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MPO > SEC Filings for MPO > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for MIDSTATES PETROLEUM COMPANY, INC.

Form 10-Q for MIDSTATES PETROLEUM COMPANY, INC.


9-Nov-2012

Quarterly Report


Item 2. - Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and notes thereto for the year ended December 31, 2011, and the related management's discussion and analysis contained in our final prospectus dated April 19, 2012 and filed with the Securities and Exchange Commission ("SEC") pursuant to Rule 424(b) on April 20, 2012, as well as the unaudited condensed consolidated financial statements and notes thereto included in this quarterly report on Form 10-Q and in our quarterly reports on Form 10-Q for the quarterly periods ended March 31, 2012 and June 30, 2012.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Various statements contained in or incorporated by reference into this report are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act"). These forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond our control. All statements, other than statements of historical fact, regarding our strategy, future operations, financial position, estimated revenues and losses, projected costs, prospects, and the plans, beliefs, expectations, intentions and objectives of management are forward-looking statements. When used in this quarterly report, the words "could," "believe," "anticipate," "intend," "estimate," "expect," "may," "continue," "predict," "potential," "project," and similar expressions are intended to identify forward looking statements, although not all forward looking statements contain such identifying words. In particular, the factors discussed in this report on Form 10-Q, our quarterly reports on Form 10-Q for the quarterly periods ended March 31, 2012 and June 30, 2012 and detailed in our prospectus dated April 19, 2012 and filed with the SEC pursuant to Rule 424(b) on April 20, 2012, could affect our actual results and cause our actual results to differ materially from expectations, estimates, or assumptions expressed in, forecasted in, or implied in such forward-looking statements.

Forward-looking statements may include statements about our:

          our business strategy;

          estimated future net reserves and present value thereof;

          technology;

          cash flows and liquidity;

          financial strategy, budget, projections and operating results;

          oil and natural gas realized prices;

          timing and amount of future production of oil and natural gas;

          availability of drilling and production equipment;

          availability of oilfield labor;

          the amount, nature and timing of capital expenditures, including
future development costs;

          availability and terms of capital;

          drilling of wells including our identified drilling locations;

          successful results from our identified drilling locations;

          marketing of oil and natural gas;

          the closing, financing, integration and benefits of the Eagle

Acquisition or the effects of the acquisition on our cash position and levels of indebtedness;

          infrastructure for salt water disposal;

          property acquisitions;

          costs of developing our properties and conducting other operations;

          general economic conditions;

          effectiveness of our risk management activities;

          environmental liabilities;

          counterparty credit risk;

          the outcome of pending and future litigation;

          governmental regulation and taxation of the oil and natural gas
industry;

          developments in oil-producing and natural gas-producing countries;

          uncertainty regarding our future operating results; and

          plans, objectives, expectations and intentions contained in this

prospectus that are not historical.

All forward-looking statements speak only as of the date of this quarterly report. You should not place undue reliance on these forward-looking statements. These forward-looking statements are subject to a number of risks, uncertainties and assumptions. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible


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for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. Although we believe that our plans, intentions and expectations reflected in or suggested by the forward-looking statements we make in this quarterly report are reasonable, we can give no assurance that these plans, intentions or expectations will be achieved or occur, and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.

Overview

We are an independent exploration and production company focused on the development of oil-prone resources in the Upper Gulf Coast Tertiary trend onshore in central Louisiana and, with the October 1, 2012 closing of the Eagle Energy Acquisition, in the Mississippian Lime trend in northwestern Oklahoma and southern Kansas. In Louisiana, our current acreage positions and evaluation efforts are concentrated in the Wilcox interval of the Upper Gulf Coast Tertiary trend, while the majority of our acreage in the Mississippian Lime trend is concentrated in the core of the play in Woods and Alfalfa Counties in northwestern Oklahoma. We are currently focused on the development of our inventory of identified drilling locations, which we will selectively allocate capital to by applying rigorous investment analysis in an effort to maximize our potential returns. We are focused on maximizing the net present value of our drilling opportunities by measuring risk and financial return, among other factors. In addition, we are the operator of a substantial majority of our properties, which enables us to better control timing, costs and drilling and completion techniques.

