Attached files

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EX-32.2 - EX-32.2 - Mid-Con Energy Partners, LPmcep-ex322_7.htm
EX-32.1 - EX-32.1 - Mid-Con Energy Partners, LPmcep-ex321_9.htm
EX-31.2 - EX-31.2 - Mid-Con Energy Partners, LPmcep-ex312_6.htm
EX-31.1 - EX-31.1 - Mid-Con Energy Partners, LPmcep-ex311_8.htm
EX-10.2 - EX-10.2 - Mid-Con Energy Partners, LPmcep-ex102_273.htm
EX-10.1 - EX-10.1 - Mid-Con Energy Partners, LPmcep-ex101_97.htm

 

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2020

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File No.: 1-35374

 

Mid-Con Energy Partners, LP

(Exact name of registrant as specified in its charter)

 

 

Delaware

45-2842469

(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer
Identification Number)

 

2431 East 61st Street, Suite 800

Tulsa, Oklahoma 74136

(Address of principal executive offices and zip code)

(918) 748-3361

(Registrant’s telephone number, including area code)

 

 

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading symbol

Name of each exchange on which registered

Common Units Representing Limited Partner Interests

MCEP

NASDAQ Global Select Market

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES    NO  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). YES      NO  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

Smaller reporting company

 

 

 

 

 

Emerging Growth Company

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes      No  

As of November 6, 2020, the registrant had 14,311,522 common units outstanding.

 

 

 


TABLE OF CONTENTS

 

PART I

FINANCIAL INFORMATION

 

 

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

3

ITEM 1. FINANCIAL STATEMENTS

 

5

Unaudited Condensed Consolidated Balance Sheets

 

5

Unaudited Condensed Consolidated Statements of Operations

 

6

Unaudited Condensed Consolidated Statements of Cash Flows

 

7

Unaudited Condensed Consolidated Statements of Changes in Equity

 

8

Notes to Unaudited Condensed Consolidated Financial Statements

 

10

 

 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

24

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

34

ITEM 4. CONTROLS AND PROCEDURES

 

34

 

 

 

PART II

OTHER INFORMATION

 

 

 

ITEM 1. LEGAL PROCEEDINGS

 

35

ITEM 1A. RISK FACTORS

 

35

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

40

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

40

ITEM 4. MINE SAFETY DISCLOSURES

 

40

ITEM 5. OTHER INFORMATION

 

40

ITEM 6. EXHIBITS

 

41

 

 

 

Signature

 

42

 

2


 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (“Form 10-Q”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond our control, which may include statements about:

 

risks related to our pending Merger, as defined herein, with Contango Oil & Gas Co., including, but not limited to, disruption of management time from ongoing business operations due to the Merger, the risk of any litigation relating to the Merger and the risk that the parties may not be able to satisfy the conditions to the completion of the Merger in a timely manner or at all;

 

our ability to continue as a going concern;

 

volatility of commodity prices;

 

supply and demand of oil and natural gas;

 

revisions to oil and natural gas reserves estimates as a result of changes in commodity prices;

 

effectiveness of risk management activities;

 

business strategies;

 

future financial and operating results;

 

our ability to pay distributions;

 

our ability to replace the reserves we produce through acquisitions and the development of our properties;

 

future capital requirements and availability of financing;

 

technology and cybersecurity;

 

realized oil and natural gas prices;

 

production volumes;

 

lease operating expenses;

 

general and administrative expenses;

 

cash flow and liquidity;

 

availability of production equipment;

 

availability of oil field labor;

 

capital expenditures;

 

availability and terms of capital;

 

marketing of oil and natural gas;

 

general economic conditions;

 

world-wide epidemics, including COVID-19, and the related effects of sheltering in place;

 

competition in the oil and natural gas industry;

 

environmental liabilities;

 

counterparty credit risk;

 

governmental regulation and taxation;

 

compliance with NASDAQ Global Select Market (“NASDAQ”) listing requirements;

 

developments in oil and natural gas producing countries, including increases and decreases in supply from Russia and OPEC; and

 

plans, objectives, expectations and intentions.

3


 

All of these types of statements, other than statements of historical fact included in this Form 10-Q, are forward-looking statements. These forward-looking statements may be found in Item 1. “Financial Statements,” Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other items within this Form 10-Q. In some cases, forward-looking statements can be identified by terminology such as “may,” “will,” “could,” “should,” “expect,” “plan,” “project,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “pursue,” “target,” “continue,” “goal,” “forecast,” “guidance,” “might,” “scheduled” and the negative of such terms or other comparable terminology.

The forward-looking statements contained in this Form 10-Q are largely based on our expectations, which reflect estimates and assumptions made by our management. These estimates and assumptions reflect our best judgment based on currently known market conditions and other factors. Although we believe such estimates and assumptions to be reasonable, they are inherently uncertain and involve a number of risks and uncertainties that are beyond our control. In addition, management’s assumptions about future events may prove to be inaccurate. All readers are cautioned that the forward-looking statements contained in this Form 10-Q are not guarantees of future performance and we cannot assure any reader that such statements will be realized or that the forward-looking events will occur. Actual results may differ materially from those anticipated or implied in the forward-looking statements due to factors described in the “Risk Factors” section included in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2019, (“Annual Report”) and Part II - Item 1A in this Form 10-Q. All forward-looking statements speak only as of the date made, and other than as required by law, we do not intend to update or revise any forward-looking statements as a result of new information, future events or otherwise. These cautionary statements qualify all forward-looking statements attributable to us or persons acting on our behalf.

4


 

PART I

FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Mid-Con Energy Partners, LP and subsidiaries

Condensed Consolidated Balance Sheets

(in thousands, except number of units)

(Unaudited)

 

 

 

 

 

 

September 30, 2020

 

 

December 31, 2019

 

ASSETS

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

424

 

 

$

255

 

Accounts receivable

 

 

4,114

 

 

 

6,853

 

Derivative financial instruments

 

 

7,225

 

 

 

 

Prepaid expenses

 

 

228

 

 

 

87

 

Assets held for sale

 

 

 

 

 

365

 

Total current assets

 

 

11,991

 

 

 

7,560

 

Property and equipment

 

 

 

 

 

 

 

 

Oil and natural gas properties, successful efforts method

 

 

 

 

 

 

 

 

Proved properties

 

 

265,083

 

 

 

261,375

 

Unproved properties

 

 

4,290

 

 

 

3,125

 

Other property and equipment

 

 

985

 

 

 

1,262

 

Accumulated depletion, depreciation, amortization and impairment

 

 

(98,609

)

 

 

(72,303

)

Total property and equipment, net

 

 

171,749

 

 

 

193,459

 

Derivative financial instruments

 

 

1,372

 

 

 

730

 

Other assets

 

 

1,758

 

 

 

1,020

 

Total assets

 

$

186,870

 

 

$

202,769

 

 

 

 

 

 

 

 

 

 

LIABILITIES, CONVERTIBLE PREFERRED UNITS AND EQUITY

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

 

 

 

 

 

 

 

Trade

 

$

864

 

 

$

320

 

Related parties

 

 

2,743

 

 

 

6,902

 

Derivative financial instruments

 

 

 

 

 

1,944

 

Accrued liabilities

 

 

2,575

 

 

 

795

 

Other current liabilities

 

 

454

 

 

 

430

 

Current debt

 

 

69,737

 

 

 

 

Total current liabilities

 

 

76,373

 

 

 

10,391

 

Long-term debt

 

 

 

 

 

68,000

 

Other long-term liabilities

 

 

113

 

 

 

457

 

Asset retirement obligations

 

 

32,179

 

 

 

30,265

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Class A convertible preferred units - 0 and 11,627,906 issued and outstanding, respectively

 

 

 

 

 

22,964

 

Class B convertible preferred units - 0 and 9,803,921 issued and outstanding, respectively

 

 

 

 

 

14,829

 

Equity, per accompanying statements

 

 

 

 

 

 

 

 

General partner

 

 

 

 

 

(793

)

Limited partners - 14,311,522 and 1,541,215 units issued and outstanding, respectively

 

 

78,205

 

 

 

56,656

 

Total equity

 

 

78,205

 

 

 

55,863

 

Total liabilities, convertible preferred units and equity

 

$

186,870

 

 

$

202,769

 

 

See accompanying notes to condensed consolidated financial statements

5


 

