availability on our $170 million RBL facility.

As noted in our earnings released last night, we utilized a portion of our revolver availability and cash on hand to satisfy the share repurchase completed earlier this year. As a result, our liquidity on March 6, 2019 was approximately $109 million consisting of $3 million in cash and $106 million of availability on our RBL facility, and net debt was approximately $59.1 million.

With that I'll turn the call back over to David for closing comments.

Question-and-Answer Session

Operator

[Operator Instructions]

David Sambrooks

Thanks, Jason. Our work in 2018 has set us up in 2019 to maximize free cash flow generation and puts us in an advantaged position to explore strategic alternatives. Thus far in 2019, we have successfully executed a $50 million tender offer and repurchasing 20% of the company's outstanding shares, delivering on our commitment to return capital to shareholders that we laid out in late 2018.

Additionally, we have retained Houlihan Lokey as financial advisors to help us pursue all strategic and opportunistic transactions that create significant shareholder value, including a sale of the company or mergers and acquisitions that provide for greater scale and operational synergies to enhance bottom-line profitability. Since we're currently exploring strategic alternatives and are still in consideration on our capital plans for 2019, we will not be providing 2019 guidance at this time. As our efforts progress, we will be in a better position to inform you on our 2019 capital plans.

Lastly, but most importantly, I would like to take this opportunity to thank all of our employees for their outstanding contributions to our company's success during the year. With that, we will end our call. And we look forward to advising you further as our efforts develop during the year. Thank you.