We were incorporated pursuant to the laws of the State of Delaware on October 25, 2011 to become a holding company for Midstates Petroleum Company LLC ("Midstates Sub"), a wholly-owned subsidiary of Midstates Petroleum Holdings
LLC. Pursuant to the terms of a corporate reorganization that was completed immediately prior to the closing of our initial public offering on April 25, 2012, all of the interests in Midstates Petroleum Holdings LLC were exchanged for our newly issued common shares, and as a result, Midstates Petroleum Company LLC became our wholly-owned subsidiary and Midstates Petroleum Holdings LLC ceased to exist as a separate entity.

With the completion of our initial public offering, we became a publicly traded company. Our common stock is listed on the NYSE under the ticker symbol "MPO." The terms "the Company," "we," "us," "our," and similar terms, when used in the present tense, prospectively or for historical periods since April 25, 2012 refer to us and our subsidiary, and for historical periods prior to April 25, 2012, refer to Midstates Petroleum Holdings LLC and its subsidiary, unless the context indicates otherwise.

Our financial results depend upon many factors, but are largely driven by the volume of our oil and natural gas production and the price that we receive for that production. Our production volumes will decline as reserves are depleted unless we expend capital resources in successful development and exploration activities or acquire properties with existing production. The amount we realize for our production depends predominantly upon commodity prices and our related commodity price hedging activities, which are affected by changes in market demand and supply, as impacted by overall economic activity, weather, pipeline capacity, constraints, inventory storage levels, basis differentials, and other factors. Accordingly, finding and developing oil and natural gas reserves at economical costs is critical to our long-term success.

Eagle Energy Asset Acquisition

On August 11, 2012, we entered into an Asset Purchase Agreement (the "Eagle Purchase Agreement") with Eagle Energy Production, LLC ("Eagle"), pursuant to which we agreed to acquire certain interests in producing oil and natural gas assets, unevaluated leasehold acreage in Oklahoma and Kansas and the related hedging instruments (the "Eagle Energy Acquisition"). On October 1, 2012, we completed the Eagle Energy Acquisition for an aggregate purchase price consisting of (a) $325.0 million in cash and (b) 325,000 shares of our Series A Preferred Stock with an initial liquidation value of $1,000 per share (the "Series A Preferred Stock"), subject to customary post-closing purchase price adjustments. The cash portion of the purchase price was funded with a portion of the proceeds from our sale of $600 million in aggregate principal amount of 10.75% senior unsecured notes (the "Notes") maturing on October 1, 2020. See "- Liquidity and Capital Resources -Significant Sources of Capital - Senior Notes Offering" for more information.

With the closing of the Eagle Energy Acquisition, we acquired approximately 82,000 net acres prospective in the Mississippian Lime trend, with 76,000 net acres in Woods and Alfalfa Counties in Northwestern Oklahoma, and 6,000 net acres in Kansas, in which we now own an average working interest of approximately 53%. We currently intend to continue developing these oil and liquids rich properties using horizontal wells. We also acquired approximately 15,000 net acres in the Hunton formation in Lincoln County, Oklahoma, which is primarily a natural gas play. At June 30, 2012, the properties acquired in the Eagle Energy Acquisition had estimated net proved reserves of approximately 33.3 MMBOE, 59% of which were comprised of oil and NGLs.

The oil and gas production and the financial results for the assets acquired in the Eagle Energy Acquisition will be included in our results beginning October 1, 2012.


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Operations Update

We spud 53 gross wells and four sidetracks during the nine months ended September 30, 2012 in Louisiana. Of these 57 wells (including the four sidetracks), 41 were producing, eight were awaiting completion, four were undergoing further evaluation after disappointing initial results and four were drilling at quarter end. Since September 30, 2012 through November 5, 2012, we spud eight additional wells in Louisiana. During the third quarter, 20 wells, including one horizontal well, were spud. In addition, two horizontal sidetracks were spud.

As of September 30, 2012, our properties in Louisiana consisted of approximately 139 gross active producing wells, 96% of which we operate and in which we held an average working interest of 98%.