 

Mid-Con Energy Partners, LP and subsidiaries

Condensed Consolidated Statements of Operations

(in thousands, except per unit data)

(Unaudited)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Oil sales

 

$

9,632

 

 

$

15,468

 

 

$

28,253

 

 

$

46,854

 

Natural gas sales

 

 

271

 

 

 

283

 

 

 

635

 

 

 

930

 

Other operating revenues

 

 

226

 

 

 

271

 

 

 

547

 

 

 

983

 

(Loss) gain on derivatives, net

 

 

(1,379

)

 

 

5,730

 

 

 

19,062

 

 

 

(3,072

)

Total revenues

 

 

8,750

 

 

 

21,752

 

 

 

48,497

 

 

 

45,695

 

Operating costs and expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lease operating expenses

 

 

5,124

 

 

 

8,293

 

 

 

18,640

 

 

 

22,710

 

Production and ad valorem taxes

 

 

533

 

 

 

1,333

 

 

 

1,781

 

 

 

4,084

 

Other operating expenses

 

 

282

 

 

 

536

 

 

 

1,158

 

 

 

1,426

 

Impairment of proved oil and natural gas properties

 

 

 

 

 

180

 

 

 

19,547

 

 

 

384

 

Depreciation, depletion and amortization

 

 

2,104

 

 

 

2,559

 

 

 

6,759

 

 

 

8,026

 

Accretion of discount on asset retirement obligations

 

 

445

 

 

 

423

 

 

 

1,283

 

 

 

1,168

 

General and administrative

 

 

2,176

 

 

 

1,404

 

 

 

7,956

 

 

 

6,414

 

Total operating costs and expenses

 

 

10,664

 

 

 

14,728

 

 

 

57,124

 

 

 

44,212

 

Gain on sales of oil and natural gas properties, net

 

 

 

 

 

 

 

 

 

 

 

9,692

 

(Loss) income from operations

 

 

(1,914

)

 

 

7,024

 

 

 

(8,627

)

 

 

11,175

 

Other (expense) income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

 

 

 

1

 

 

 

1

 

 

 

10

 

Interest expense

 

 

(1,630

)

 

 

(1,175

)

 

 

(3,998

)

 

 

(4,019

)

Other (expense) income

 

 

5

 

 

 

4

 

 

 

(42

)

 

 

53

 

Gain on sale of other assets

 

 

 

 

 

123

 

 

 

 

 

 

123

 

Loss on settlements of asset retirement obligations

 

 

 

 

 

(16

)

 

 

(15

)

 

 

(72

)

Total other expense

 

 

(1,625

)

 

 

(1,063

)

 

 

(4,054

)

 

 

(3,905

)

Net (loss) income

 

 

(3,539

)

 

 

5,961

 

 

 

(12,681

)

 

 

7,270

 

Less: Distributions to preferred unitholders

 

 

 

 

 

1,166

 

 

 

1,172

 

 

 

3,472

 

Less: General partner's interest in net income

 

 

 

 

 

69

 

 

 

 

 

 

84

 

Limited partners' interest in net (loss) income

 

$

(3,539

)

 

$

4,726

 

 

$

(13,853

)

 

$

3,714

 

Limited partners' interest in net (loss) income per unit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.25

)

 

$

3.08

 

 

$

(1.97

)

 

$

2.42

 

Diluted

 

$

(0.25

)

 

$

1.79

 

 

$

(1.97

)

 

$

1.41

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average limited partner units outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Limited partner units (basic)

 

 

14,312

 

 

 

1,541

 

 

 

7,048

 

 

 

1,537

 

Limited partner units (diluted)

 

 

14,312

 

 

 

2,659

 

 

 

7,048

 

 

 

2,657

 

 

See accompanying notes to condensed consolidated financial statements

6


 

Mid-Con Energy Partners, LP and subsidiaries

Condensed Consolidated Statements of Cash Flows

(in thousands)

(Unaudited) 

 

 

 

Nine Months Ended

September 30,

 

 

 

2020

 

 

2019

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(12,681

)

 

$

7,270

 

Adjustments to reconcile net (loss) income to net cash provided by operating activities

 

 

 

 

 

 

 

 

Depreciation, depletion and amortization

 

 

6,759

 

 

 

8,026

 

Debt issuance costs amortization

 

 

588

 

 

 

533

 

Accretion of discount on asset retirement obligations

 

 

1,283

 

 

 

1,168

 

Impairment of proved oil and natural gas properties

 

 

19,547

 

 

 

384

 

Loss on settlements of asset retirement obligations

 

 

15

 

 

 

72

 

Cash paid for settlements of asset retirement obligations

 

 

(21

)

 

 

(96

)

Paid-in-kind interest on revolving credit facility

 

 

487

 

 

 

 

Mark to market on derivatives

 

 

 

 

 

 

 

 

(Gain) loss on derivatives, net

 

 

(19,062

)

 

 

3,072

 

Cash settlements received (paid) for matured derivatives, net

 

 

9,251

 

 

 

(750

)

Gain on sales of oil and natural gas properties

 

 

 

 

 

(9,692

)

Gain on sale of other assets

 

 

 

 

 

(123

)

Non-cash equity-based compensation

 

 

271

 

 

 

577

 

Changes in operating assets and liabilities

 

 

 

 

 

 

 

 

Accounts receivable

 

 

2,739

 

 

 

(1,246

)

Prepaid expenses and other assets

 

 

(1,070

)

 

 

(84

)

Accounts payable - trade and accrued liabilities

 

 

123

 

 

 

(226

)

Accounts payable - related parties

 

 

(2,379

)

 

 

1,537

 

Net cash provided by operating activities

 

 

5,850

 

 

 

10,422

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

Acquisitions of oil and natural gas properties

 

 

(111

)

 

 

(3,296

)

Additions to oil and natural gas properties

 

 

(5,905

)

 

 

(9,363

)

Additions to other property and equipment

 

 

(84

)

 

 

 

Proceeds from sales of oil and natural gas properties

 

 

 

 

 

32,514

 

Proceeds from sale of other assets

 

 

365

 

 

 

123

 

Net cash (used in) provided by investing activities

 

 

(5,735

)

 

 

19,978

 

Cash flows from financing activities

 

 

 

 

 

 

 

 

Proceeds from line of credit

 

 

6,000

 

 

 

8,000

 

Payments on line of credit

 

 

(4,750

)

 

 

(36,000

)

Debt issuance costs

 

 

(396

)

 

 

 

Distributions to Class A convertible preferred units

 

 

(500

)

 

 

(1,500

)

Distributions to Class B convertible preferred units

 

 

(300

)

 

 

(900

)

Net cash provided by (used in) financing activities

 

 

54

 

 

 

(30,400

)

Net increase in cash and cash equivalents

 

 

169

 

 

 

 

Beginning cash and cash equivalents

 

 

255

 

 

 

467

 

Ending cash and cash equivalents

 

$

424

 

 

$

467

 

 

 

 

 

 

 

 

 

 

See accompanying notes to condensed consolidated financial statements

7


 

Mid-Con Energy Partners, LP and subsidiaries

Condensed Consolidated Statements of Changes in Equity

(in thousands)

(Unaudited)

 

 

 

General

 

 

Limited Partners

 

 

Total

 

 

 

Partner

 

 

Units

 

 

Amount

 

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2019

 

$

(793

)

 

 

1,541

 

 

$

56,656

 

 

$

55,863

 

Equity-based compensation

 

 

 

 

 

17

 

 

 

78

 

 

 

78

 

Distributions to Class A convertible preferred units

 

 

 

 

 

 

 

 

(500

)

 

 

(500

)

Distributions to Class B convertible preferred units

 

 

 

 

 

 

 

 

(300

)

 

 

(300

)

Accretion of beneficial conversion feature of Class A convertible preferred units

 

 

 

 

 

 

 

 

(323

)

 

 

(323

)

Accretion of beneficial conversion feature of Class B convertible preferred units

 

 

 

 

 

 

 

 

 

(49

)

 

 

(49

)

Net income

 

 

31

 

 

 

 

 

 

2,752

 

 

 

2,783

 

Balance, March 31, 2020

 

 

(762

)

 

 

1,558

 

 

 

58,314

 

 

 

57,552

 

Equity-based compensation

 

 

 

 

 

11

 

 

 

193

 

