Midstates says Q2 liquidity transactions give it ‘significant runway’ to survive low energy-price environment

By Paul Deckelman

New York, Aug. 5 – Earlier this year, Midstates Petroleum Co., Inc. felt compelled to warn investors in a regulatory filing that with the steep slide in energy prices, the uncertainty associated with its ability to meet its commitments as they came due or to repay its outstanding debt “raises substantial doubt about our ability to continue as a going concern.”

But the Tulsa, Okla.-based independent oil and natural gas exploration and production company is now singing quite a different tune following a series of what it calls “liquidity-enhancing transactions” that took place during the 2015 second quarter.

Consisting of an asset sale and several capital markets deals, “these transactions substantially increased our liquidity and provide us with a significant runway to manage the company through an extended period of low commodity prices,” its chief financial officer declared on Wednesday.

And Nelson M. Haight, who also serves as an executive vice president, said that the timing of the transactions – April, May and early June – couldn’t have worked out better for the company.

Indeed, he noted on Midstates’ conference call following the release of its results for the second quarter ended June 30 that “the capital markets and commodity markets have changed significantly in recent weeks, and that transaction likely could not get done today on those terms.”

Capital markets activity

Midstates – which last year had made a substantial sale of oil and gas producing assets in Louisiana – announced on April 21 that it had closed its previously announced sale of its remaining oil and gas producing properties in that state to Pintail Oil & Gas LLC for $44 million, realizing net proceeds of $42 million.

It said it would use the proceeds to pay down a portion of the outstanding borrowings under its asset-based revolving credit facility due 2018, with the remainder slated for general corporate purposes.

In May, the company “substantially enhanced our liquidity with a comprehensive financing transaction,” its president and chief executive officer, Frederick F. “Jake” Brace, said on the call.

Along with the proceeds from the Louisiana asset sale, “these transactions quadrupled our near-term liquidity position, while holding our debt level essentially flat,” he said.

Midstates announced on May 21 that it had sold $625 million of 10% second-lien notes due 2020 in a private placement transaction, pricing the notes at par. It used a portion of the proceeds to repay the roughly $468 million outstanding balance on its credit facility, with the remainder earmarked for general corporate purposes.

It concurrently announced that it had exchanged $504.1 million of new 12% third-lien senior secured notes due 2020 for a total of $630.1 million of its existing unsecured paper – $279.8 million of its 10 ¾% senior notes due 2020, out of the $600 million then outstanding, and $350.3 million of its then-outstanding $700 million of 9¼% senior notes due 2021, an exchange at 80% of the par value of the existing notes.

The 12% coupon on the new third-lien notes consists of 10% payable in cash and the remaining 2% as payment in kind.

Midstates followed that initial exchange with a subsequent transaction on June 2 in which it issued another $20 million of the third-lien notes for $26.5 million of the existing 10¾% notes and $2 million of the 9¼% notes, an exchange at 70% of the existing paper’s par value.

The second exchange transaction raised the total amount of existing notes taken out to $658.6 million, with $524.1 million of new notes issued, an extinguishment of $134.5 million of debt.

In conjunction with those transactions, Midstates also in May entered into an amendment to its credit facility that provided the company with additional covenant flexibility, though it ultimately reduced the borrowing base on that revolver to $252 million from $525 million, the figure that banks had left the borrowing base at during their most recent semiannual redetermination on March 25, before the Louisiana asset sale had closed.

At that March borrowing-base redetermination, the banks had agreed to relax the facility’s maximum permitted leverage covenant to net consolidated debt at 4.5 times EBITDA through the end of this year from a 4.0 times maximum leverage ratio previously. As of the end of the first quarter, Midstates’ debt stood at 3.7 times EBITDA.

No revolver borrowings seen

As of June 30, Midstates’ total liquidity stood at $402 million – $151 million of cash on its balance sheet following the various transactions earlier in the quarter and $251 million of revolver availability.

Haight noted that the next redetermination date for the revolver’s borrowing base would come at the end of September.

He said that “while we don’t know what the price deck our banks plan to use in their calculations,” which involve using current, recent and projected future commodity price levels to determine the valuation of the oil and gas reserves securing the facility, “we don’t expect much change in the facility, if any, since we recently renegotiated our borrowing base as part of our liquidity-enhancing transactions,” which involved the loss of the Louisiana assets the company formerly held.

“Regardless of the outcome, we don’t anticipate drawing on that revolver in the next 12 months,” he added.

After taking into account all of the capital markets transactions the company entered into during the second quarter, including the sale of the new second-lien notes and use of its proceeds to repay the revolver borrowings and the two sets of exchanges for the existing 2020 and 2021 unsecured notes, as well as the issuance of the new third-lien notes in connections with those exchanges, total debt as of June 30 stood at $1.79 billion, Haight said – not too far above the $1.74 billion on the balance sheet at the end of the first quarter on March 31 or at the end of fiscal 2014 on Dec. 31 of that year. Debt had stood at $1.65 billion in the year-earlier second quarter.

During the question-and-answer portion of the conference call that followed the formal presentations by CEO Brace, CFO Haight and by the company’s executive vice president and chief operating officer, Mark E. Eck, an analyst noted that the company’s balance sheet as published in its press release showed $1.92 billion of total debt at June 30.

Haight explained that while the company extinguished $134 million of debt via the exchange of the new third-lien notes for the existing notes, “because of some accounting literature and guidance out there, we were not able to recognize a gain. So that gain will be amortized over the life of the third-lien notes, but today, it’s embedded in the debt balance,” swelling that paper figure to above $1.9 billion.

Another analyst wanted to know whether the company planned to delever its balance sheet via organic growth of the company, resulting in improved EBITDA and a decreased leverage ratio.

Brace said that “our primary focus right now is, in fact, organic growth – we have some great assets, we know the assets real well ,and we think we can produce very high IRR [internal rate of return] wells in those assets on a very reliable basis. And so, that is primarily our focus. But we are also opportunists, and [as] other things present themselves, we certainly would not rule anything out.”

The CEO said that management was “very pleased” with the results of the asset sale and capital markets transactions Midstates undertook during the quarter, since “they provided us with the liquidity and the flexibility to execute the multi-year business plan that we outlined in past filings.”

He said the company continues to be “intensely focused on operating and drilling efficiently” in the Mississippian Lime geological formation in Oklahoma, where it now has most of its reserves and other assets, “while we begin to explore the opportunities our liquidity-enhancing transaction permits.”

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