During the three and nine months ended September 30, 2012, our average daily production was 8,182 Boe/d and 8,120 Boe/d, respectively. Our average daily production for the three months ended September 30, 2012 grew by 4% as compared to the three months ended June 30, 2012, and 11% as compared to the same period of 2011. Our oil and NGL production for the three months ended September 30, 2012 increased by approximately 13% and 18%, respectively, partially offset by a 28% decline in natural gas production when compared to the prior 2012 quarter. Our natural gas production declined in the third quarter of 2012 due to a number of factors, including natural well decline, a lower gas oil ratio attributable to wells recently brought into production, and increased processing for NGL recovery.

With the completion of the Eagle Energy Acquisition, we currently have four rigs drilling in the Mississippian Lime trend and we have completed six wells and spud an additional five wells during the period from the acquisition date of October 1, 2012 through November 5, 2012, and five wells are in the process of completion. As of November 5, 2012, our Mississippian Lime and Hunton properties consist of approximately 122 gross active producing wells, of which we operate approximately 90% and in which we held an average working interest of 70%.

As a result of the Eagle Energy Acquisition on October 1, 2012, we expect to increase our 2012 capital expenditures from $365 million to approximately $440 million, which consists of:

          $355 million for drilling and completion capital;

          $58 million for acquisition of acreage and seismic data; and

          $27 million in unallocated funds which are available for facilities
and other capital expenditures.

Through September 30, 2012, approximately $314.8 million of our 2012 capital expenditure budget had been incurred, all of which related to our Louisiana properties. We anticipate that capital expenditures for the remainder of 2012 will be approximately $75 million in our Louisiana properties and approximately $50 million in our Mississippian Lime properties that were acquired as of October 1, 2012.

Set forth below is a discussion of our operating results and projected activity for the last quarter of 2012 by area.

Pine Prairie

We spud 38 gross wells during the nine months ended September 30, 2012 in Pine Prairie. Of these 38 wells, 26 were producing, seven were awaiting completion, three were drilling, and two were mechanical dry holes at September 30, 2012. We drilled 19 vertical wells during the third quarter of 2012, nine of which targeted the Wilcox interval and ten targeted the shallower Miocene and Frio intervals. We expect to drill 12 vertical wells and one vertical sidetrack in Pine Prairie during the remainder of 2012. The program is expected to consist of five Wilcox wells, one Wilcox sidetrack and seven shallower Miocene/Frio wells.

During the three months ended September 30, 2012, average production from these properties was 4,842 net Boe/d, an increase of 173 net Boe/d compared to the three months ended June 30, 2012.

South Bearhead Creek

We spud six gross wells, including one horizontal well, and one vertical sidetrack during the nine months ended September 30, 2012 in South Bearhead Creek. Of these seven wells, six were producing, and one was not producing due to a lease issue at September 30, 2012. During the third quarter we did not spud any wells in South Bearhead Creek. We expect to drill one horizontal sidetrack in the South Bearhead Creek area in the fourth quarter of 2012.

During the three months ended September 30, 2012, average production from these properties was 2,499 net Boe/d, an increase of 233 net Boe/d compared to the three months ended June 30, 2012.


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West Gordon

We spud five gross wells and two horizontal sidetracks during the nine months ended September 30, 2012 in West Gordon. Of these seven wells, five are producing, one is awaiting completion, and one was drilling at September 30, 2012. One of the two horizontal sidetracks spud during the third quarter encountered mechanical issues during the completion phase, and we currently plan to sidetrack the well in the fourth quarter. The second sidetrack is currently under evaluation.

During the three months ended September 30, 2012, average production from these properties was 585 net Boe/d, a decrease of 89 net Boe/d compared to the three months ended June 30, 2012, with the decrease principally due to natural decline.

North Cowards Gully

In the North Cowards Gully area, we drilled one horizontal well during the third quarter of 2012 and in the nine months ended September 30, 2012. This well is currently producing, and we expect to drill one additional horizontal well and one vertical sidetrack in the North Cowards Gully area in the fourth quarter of 2012.

During the three months ended September 30, 2012, average production from these properties was 92 net Boe/d, an increase of 25 net Boe/d compared to the three months ended June 30, 2012.

