Mid-con energy partners cash flow may not improve despite higher oil prices – mid-con energy partners (nasdaq mcep) seeking alpha electricity generation by country


Mid-Con Energy Partners ( MCEP) has production that is mostly oil, so theoretically it should benefit quite a bit from the recent improvement in oil prices. However, the widening basis differentials and Mid-Con’s hedges mean that the $5 to $6 average increase in WTI Cushing strip prices (from 2018 to 2020) may not translate into any meaningful improvement in Mid-Con’s cash flow over the next few years. Mid-Con needs to increase its production levels to be able to take more advantage of the higher oil prices, but its ability to do so at the moment remains uncertain. Continuing Production Concerns

Mid-Con’s Q1 2018 production came in quite low at 2,800 BOEPD, although that was affected by January winter weather issues. Mid-Con’s March 2018 production ended up higher at 2,884 BOEPD. This March 2018 production still appears to represent a 1.2% decline from Mid-Con’s December 2017 adjusted production levels though. I had previously estimated that Mid-Con’s December 2017 adjusted production was around 2,920 BOEPD, excluding all estimated Southern Oklahoma production for the month and adding estimated production from its subsequent Powder River Basin acquisition.

Due to Mid-Con’s large guidance range for the year (2,800 to 3,200 BOEPD), it still appears likely to meet its guidance. However, Mid-Con may be challenged to reach the midpoint of its guidance as that would require it to average 3,065 BOEPD over the last three quarters of 2018, a 6.3% increase from March levels.

While oil prices have improved, Mid-Con’s financial outlook for 2018 may actually be slightly worse than it was a couple of months ago. This is due to Mid-Con’s significant amount of hedges and the effect of widening WTI Midland basis differentials. Close to half of Mid-Con’s oil production comes from Texas, and most of its Texas production appears to be likely tied to WTI Midland pricing.

This results in Mid-Con delivering an estimated $55.2 million in revenue net of hedges during 2018, slightly less than the $55.9 million I had modeled in March based on $61 WTI oil during the year. This also gives Mid-Con some benefit of the doubt regarding production and assumes that it can reach the midpoint of its production guidance for the year.

As a waterflood company, Mid-Con should at least be largely exempt from the service cost inflation pressure affecting many companies with Permian operations. Mid-Con’s cash expenditures are estimated at $48.8 million in 2018, resulting in around $6.4 million in positive cash flow during the year.

The hedges and wider differentials also negate much of benefit to Mid-Con from the upward movement in oil prices over the next couple of years. I estimate that the move in 2019 futures prices from $58 WTI oil to $65 WTI oil ( from early April) will result in a $0.5 million decrease in estimated cash flow after accounting for hedges and basis differential changes.

The move from $55 WTI oil to $59 WTI oil in 2020 futures prices does benefit Mid-Com somewhat, with a projected $1.6 million increase in estimated cash flow. This is due to expectations for the WTI Midland basis differential to narrow significantly by the end of 2019, along with Mid-Con’s hedges ending after Q3 2020.

Although oil prices have moved up significantly recently (strip prices have improved around $5 to $6 on average between 2018 and 2020), the impact on Mid-Con’s cash flow is minimal due to its hedges and widening basis differentials. Mid-Con’s projected cash flow from 2018 to 2020 has increased by less than $0.5 million as a result of that improvement in oil prices.

Investors in Mid-Con are thus betting that prices will remain improved into 2021 and beyond. However, the move in the futures curve diminishes as time goes on. By 2023, the futures curve has moved up by only $1 to $2 compared to late March/early April.

Mid-Con’s current price incorporates expectations for increased production and/or a further move upwards in the oil strip. I estimate that for Mid-Con to be worth $2.23 per unit by late 2020, production should be around 3,300 BOEPD by then or the 2021 oil futures should be around $59 to $60 (versus around $56 currently).

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