 

 

193

 

Distributions to Class A convertible preferred units

 

 

 

 

 

 

 

 

(333

)

 

 

(333

)

Distributions to Class B convertible preferred units

 

 

 

 

 

 

 

 

(200

)

 

 

(200

)

Accretion of beneficial conversion feature of Class A convertible preferred units

 

 

 

 

 

 

 

 

(219

)

 

 

(219

)

Accretion of beneficial conversion feature of Class B convertible preferred units

 

 

 

 

 

 

 

 

(32

)

 

 

(32

)

Conversion of Preferred Units Class A and Class B to common units

 

 

 

 

 

12,725

 

 

 

36,708

 

 

 

36,708

 

Conversion of General Partner to common units

 

 

762

 

 

 

18

 

 

 

(762

)

 

 

 

Net loss

 

 

 

 

 

 

 

 

(11,925

)

 

 

(11,925

)

Balance, June 30, 2020

 

 

 

 

 

14,312

 

 

 

81,744

 

 

 

81,744

 

Net loss

 

 

 

 

 

 

 

 

(3,539

)

 

 

(3,539

)

Balance, September 30, 2020

 

$

 

 

 

14,312

 

 

$

78,205

 

 

$

78,205

 

 

See accompanying notes to condensed consolidated financial statements.

8


 

Mid-Con Energy Partners, LP and subsidiaries

Condensed Consolidated Statements of Changes in Equity

(in thousands)

(Unaudited)

 

 

 

General

 

 

Limited Partners

 

 

Total

 

 

 

Partner

 

 

Units

 

 

Amount

 

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2018

 

$

(786

)

 

 

1,522

 

 

$

61,195

 

 

$

60,409

 

Equity-based compensation

 

 

 

 

 

19

 

 

 

334

 

 

 

334

 

Distributions to Class A convertible preferred units

 

 

 

 

 

 

 

 

(500

)

 

 

(500

)

Distributions to Class B convertible preferred units

 

 

 

 

 

 

 

 

(300

)

 

 

(300

)

Accretion of beneficial conversion feature of Class A convertible preferred units

 

 

 

 

 

 

 

 

(301

)

 

 

(301

)

Accretion of beneficial conversion feature of Class B convertible preferred units

 

 

 

 

 

 

 

 

(48

)

 

 

(48

)

Net loss

 

 

(45

)

 

 

 

 

 

(3,743

)

 

 

(3,788

)

Balance, March 31, 2019

 

 

(831

)

 

 

1,541

 

 

 

56,637

 

 

 

55,806

 

Equity-based compensation

 

 

 

 

 

 

 

 

 

122

 

 

 

122

 

Distributions to Class A convertible preferred units

 

 

 

 

 

 

 

 

(500

)

 

 

(500

)

Distributions to Class B convertible preferred units

 

 

 

 

 

 

 

 

(300

)

 

 

(300

)

Accretion of beneficial conversion feature of Class A convertible preferred units

 

 

 

 

 

 

 

 

(309

)

 

 

(309

)

Accretion of beneficial conversion feature of Class B convertible preferred units

 

 

 

 

 

 

 

 

(48

)

 

 

(48

)

Net income

 

 

60

 

 

 

 

 

 

5,037

 

 

 

5,097

 

Balance, June 30, 2019

 

 

(771

)

 

 

1,541

 

 

 

60,639

 

 

 

59,868

 

Equity-based compensation

 

 

 

 

 

1

 

 

 

121

 

 

 

121

 

Distributions to Class A convertible preferred units

 

 

 

 

 

 

 

 

(500

)

 

 

(500

)

Distributions to Class B convertible preferred units

 

 

 

 

 

 

 

 

(300

)

 

 

(300

)

Accretion of beneficial conversion feature of Class A convertible preferred units

 

 

 

 

 

 

 

 

(317

)

 

 

(317

)

Accretion of beneficial conversion feature of Class B convertible preferred units

 

 

 

 

 

 

 

 

(49

)

 

 

(49

)

Net income

 

 

69

 

 

 

 

 

 

5,892

 

 

 

5,961

 

Balance, September 30, 2019

 

$

(702

)

 

 

1,542

 

 

$

65,486

 

 

$

64,784

 

 

See accompanying notes to condensed consolidated financial statements.

9


 

Mid-Con Energy Partners, LP and subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

Note 1. Organization and Nature of Operations

Nature of Operations

Mid-Con Energy Partners, LP (“we,” “our,” “us,” the “Partnership” or the “Company”) is a publicly held Delaware limited partnership formed in July 2011 that engages in the ownership, acquisition and development of producing oil and natural gas properties in North America, with a focus on enhanced oil recovery (“EOR”). Our limited partner units (“common units”) are listed under the symbol “MCEP” on the NASDAQ.

Basis of Presentation

Our unaudited condensed consolidated financial statements are prepared pursuant to the rules and regulations of the SEC. These financial statements have not been audited by our independent registered public accounting firm, except that the condensed consolidated balance sheet at December 31, 2019, is derived from the audited financial statements. Accordingly, certain information and footnote disclosures normally included in the financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted in this Form 10-Q. We believe that the presentations and disclosures made are adequate to make the information not misleading.

The unaudited condensed consolidated financial statements include all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the interim periods. The results of operations for the interim periods are not necessarily indicative of the results of operations for the full year. These interim financial statements should be read in conjunction with our Annual Report. All intercompany transactions and account balances have been eliminated.

Liquidity and Going Concern

These unaudited condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the continuity of normal business activities and the realization of assets and settlement of liabilities in the normal course of business. At March 31, 2020, the Partnership was not in compliance with the leverage ratio covenant of our credit agreement. On June 4, 2020, Amendment 15 to the credit agreement was executed, decreasing the borrowing base of the revolving credit facility from $95.0 million to $64.0 million, establishing a repayment schedule for the borrowing base deficiency and waiving the March 31, 2020, leverage ratio noncompliance. See Note 7 in this section for additional information on Amendment 15 to the credit agreement. At September 30, 2020, the Partnership was in compliance with the financial covenants required by the credit agreement. Our ability to continue as a going concern is dependent on the re-negotiation of our revolving credit agreement that matures May 1, 2021, or other measures such as the sale of assets or raising additional capital. There can be no assurance, however, that such discussions will result in a refinancing of the credit facility on acceptable terms, if at all, or provide any specific amount of additional liquidity. These factors raise substantial doubt over the Partnership’s ability to continue as a going concern for at least one year from the date that these financial statements are issued, and therefore, whether we will realize our assets and extinguish our liabilities in the normal course of business and at the amounts stated in the unaudited condensed consolidated financial statements. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty, nor do they include adjustments to reflect the possible future effects of the recoverability and classification of recorded asset amounts and classifications of liabilities that might be necessary should the Partnership be unable to continue as a going concern.

10


 

Non-cash Investing and Supplemental Cash Flow Information

The following presents the non-cash investing and supplemental cash flow information for the periods presented:

 

 

 

Nine Months Ended

September 30,

 

(in thousands)

 

2020

 

 

2019

 

Non-cash investing information

 

 

 

 

 

 

 

 

Conversion of preferred equity to common units

 

$

(36,708

)

 

$

 

Change in oil and natural gas properties - assets received in exchange

 

$

 

 

$

38,533

 

Change in oil and natural gas properties - accrued capital expenditures

 

$

(2,140

)

 

$

455

 

Change in oil and natural gas properties - accrued acquisitions

 

$

360

 

 

$

(1,462

)

Supplemental cash flow information

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

2,848

 

 

$

3,639

 

Reverse Unit Split

On April 9, 2020, the Partnership effected a 1-for-20 reverse common unit split. For presentation purposes, the unaudited condensed consolidated financial statements and footnotes have been adjusted to reflect this reverse unit split as if it had occurred at the beginning of the periods presented.

 

Note 2. Acquisitions, Divestitures and Assets Held for Sale

Assets and liabilities assumed in acquisitions accounted for as business combinations are recorded in our unaudited condensed consolidated balance sheets at their estimated fair values as of the acquisition date using assumptions that represent Level 3 fair value measurement inputs. See Note 5 in this section for additional discussion of our fair value measurements.

Results of operations attributable to the acquisition subsequent to the closing are included in our unaudited condensed consolidated statements of operations. The operations and cash flows of divested properties are eliminated from our ongoing operations.