Louisiana Expansion Areas

We spud three gross wells and one horizontal sidetrack during the nine months ended September 30, 2012 in our expansion areas. Of these four wells, three were producing and one was not producing due to poor results. We did not spud any wells in our expansion areas during the third quarter of 2012 and do not plan on any activity in the fourth quarter of 2012.

Mississippian Lime and Hunton Formation

We expect to operate four rigs and spud 12 horizontal wells in the Oklahoma portion of the Mississippian Lime trend during the remainder of 2012.

Capital Expenditures

During the three and nine months ended September 30, 2012, we incurred capital expenditures of $108.2 million and $314.8 million, respectively, all of which was incurred on our Louisiana properties, and which consisted primarily of (in thousands):

                                                                         For the Nine Months
                                             For the Three Months        Ended September 30,
                                           Ended September 30, 2012             2012
Drilling and completion activities         $                  91,945    $             250,092
Acquisition of acreage and seismic data                        9,724                   42,248
Facilities and other                                           6,555                   22,430
Total capital expenditures incurred        $                 108,224    $             314,770

Through September 30, 2012, we also increased our acreage in the Louisiana trend to approximately 159,855 total net acres, comprised of approximately 104,755 net leased acres and approximately 55,100 net optioned acres, an increase of 47% in total net acres since December 31, 2011.

On October 1, 2012, with the closing of the Eagle Energy acquisition, we acquired approximately 82,000 net acres prospective in the Mississippian Lime trend, with approximately 76,000 net acres in Woods and Alfalfa Counties in Northwestern Oklahoma, and approximately 6,000 net acres in Kansas, and approximately 15,000 net acres in the Hunton formation in Lincoln County, Oklahoma.

Amended and Restated Credit Agreement

On September 7, 2012, and again on September 26, 2012, we entered into amendments to our Credit Facility among the Company, as parent, Midstates Sub, as borrower, SunTrust Bank, N.A., as administrative agent, and the other lenders and parties party thereto (collectively the "Amendments"). The Amendments provided for, among other things, (a) $35 million of non-conforming borrowing base loans (thereby increasing the borrowing base from $200 million to $235 million), and (b) waiver of the requirement to comply with the minimum current ratio financial covenant for the quarter ending September 30, 2012. Upon the closing of the Eagle Energy Acquisition, the Amendments also provided that the Credit Facility would automatically be amended to (a) accommodate the issuance, incurrence and/or compliance with the terms of the Preferred Stock and the Notes (See "Item 1. - Financial Statements - Notes to Unaudited Condensed Consolidated Financial Statements - Note 13. Subsequent Events."), (b) increase the allowance for the incurrence of certain unsecured indebtedness to allow for the issuance of $600 million of senior unsecured notes without a corresponding reduction in the borrowing base, (c) provide for an initial borrowing base of $250 million and (d) extend the maturity of


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the Credit Facility to October 1, 2017 (the "Amended Credit Facility"). These terms became effective with the closing of the Eagle Energy Acquisition on October 1, 2012, and availability of non-conforming borrowing base loans ended as of that date.

Offering of Senior Notes

On October 1, 2012, we closed on the issuance of $600 million in aggregate principal amount of 10.75% senior notes due October 1, 2020 (the "Notes") in a private placement conducted pursuant to Rule 144A and Regulation S under the Securities Act. The estimated net proceeds from the offering of $582 million (net of the initial purchasers' discount and related offering expenses) were used to fund the cash portion of, and expenses related to, the Eagle Energy Acquisition, to pay the expenses related to the amendments to our revolving credit facility, to repay $182.9 million in outstanding borrowings under our Credit Facility, and for general corporate purposes. See "- Liquidity and Capital Resources -Significant Sources of Capital - Offering of Senior Notes" for more information.

Factors that Significantly Affect our Results

Our revenue, profitability and future growth rate depend substantially on factors beyond our control, such as economic, political and regulatory developments, as well as competition from other sources of energy. Oil and natural gas prices historically have been volatile and may fluctuate widely in the future. Sustained periods of low prices for oil or natural gas could materially and adversely affect our financial position, our results of operations, our cash flows, the quantities of oil and natural gas reserves that we can economically produce and our access to capital.