Strategic Transaction

In March 2019, we simultaneously closed the previously announced definitive agreements to sell substantially all of our oil and natural gas properties located in Texas for $60.0 million and to purchase certain oil and natural gas properties located in Osage, Grady and Caddo Counties in Oklahoma for an aggregate purchase price of $27.5 million, both agreements subject to customary purchase price adjustments. We received net proceeds of $32.5 million at the close of this strategic transaction (“Strategic Transaction”) of which $32.0 million was used to reduce borrowings outstanding under our revolving credit facility. The acquired properties were accounted for as an asset acquisition. A gain on the sale of oil and natural gas properties of $9.5 million was reported in the unaudited condensed consolidated statements of operations for the nine months ended September 30, 2019.

The following table presents revenues and expenses of the oil and natural gas properties sold included in the accompanying unaudited condensed consolidated statements of operations for the periods presented:

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

(in thousands)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Oil and natural gas sales

 

$

 

 

$

 

 

$

 

 

$

4,689

 

Expenses(1)

 

$

 

 

$

63

 

 

$

 

 

$

3,433

 

(1) Expenses include lease operating expenses ("LOE"), production and ad valorem taxes, accretion and depletion.

 

11


 

Divestiture

On January 23, 2020, we closed the sale of land in Southern Oklahoma for a net cash settlement of $0.4 million. At December 31, 2019, the carrying value of $0.4 million was presented in “Assets held for sale” in our unaudited condensed consolidated balance sheets. No gain or loss on the transaction was recorded during the nine months ended September 30, 2020.

Note 3. Equity Awards

We have a long-term incentive program (the “Long-Term Incentive Program”) for employees, officers, consultants and directors of our general partner and its former affiliates, including Mid-Con Energy Operating, LLC (“Mid-Con Energy Operating”) and ME3 Oilfield Service, LLC (“ME3 Oilfield Service”), who performed services for us. The Long-Term Incentive Program allows for the award of unit options, unit appreciation rights, unrestricted units, restricted units, phantom units, distribution equivalent rights granted with phantom units and other types of awards. The Long-Term Incentive Program is administered by the voting members of our general partner and approved by the Board of Directors of our general partner (the “Board”). If an employee terminates employment prior to the restriction lapse date, the awarded units are forfeited and canceled and are no longer considered issued and outstanding.

The following table shows the number of existing awards and awards available under the Long-Term Incentive Program at September 30, 2020:

 

 

 

Number of

Common

Units

 

Approved and authorized awards

 

 

175,700

 

Unrestricted units granted

 

 

(69,160

)

Restricted units granted, net of forfeitures

 

 

(19,971

)

Equity-settled phantom units granted, net of forfeitures

 

 

(72,251

)

Awards available for future grant

 

 

14,318

 

    

We recognized $0.3 million of total equity-based compensation expense for the nine months ended September 30, 2020, respectively. We recognized $0.2 million and $0.6 million of total equity-based compensation expense for the three and nine months ended September 30, 2019. These costs are reported as a component of general and administrative expenses (“G&A”) in our unaudited condensed consolidated statements of operations.  

Unrestricted Unit Awards

During the nine months ended September 30, 2020, we granted 1,633 unrestricted units with an average grant date fair value of $5.20, as adjusted for the reverse unit split. During the nine months ended September 30, 2019, we granted 2,500 unrestricted units with an average grant date fair value of $20.80 per unit, as adjusted for the reverse unit split.

Equity-Settled Phantom Unit Awards

Equity-settled phantom units vest over a period of two or three years. During the nine months ended September 30, 2020, we did not grant any equity-settled phantom units. During the nine months ended September 30, 2019, we granted 25,500 equity-settled phantom units with a two-year vesting period and 3,300 equity-settled phantom units with a three-year vesting period, as adjusted for the reverse split.

A summary of our equity-settled phantom unit awards for the nine months ended September 30, 2020, is presented below:

 

 

 

Number of

Equity-Settled

Phantom Units

 

 

Average Grant Date

Fair Value per Unit

 

Outstanding at December 31, 2019

 

 

28,550

 

 

$

25.00

 

Units vested

 

 

(26,267

)

 

$

15.73

 

Units forfeited

 

 

(2,283

)

 

$

23.24

 

Outstanding at September 30, 2020

 

 

-

 

 

 

 

 

 

12


 

Note 4. Derivative Financial Instruments

Our risk management program is intended to reduce our exposure to commodity price volatility and to assist with stabilizing cash flows. Accordingly, we utilize commodity derivative contracts (swaps, calls, puts and collars) to manage a portion of our exposure to commodity prices. We enter into commodity derivative contracts or modify our portfolio of existing commodity derivative contracts when we believe market conditions or other circumstances suggest that it is prudent or as required by our lenders. We account for our commodity derivative contracts at fair value. See Note 5 in this section for a description of our fair value measurements.

We do not designate derivatives as hedges for accounting purposes; therefore, the mark-to-market adjustment reflecting the change in the fair value of our commodity derivative contracts is recorded in current period earnings. When prices for oil are volatile, a significant portion of the effect of our hedging activities consists of non-cash gains or losses due to changes in the fair value of our commodity derivative contracts. In addition to mark-to-market adjustments, gains or losses arise from net amounts paid or received on monthly settlements, proceeds from or payments for termination of contracts prior to their expiration and premiums paid or received for new contracts. Any deferred premiums are recorded as a liability and recognized in earnings as the related contracts mature. Gains and losses on derivatives are included in cash flows from operating activities. Pursuant to the accounting standard that permits netting of assets and liabilities where the right of offset exists, we present the fair value of commodity derivative contracts on a net basis.

At September 30, 2020, our commodity derivative contracts were in a net asset position with a fair value of $8.6 million, whereas at December 31, 2019, our commodity derivative contracts were in a net liability position with a fair value of $1.2 million. All of our commodity derivative contracts are with major financial institutions that are also lenders under our revolving credit facility. Should one of these financial counterparties not perform, we may not realize the benefit of some of our commodity derivative contracts under lower commodity prices and we could incur a loss. As of September 30, 2020, all of our counterparties have performed pursuant to the terms of their commodity derivative contracts.

The following tables summarize the gross fair value by the appropriate balance sheet classification, even when the derivative financial instruments are subject to netting arrangements and qualify for net presentation, in our unaudited condensed consolidated balance sheets at September 30, 2020, and December 31, 2019:

 

(in thousands)

 

Gross

Amounts

Recognized

 

 

Gross Amounts

Offset in the

Unaudited

Condensed

Consolidated

Balance Sheets

 

 

Net Amounts

Presented in

the Unaudited

Condensed

Consolidated

Balance Sheets

 

September 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

Derivative financial instruments - current asset

 

$

7,341

 

 

$

(116

)

 

$

7,225

 

Derivative financial instruments - long-term asset

 

 

1,459

 

 

 

(87

)

 

$

1,372

 

Total

 

 

8,800

 

 

 

(203

)

 

 

8,597

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Derivative financial instruments - current liability

 

 

(116

)

 

 

116

 

 

 

 

Derivative financial instruments - long-term liability

 

 

(87

)

 

 

87

 

 

 

 

Total

 

 

(203

)

 

 

203

 

 

 

 

Net asset

 

$

8,597

 

 

$

 

 

$

8,597

 

13


 

 

(in thousands)

 

Gross

Amounts

Recognized

 

 

Gross Amounts

Offset in the

Unaudited

Condensed

Consolidated

Balance Sheets

 

 

Net Amounts

Presented in

the Unaudited

Condensed

Consolidated

Balance Sheets

 

December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

Derivative financial instruments - long-term asset

 

$

1,635

 

 

$

(905

)

 

$

730

 

Total

 

 

1,635

 

 

 

(905

)

 

 

730

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Derivative financial instruments - current liability

 

 

(1,944

)

 

 

 

 

 

(1,944

)

Derivative financial instruments - long-term liability

 

 

(905

)

 

 

905

 

 

 

 

Total

 

 

(2,849

)

 

 

905

 

 

 

(1,944

)

Net liability

 

$

(1,214

)

 

$

 

 

$

(1,214

)

 

The following table presents the impact of derivative financial instruments and their location within the unaudited condensed consolidated statements of operations:

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

(in thousands)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Net settlements on matured derivatives

 

$

2,267

 

 

$

(164

)

 

$

9,251

 

 

$

(750

)

Net change in fair value of derivatives

 

 

(3,646

)

 

 

5,894

 

 

 

9,811

 

 

 

(2,322

)

Total (loss) gain on derivatives, net

 

$

(1,379

)

 

$

5,730

 

 

$

19,062

 

 

$

(3,072

)

 

At September 30, 2020, and December 31, 2019, our commodity derivative contracts had maturities at various dates through December 2021 and were comprised of commodity price swap and collar contracts. At September 30, 2020, we had the following oil derivatives net positions:

 

Period Covered

 

Weighted Average Fixed Price

 

 

Weighted Average Floor Price

 

 

Weighted Average Ceiling Price

 

 

Total Bbls

Hedged/day

 

 

Index

Swaps - 2020

 

$

57.44

 

 

$

 

 

$

 

 

 

1,786

 

 

NYMEX-WTI

Swaps - 2021

 

$

55.78

 

 

$

 

 

$

 

 

 

672

 

 

NYMEX-WTI

Collars - 2021

 

$

 

 

$

52.00

 

 

$

58.80

 

 

 

672

 

 

NYMEX-WTI

 

At December 31, 2019, we had the following oil derivatives net positions:

 

Period Covered

 

Weighted Average Fixed Price

 

 

Weighted Average Floor Price

 

 

Weighted Average Ceiling Price

 

 

Total Bbls

Hedged/day

 

 

Index

Swaps - 2020

 

$

55.81

 

 

$

 

 

$

 

 

 

1,931

 

 

NYMEX-WTI

Swaps - 2021

 

$

55.78

 

 

$

 

 

$

 

 

 

672

 

 

NYMEX-WTI

Collars - 2021

 

$

 

 

$

52.00

 

 

$

58.80

 

 

 

672

 

 

NYMEX-WTI

 

Note 5. Fair Value Disclosures

Fair Value of Financial Instruments

The carrying amounts reported in our unaudited condensed consolidated balance sheets for cash, accounts receivable and accounts payable approximate their fair values. The carrying amount of debt under our revolving credit facility approximates fair value because the revolving credit facility’s variable interest rate resets frequently and approximates current market rates available to us. We account for our commodity derivative contracts at fair value as discussed in “Assets and Liabilities Measured at Fair Value on a Recurring Basis” below.

14


 

Fair Value Measurements

Fair value is the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. GAAP establishes a three-tier fair value hierarchy that is intended to increase consistency and comparability in fair value measurements and related disclosures. The hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). Assets and liabilities recorded in the balance sheet are categorized based on the inputs to the valuation technique as follows:

Level 1 - Financial assets and liabilities for which values are based on unadjusted quoted prices for identical assets or liabilities in an active market that management has the ability to access. We consider active markets to be those in which transactions for the assets or liabilities occur in sufficient frequency and volume to provide pricing information on an on-going basis.

Level 2 - Financial assets and liabilities for which values are based on quoted prices in markets that are not active or model inputs that are observable either directly or indirectly for substantially the full term of the asset or liability. Level 2 instruments primarily include swap, call, put and collar contracts.

Level 3 - Financial assets and liabilities for which values are based on prices or valuation approaches that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect management’s own assumptions about the assumptions a market participant would use in pricing the asset or liability.

When the inputs used to measure fair value fall within different levels of the hierarchy in a liquid environment, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement in its entirety. Changes in the observability of valuation inputs may result in a reclassification for certain financial assets or liabilities. We had no transfers in or out of Levels 1, 2 or 3 for the nine months ended September 30, 2020, and for the year ended December 31, 2019.

Our estimates of fair value have been determined at discrete points in time based on relevant market data. These estimates involve uncertainty and cannot be determined with precision. There were no material changes in valuation approach or related inputs for the nine months ended September 30, 2020, and for the year ended December 31, 2019.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

We account for commodity derivative contracts and their corresponding deferred premiums at fair value on a recurring basis utilizing certain pricing models. Inputs to the pricing models include publicly available prices from a compilation of data gathered from third parties and brokers. We validate the data provided by third parties by understanding the pricing models used, obtaining market values from other pricing sources, analyzing pricing data in certain situations and confirming that those securities trade in active markets. Any deferred premiums associated with our commodity derivative contracts are categorized as Level 3, as we utilize a net present value calculation to determine the valuation. See Note 4 in this section for a summary of our derivative financial instruments.

The following sets forth, by level within the hierarchy, the fair value of our assets and liabilities measured at fair value on a recurring basis as of September 30, 2020, and December 31, 2019:

 

(in thousands)

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Fair Value

 

September 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative financial instruments - asset

 

$

 

 

$

8,800

 

 

$

 

 

$

8,800

 

Derivative financial instruments - liability

 

$

 

 

$

203

 

 

$

 

 

$

203

 

December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative financial instruments - asset

 

$

 

 

$

1,635

 

 

$

 

 

$

1,635

 

Derivative financial instruments - liability

 

$

 

 

$

2,849

 

 

$

 

 

$

2,849

 

Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis

Asset Retirement Obligations

We estimate the fair value of our asset retirement obligations (“ARO”) based on discounted cash flow projections using numerous estimates, assumptions and judgments regarding such factors as the existence of a legal obligation for ARO, amounts

15


 

and timing of settlements, the credit-adjusted risk-free rate to be used and inflation rates. See Note 6 in this section for a summary of changes in ARO.

Acquisitions

The estimated fair values of proved oil and natural gas properties acquired in business combinations are based on a discounted cash flow model and market assumptions as to future commodity prices, projections of estimated quantities of oil and natural gas reserves, expectations for timing and amount of future development and operating costs, projections of future rates of production, expected recovery rates and risk-adjusted discount rates at the acquisition date. Based on the unobservable nature of certain of the inputs, the estimated fair value of the oil and natural gas properties acquired is deemed to use Level 3 inputs. See Note 2 in this section for further discussion of our acquisitions.

Reserves

We calculate the estimated fair values of reserves and properties using valuation techniques consistent with the income approach, converting future cash flows to a single discounted amount. Significant inputs used to determine the fair values of proved properties include estimates of reserves, future operating and developmental costs, future commodity prices, a market-based weighted average cost of capital rate and the rate at which future cash flows are discounted to estimate present value. We discount future values by a per annum rate of 10% because we believe this amount approximates our long-term cost of capital and accordingly, is well aligned with our internal business decisions. The underlying commodity prices embedded in our estimated cash flows begin with Level 1 NYMEX-WTI forward curve pricing, less Level 3 assumptions that include location, pricing adjustments and quality differentials.

Impairment

The need to test oil and natural gas assets for impairment may result from significant declines in sales prices or downward revisions in estimated quantities of oil and natural gas reserves. If the carrying value of the long-lived assets exceeds the estimated undiscounted future net cash flows, an impairment expense is recognized for the difference between the estimated fair value and the carrying value of the assets. Due to the unprecedented decline in oil prices, we recorded impairment expense of $19.5 million for the nine months ended September 30, 2020. We recorded impairment expense of $0.2 million and $0.4 million for the three and nine months ended September 30, 2019.

Note 6. Asset Retirement Obligations

We have obligations under our lease agreements and federal regulations to remove equipment and restore land at the end of oil and natural gas operations. These ARO are primarily associated with plugging and abandoning wells. We typically incur this liability upon acquiring or successfully drilling a well and determine our ARO by calculating the present value of estimated cash flow related to the estimated future liability. Determining the removal and future restoration obligation requires management to make estimates and judgments, including the ultimate settlement amounts, inflation factors, credit-adjusted risk-free rates, timing of settlement and changes in the legal, regulatory, environmental and political environments. We are required to record the fair value of a liability for the ARO in the period in which it is incurred with a corresponding increase in the carrying amount of the related long-lived asset. We review our assumptions and estimates of future ARO on an annual basis, or more frequently, if an event or circumstances occur that would impact our assumptions. To the extent future revisions to these assumptions impact the present value of the abandonment liability, management will make corresponding adjustments to both the ARO and the related oil and natural gas property asset balance. The liability is accreted each period toward its future value and is recorded in our unaudited condensed consolidated statements of operations. The discounted capitalized cost is amortized to expense through the depreciation calculation over the life of the assets based on proved developed reserves. Upon settlement of the liability, a gain or loss is recognized to the extent the actual costs differ from the recorded liability.