We generally hedge a portion of our expected future oil and gas production to reduce our exposure to fluctuations in commodity price. By removing a portion of commodity price volatility, we expect to reduce some of the variability in our cash flow from operations. See "Item 3. - Quantitative and Qualitative Disclosures About Market Risk - Commodity Price Exposure" beginning on page 34 for discussion of our hedging and hedge positions.

Like all businesses engaged in the exploration and production of oil and natural gas, we face the challenge of natural production declines. As initial reservoir pressures are depleted, oil and natural gas production from any given well is expected to decline. As a result, oil and natural gas exploration and production companies deplete their asset base with each unit of oil or natural gas they produce. We attempt to overcome this natural production decline by developing additional reserves through our drilling operations, acquiring additional reserves and production and implementing secondary recovery techniques. Our future growth will depend on our ability to enhance production levels from our existing reserves and to continue to add reserves in excess of production. We will maintain our focus on the capital investments necessary to produce our reserves as well as to add to our reserves through drilling and acquisition. Our ability to make the necessary capital expenditures is dependent on cash flow from operations as well as our ability to obtain additional debt and equity financing. That ability can be limited by many factors, including the cost of such capital and operational considerations.

The volumes of oil and natural gas that we produce are driven by several factors, including:

success in the drilling of new wells, including exploratory wells, and the recompletion of existing wells;

the amount of capital we invest in the leasing and development of our oil and natural gas properties;

          facility or equipment availability and unexpected downtime;

          delays imposed by or resulting from compliance with regulatory
requirements; and

          the rate at which production volumes on our wells naturally decline.

Results of Operations

Revenues

The following tables summarize our revenue, production and price data for the periods indicated.


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                                 For the Three Months                  For the Nine Months
                                  Ended September 30,                  Ended September 30,
                                2012              2011               2012               2011
                                                       (in thousands)
REVENUES:
Oil sales                  $ 53,143    89%   $ 41,241    80%   $ 146,281    87%   $ 122,817    83%
Natural gas sales             2,257     4%      5,779    11%       8,086     5%      14,813    10%
Natural gas liquid sales      4,134     7%      4,732     9%      14,307     8%       9,949     7%
Total oil, natural gas,
and natural gas liquids
sales                        59,534   100%     51,752   100%     168,674   100%     147,579   100%

Realized gains (losses)
on commodity derivative
contracts, net               (4,160 )  12%     (3,958 ) -10%     (15,840 ) 155%     (12,094 ) -54%
Unrealized gains
(losses) on commodity
derivative contracts,
net                         (29,566 )  88%     44,518   110%       5,591   -55%      34,536   154%
Gains (Losses) on
commodity derivative
contracts - net             (33,726 ) 100%     40,560   100%     (10,249 ) 100%      22,442   100%

Other                           124               146                331                260

Total revenues             $ 25,932          $ 92,458          $ 158,756          $ 170,281

Production



                                     For the Three Months         For the Nine Months
                                      Ended September 30,         Ended September 30,
                                   2012     2011    % Change    2012     2011    % Change
PRODUCTION DATA:
Oil (MBbls)                          509      383        33%    1,362    1,136        20%
Natural gas (MMcf)                   760    1,230       -38%    3,129    3,154        -1%
Natural gas liquids (MBbls)          117       90        29%      342      207        65%
Oil equivalents (MBoe)               753      679        11%    2,225    1,869        19%

Oil (Boe/day)                      5,537    4,168        33%    4,969    4,163        19%
Natural gas (Mcf/day)              8,261   13,373       -38%   11,419   11,553        -1%
Natural gas liquids (Boe/day)      1,267      983        29%    1,248      759        64%
Average daily production (Boe/d)   8,182    7,379        11%    8,120    6,847        19%

Prices



                                   For the Three Months             For the Nine Months
                                   Ended September 30,              Ended September 30,
                                2012       2011     % Change     2012       2011     % Change
AVERAGE SALES PRICES:
Oil, without realized
derivatives (per Bbl)         $ 104.32   $ 107.56        -3%   $ 107.43   $ 108.08        -1%
Oil, with realized
derivatives (per Bbl)         $  96.15   $  97.24        -1%   $  95.80   $  97.43        -2%
Natural gas (per Mcf)         $   2.97   $   4.70       -37%   $   2.58   $   4.70       -45%
. . .
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