16


 

As of September 30, 2020, and December 31, 2019, our ARO were reported as asset retirement obligations in our unaudited condensed consolidated balance sheets. Changes in our ARO for the periods indicated are presented in the following table:

 

(in thousands)

 

Nine Months Ended

September 30, 2020

 

 

Year Ended

December 31, 2019

 

Asset retirement obligations - beginning of period

 

$

30,265

 

 

$

26,001

 

Liabilities incurred for new wells and interest

 

 

637

 

 

 

8,840

 

Liabilities settled upon plugging and abandoning wells

 

 

(6

)

 

 

(24

)

Liabilities removed upon sale of wells

 

 

 

 

 

(5,795

)

Revision of estimates

 

 

 

 

 

(353

)

Accretion expense

 

 

1,283

 

 

 

1,596

 

Asset retirement obligations - end of period

 

$

32,179

 

 

$

30,265

 

 

Note 7. Debt

We had outstanding borrowings under our revolving credit facility of $69.7 million and $68.0 million at September 30, 2020, and December 31, 2019, respectively. Our current revolving credit facility matures in May 2021. Borrowings under the facility are secured by liens on not less than 90% of the value of our proved reserves. At March 31, 2020, we were not in compliance with our leverage ratio covenant, which was waived in Amendment 15 to the credit agreement, executed June 4, 2020. At September 30, 2020, we were in compliance with the financial covenants required by our credit agreement.

The borrowing base of our revolving credit facility is collectively determined by our lenders based on the value of our proved oil and natural gas reserves using assumptions regarding future prices, costs and other variables. The borrowing base is subject to scheduled redeterminations in the spring and fall of each year with an additional redetermination, either at our request or at the request of the lenders, during the period between each scheduled borrowing base redetermination. An additional borrowing base redetermination may be made at the request of the lenders in connection with a material disposition of our properties or a material liquidation of a hedge contract. Our spring 2020 redetermination was finalized in June 2020. The next semi-annual redetermination is expected to occur on or before December 31, 2020.

At September 30, 2020, borrowings under the revolving credit facility bore interest at a floating rate based on, at our election, the greater of the prime rate of Wells Fargo Bank, National Association, the federal funds effective rate plus 0.50% and the one month adjusted London Interbank Offered Rate (“LIBOR”) plus 1.0%, all of which are subject to a margin that varies from 1.75% to 2.75% per annum according to the borrowing base usage (which is the ratio of outstanding borrowings and letters of credit to the borrowing base then in effect), or the applicable LIBOR plus a margin that varies from 2.75% to 3.75% per annum according to the borrowing base usage. For the three months ended September 30, 2020, the average effective rate was 6.77%. Any unused portion of the borrowing base is subject to a commitment fee of 0.50% per annum. Letters of credit are subject to a letter of credit fee that varies from 2.75% to 3.75% according to usage.

We may use borrowings under the revolving credit facility for acquiring and developing oil and natural gas properties, for working capital purposes, for general partnership purposes and for funding distributions to our unitholders. The revolving credit facility includes customary affirmative and negative covenants, such as limitations on the creation of new indebtedness and on certain liens, and restrictions on certain transactions and payments, including distributions, and requires us to maintain hedges covering projected production. If we fail to perform our obligations under these and other covenants, the revolving credit commitments may be terminated and any outstanding indebtedness under the credit agreement, together with accrued interest, could be declared immediately due and payable.

On March 28, 2019, in conjunction with closing the Strategic Transaction and serving as our spring redetermination, Amendment 13 to the credit agreement was executed, decreasing our borrowing base to $110.0 million. The amendment also required that the leverage ratio be calculated on a building, period-annualized basis, beginning with the second quarter of 2019. See Note 2 in this section for further discussion of the Strategic Transaction.

On December 6, 2019, Amendment 14 to the credit agreement was executed, decreasing the borrowing base of the Partnership’s revolving credit facility to $95.0 million. The amendment also extended the maturity date of the revolving credit facility to May 1, 2021, and provided for a benchmark rate replacement to address the transition of LIBOR in 2021. Under the terms of the amendment, the Partnership is required to have a Consolidated Funded Indebtedness to Consolidated EBITDAX of

17


 

less than 3.0 to 1.0 to make any borrowings above the borrowing cap of $85.0 million, and must maintain a maximum Leverage Ratio of Consolidated Funded Indebtedness to Consolidated EBITDAX that does not exceed:

 

4.0 to 1.0 for the quarter ending December 31, 2019,

 

3.75 to 1.0 for the quarter ending March 31, 2020, and

 

3.5 to 1.0 for the quarter ending June 30, 2020, and thereafter.

Amendment 15 to the credit agreement, effective June 1, 2020, among other changes decreased the borrowing base from $95.0 million to $64.0 million and established a monthly repayment schedule beginning June 1, 2020, through November 1, 2020, for the $11.0 million borrowing base deficiency (such amount due on November 1, 2020, the “Original Deficiency Balance Amount”); permitted the Recapitalization Transactions; introduced anti-cash hoarding provisions and restrictive covenants on capital and general and administrative spending; provided for all loans to bear payment-in-kind interest, capitalized on a quarterly basis; excluded certain assumed liabilities from the Current Ratio calculation for the quarters ending June 30, 2020, September 30, 2020, and December 31, 2020; and required the Partnership’s Leverage Ratio of Consolidated Funded Indebtedness to Consolidated EBITDAX not to exceed:

 

5.75 to 1.0 for the quarter ending June 30, 2020,

 

5.00 to 1.0 for the quarter ending September 30, 2020;

 

4.50 to 1.0 for the quarter ending December 31, 2020; and

 

4.25 to 1.0 for the quarter ending March 31, 2021, and thereafter.

Note 8. Commitments and Contingencies

Services Agreement

The Partnership entered into a management services agreement with Contango Resources, Inc. (“Contango Resources”) on June 4, 2020, as part of the Recapitalization Transactions. Under the agreement, effective July 1, 2020, Contango Resources provides management and administrative services and serves as the operator of the Partnership’s assets for a flat fee arrangement of $4.0 million annually, plus a maximum $2.0 million termination fee. These expenses were included in G&A in our unaudited condensed consolidated statements of operations.

Employment Agreements

As part of the Recapitalization Transactions, the general partner terminated the employment agreements of Charles R. Olmstead and Jeffrey R. Olmstead. Pursuant to the employment agreements, each employee served in his respective position with our general partner and had duties, responsibilities and authority as the Board specified from time to time, in roles consistent with such positions that were assigned to them. The agreements stipulated that if there was a change of control, termination of employment, with cause or without cause, or death of the executive certain payments would be made to the executive officer. No payments were made under the employment agreements.

Change in Control Severance Plan

On July 24, 2019, the Board adopted a Change in Control Severance Plan that provides severance benefits to certain key management employees of the former general partner and its affiliates. The Change in Control Severance Plan provides for the payment of cash compensation and certain other benefits to eligible employees in the event of a change in control and a qualifying termination of employment. The obligations under the Change in Control Severance Plan are generally based on the terminated employee’s cash compensation and position within the Partnership. Depending on the facts and circumstances associated with a potential change in control, the total payments made pursuant to the Change in Control Severance Plan could be material. At September 30, 2020, no liability has been recorded associated with the Change in Control Severance Plan. For a more detailed description of the Change in Control Severance Plan, please refer to our Current Report on Form 8-K filed with the SEC on July 26, 2019.

Legal

Although we may, from time to time, be involved in litigation and claims arising out of our operations in the normal course of business, we are not currently a party to any material legal proceedings. In addition, we are not aware of any material legal or governmental proceedings against us under the various environmental protection statutes to which we are subject.

18


 

Note 9. Equity

Common Units

At September 30, 2020, and December 31, 2019, the Partnership’s equity consisted of 14,311,522 and 1,541,215 common units, respectively, representing a 100% and 98.8% limited partnership interest in us, respectively.

Our Partnership Agreement requires us to distribute all of our available cash on a quarterly basis. Our available cash is our cash on hand at the end of a quarter after the payment of our expenses and the establishment of reserves for future capital expenditures and operational needs, including cash from working capital borrowings. As of September 30, 2020, cash distributions to our common units continued to be indefinitely suspended. Our credit agreement stipulates written consent from our lenders is required in order to reinstate common unit distributions. Management and the Board will continue to evaluate, on a quarterly basis, the appropriate level of cash reserves in determining future distributions. The suspension of common unit cash distributions is designed to preserve liquidity and reallocate excess cash flow towards capital expenditure projects and debt reduction to maximize long-term value for our unitholders. There is no assurance as to future cash distributions since they are dependent upon our projections for future earnings, cash flows, capital requirements, financial conditions and other factors.

Preferred Units

The Partnership had previously issued Class A and Class B Preferred Units (collectively, the “Preferred Units”). Per accounting guidance, we were required to allocate a portion of the proceeds from Preferred Units to a beneficial conversion feature based on the intrinsic value of the beneficial conversion feature. The intrinsic value was calculated at the commitment date based on the difference between the fair value of the common units at the issuance date (number of common units issuable at conversion multiplied by the per-share value of our common units at the issuance date) and the proceeds attributed to the class of Preferred Units. The beneficial conversion feature was accreted using the effective yield method over the period from the closing date to the effective date of the holder’s conversion right.

The holders of our Preferred Units were entitled to certain rights that were senior to the rights of holders of common units, such as rights to distributions and rights upon liquidation of the Partnership. We paid holders of Preferred Units a cumulative, quarterly cash distribution on Preferred Units then outstanding at an annual rate of 8.0%, or in the event that the Partnership’s existing secured indebtedness prevented the payment of a cash distribution to all holders of the Preferred Units, in kind (additional Class A or Class B Preferred Units), at an annual rate of 10.0%. Such distributions were paid for each such quarter within 45 days after such quarter end, or as otherwise permitted to accumulate pursuant to the Partnership Agreement.

Each holder of Preferred Units had the right, prior to August 11, 2021, subject to certain conditions, to convert all or a portion of their Preferred Units into common units on a one-for-one basis, subject to adjustment for splits, subdivisions, combinations and reclassifications of the common units. Upon conversion of the Preferred Units, the Partnership would pay any distributions (to the extent accrued and unpaid as of the then most recent Preferred Units distribution date) on the converted units in cash, or in the event that the Partnership’s existing secured indebtedness prevents the payment of a cash distribution to all holders of the Preferred Units, in kind (additional Class A or Class B Preferred Units), at an annual rate of 10.0%.

As part of the Recapitalization Transactions on June 4, 2020, the holders of all of the Partnership’s Preferred Units converted their Preferred Units to common units at an average conversion price of $3.12 per Preferred Unit. The total of $0.8 million in accrued distributions for the first quarter 2020 were paid in kind and, along with the second quarter 2020 pro-rata distribution, included in the calculation of the conversion price to common units.

Class A Preferred Units

On August 11, 2016, we completed a private placement of 11,627,906 Class A Preferred Units for an aggregate offering price of $25.0 million. The Class A Preferred Units were issued at a price of $2.15 per Class A Preferred Unit. Proceeds from this issuance were used to fund an acquisition and for general partnership purposes, including the reduction of borrowings under our revolving credit facility. We received net proceeds of $24.6 million in connection with the issuance of these Class A Preferred Units. We allocated these net proceeds, on a relative fair value basis, to the Class A Preferred Units ($18.6 million) and the beneficial conversion feature ($6.0 million). Accretion of the beneficial conversion feature was $0.5 million for the nine months ended September 30, 2020, and $0.3 million and $0.9 million for the three and nine months ended September 30, 2019. The registration statement registering resales of common units issued upon conversion of the Class A Preferred Units was declared effective by the SEC on June 14, 2017.

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As the holders of all the Partnership’s Preferred Units received payment-in-kind for all accrued distributions as part of the previously announced Recapitalization Transactions, the Partnership did not accrue any distributions as of September 30, 2020. The following table summarizes cash distributions paid on our Class A Preferred Units during the nine months ended September 30, 2020:

 

Date Paid

 

Period Covered

 

Distribution per

Unit

 

 

Total Distributions

(in thousands)

 

February 14, 2020

 

October 1, 2019 - December 31, 2019

 

$

0.0430

 

 

$

500

 

 

The following table summarizes cash distributions paid on our Class A Preferred Units during the nine months ended September 30, 2019:

 

Date Paid

 

Period Covered

 

Distribution per

Unit

 

 

Total Distributions

(in thousands)

 

February 14, 2019

 

October 1, 2018 - December 31, 2018

 

$

0.0430

 

 

$

500

 

May 14, 2019

 

January 1, 2019 - March 31, 2019

 

$

0.0430

 

 

$

500

 

August 14, 2019

 

April 1, 2019 - June 30, 2019

 

$

0.0430

 

 

$

500

 

 

Class B Preferred Units

On January 31, 2018, we completed a private placement of 9,803,921 Class B Preferred Units for an aggregate offering price of $15.0 million. The Class B Preferred Units were issued at a price of $1.53 per Class B Preferred Unit. Proceeds from this issuance were used to fund the acquisition of certain oil and natural gas properties located in Campbell and Converse Counties, Wyoming, and for general partnership purposes, including the reduction of borrowings under our revolving credit facility. We received net proceeds of $14.9 million in connection with the issuance of these Class B Preferred Units. We allocated these net proceeds, on a relative fair value basis, to the Class B Preferred Units ($14.2 million) and the beneficial conversion feature ($0.7 million). Accretion of the beneficial conversion feature was $0.1 million for the nine months ended September 30, 2020, and $0.1 million for the three and nine months ended September 30, 2019. The registration statement registering resales of common units issued upon conversion of the Class B Preferred Units was declared effective by the SEC on May 25, 2018.

As the holders of all the Partnership’s Preferred Units received payment-in-kind for all accrued distributions as part of the previously announced Recapitalization Transactions, the Partnership did not accrue any distributions as of September 30, 2020. The following table summarizes cash distributions paid on our Class B Preferred Units during the nine months ended September 30, 2020:

 

Date Paid

 

Period Covered

 

Distribution per

Unit

 

 

Total Distributions

(in thousands)

 

February 14, 2020

 

October 1, 2019 - December 31, 2019

 

$

0.0306

 

 

$

300

 

The following table summarizes cash distributions paid on our Class B Preferred Units during the nine months ended September 30, 2019:

 

Date Paid

 

Period Covered

 

Distribution per

Unit

 

 

Total Distributions

(in thousands)

 

February 14, 2019

 

October 1, 2018 - December 31, 2018

 

$

0.0306

 

 

$

300

 

May 14, 2019

 

January 1, 2019 - March 31, 2019

 

$

0.0306

 

 

$

300

 

August 14, 2019

 

April 1, 2019 - June 30, 2019

 

$

0.0306

 

 

$

300

 

 

Allocation of Net Income or Loss

Net income or loss was allocated to our general partner in proportion to its pro-rata ownership during the period. The remaining net income or loss was allocated to the limited partner unitholders net of Preferred Unit distributions, including accretion of the Preferred Unit beneficial conversion feature. In the event of net income, diluted net income per partner unit reflected the potential dilution of non-vested restricted stock awards and the conversion of Preferred Units. On June 4, 2020, as part of the Recapitalization Transactions, the general partner units were converted to common units; therefore, net income or loss will no longer be allocated to our general partner.

20


 

Note 10. Related Party Transactions

Agreements with Affiliates

The following agreements were negotiated among affiliated parties and, consequently, are not the result of arm’s length negotiations. The following is a description of those agreements that were entered into with the affiliates of our former board member and Chief Executive Officer, Mr. Charles R. Olmstead.

Services Agreement

Prior to the Recapitalization Transactions on June 4, 2020, we were party to a services agreement with our former affiliate, Mid-Con Energy Operating, pursuant to which Mid-Con Energy Operating provided certain services to us, including managerial, administrative and operational services. The operational services included marketing, geological and engineering services. We reimbursed Mid-Con Energy Operating, on a monthly basis, for the allocable expenses it incurred in its performance under the services agreement. These expenses included, among other things, salary, bonus, incentive compensation and other amounts paid to persons who performed services for us or on our behalf and other expenses allocated by Mid-Con Energy Operating to us. These expenses were included in G&A in our unaudited condensed consolidated statements of operations.

The Partnership entered into a management services agreement with Contango Resources on June 4, 2020, as part of the Recapitalization Transactions. Under the agreement, effective July 1, 2020, Contango Resources provides management and administrative services and serves as operator of the Partnership’s assets for a flat fee arrangement of $4.0 million annually, plus a maximum $2.0 million termination fee. These expenses were included in G&A in our unaudited condensed consolidated statements of operations.

Operating Agreements

Prior to the Recapitalization Transactions on June 4, 2020, we, along with various third parties with an ownership interest in the same property, were parties to standard oil and natural gas joint operating agreements with our former affiliate, Mid-Con Energy Operating. We and those third-parties paid Mid-Con Energy Operating overhead associated with operating our properties and for its direct and indirect expenses that were chargeable to the wells under their respective operating agreements. The majority of these expenses were included in LOE in our unaudited condensed consolidated statements of operations. Mid-Con Energy Operating resigned as operator under these joint operating agreements and Contango Resources became operator on July 1, 2020. Pursuant to the Management Services Agreement with Contango Resources, Contango Resources does not charge overhead associated with operating our properties.

Oilfield Services

Prior to the Recapitalization Transactions on June 4, 2020, we were party to operating agreements, pursuant to which our former affiliate, Mid-Con Energy Operating, billed us for oilfield services performed by our affiliates, ME3 Oilfield Service and ME2 Well Services, LLC. These amounts were either included in LOE in our unaudited condensed consolidated statements of operations or were capitalized as part of oil and natural gas properties in our unaudited condensed consolidated balance sheets. Mid-Con Energy Operating resigned as operator under these service agreements, and Contango Resources became operator on July 1, 2020.

Other Agreements

Prior to the Recapitalization Transactions on June 4, 2020, we were party to monitoring fee agreements with Bonanza Fund Management, Inc. (“Bonanza”), a Class A Preferred Unitholder, and Goff Focused Strategies, LLC (“GFS”), a Class B Preferred Unitholder, pursuant to which we paid Bonanza and GFS a quarterly monitoring fee in connection with monitoring the purchasers’ investments in the Preferred Units. These expenses were included in G&A in our unaudited condensed consolidated statements of operations.

21


 

The following table summarizes the related party transactions for the periods indicated:

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

(in thousands)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Services agreement

 

$

1,000

 

 

$

719

 

 

$

3,600

 

 

$

2,196

 

Operating agreements

 

 

3,629

 

 

 

2,809

 

 

 

8,652

 

 

 

8,353

 

Oilfield services

 

 

 

 

 

1,580

 

 

 

2,657

 

 

 

4,092

 

Other agreements

 

 

 

 

 

80

 

 

 

116

 

 

 

240

 

 

 

$

4,629

 

 

$

5,188

 

 

$

15,025

 

 

$

14,881

 

 

At September 30, 2020, we had a net payable to Contango Resources of $2.5 million, comprised of joint interest billings payable of $4.6 million, offset by an oil and natural gas revenue receivable of $2.1 million. At December 31, 2019, we had a net payable to our former affiliate, Mid-Con Energy Operating, of $6.9 million, comprised of a joint interest billing payable of $7.8 million and a payable for operating services and other miscellaneous items of $0.8 million, offset by an oil and natural gas revenue receivable of $1.7 million. These amounts were included in accounts payable-related parties in our unaudited condensed consolidated balance sheets.

Note 11. Revenue Recognition

Revenue from Contracts with Customers

Under our oil and natural gas sales contracts, enforceable rights and obligations arise at the time production occurs on dedicated leases as the Partnership promises to deliver goods in the form of oil or natural gas production on contractually-specified leases to the purchasers. Sales of oil and natural gas are recognized at the point that control of the product is transferred to the customer; title and risk of loss to the product generally transfers at the delivery point specified in the contract. We do not extract natural gas liquids (“NGLs”) from our natural gas production prior to the sale and transfer of title of the natural gas stream to our purchasers. While some of our purchasers extracted NGLs from the natural gas stream sold by us to them, we had no ownership in such NGLs. The Partnership commits and dedicates for sale all of the oil or natural gas production from contractually agreed-upon leases to the purchaser. Our oil contract pricing provisions are tied to a market index, with certain marketing adjustments, including location and quality differentials as well as certain embedded marketing fees. The majority of our natural gas contract pricing provisions are tied to a market index less customary deductions, such as gathering, processing and transportation. Payment is typically received 30 to 60 days after the date production is delivered. We had no significant natural gas imbalances at September 30, 2020 and 2019.

Transaction Price Allocated to Remaining Performance Obligations

Our oil and natural gas sales are generally short-term in nature, with a contract term of one year or less. For those contracts, we have utilized the practical expedient in ASC 606-10-50-14, exempting the Partnership from disclosure of the transaction price allocated to remaining performance obligations if the performance obligation is part of a contract that has an original expected duration of one year or less.

For our oil and natural gas sales contracts, the variable consideration related to variable production is not estimated because the uncertainty related to the consideration is resolved as the barrel of oil (“Bbl”) and Mcf of natural gas are transferred to the customer each day. Therefore, we have utilized the practical expedient in ASC 606-10-50-14(a), which states the Partnership is not required to disclose the transaction price allocated to remaining performance obligations for specific situations in which the Partnership does not need to estimate variable consideration to recognize revenue.

Contract Balances

Our oil and natural gas sales contracts do not give rise to contract assets or liabilities under ASC 606.

Note 12. Leases

We adopted ASC 842, as amended, on January 1, 2019, using the modified retrospective approach. The modified retrospective approach provided a method for recording existing leases at adoption and allowed for a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The adoption of this standard did not result in an adjustment to retained earnings. We elected the transition package of practical expedients permitted under the transition

22


 

guidance, which among other things, allowed us to carry forward the historical lease classification. We also elected the optional transition practical expedient to not evaluate existing or expired land easements that were not previously accounted for as leases under ASC 840, Leases (“ASC 840”). Our leases do not provide an implicit discount rate; therefore, we used our incremental borrowing rate as of January 1, 2019. As a result of adopting the new standard, we recorded lease assets and lease liabilities of $1.2 million and $1.3 million, respectively, at January 1, 2019.

We lease office space in Tulsa, Oklahoma, Abilene, Texas, and Gillette, Wyoming. Per the short-term accounting policy election, leases with an initial term of 12 months or less were not recorded on the balance sheet, and we recognize lease expense for these leases on a straight-line basis over the term of the lease. Most of our leases include an option to renew. The exercise of the lease renewal options is at our discretion.

A summary of our leases is presented below:

 

(in thousands)

 

Classification

 

Nine Months Ended

September 30, 2020

 

 

Year Ended

December 31, 2019

 

Assets

 

 

 

 

 

 

 

 

 

 

Operating

 

Other property and equipment

 

$

474

 

 

$

835

 

Total lease assets

 

 

 

$

474

 

 

$

835

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

Current operating

 

Other current liabilities

 

$

454

 

 

$

430

 

Non-current operating

 

Other long-term liabilities

 

 

113

 

 

 

457

 

Total lease liabilities

 

 

 

$

567

 

 

$

887

 

 

 

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

Classification

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Operating lease expense(1)(2) (in thousands)

 

G&A expense

 

$

106

 

 

$

64

 

 

$

324

 

 

$

195

 

Weighted average remaining lease term (months)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating leases

 

 

 

 

15

 

 

 

26

 

 

 

15

 

 

 

26

 

Weighted average discount rate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating leases

 

 

 

 

5.7

%

 

 

5.7

%

 

 

5.7

%

 

 

5.7

%

(1) Includes short-term leases.

(2) There is not a material difference between cash paid and amortized expense.

 

Future minimum lease payments under the non-cancellable operating leases are presented in the following table:

 

(in thousands)

 

Operating Leases

 

Remaining 2020

 

$

117

 

2021

 

 

471

 

Total lease maturities

 

 

588

 

Less: imputed interest

 

 

21

 

Present value of lease liabilities

 

$

567

 

 

Note 13. New Accounting Standards

In June 2016, the FASB issued ASC 326, Financial Instruments- Credit Losses (“ASC 326”), which replaces the current “incurred loss” methodology for recognizing credit losses with an “expected loss” methodology. This new methodology requires that a financial asset measured at amortized cost be presented at the net amount expected to be collected. This standard is intended to provide more timely decision-useful information about the expected credit losses on financial instruments. For smaller reporting companies, this guidance is effective for fiscal years beginning after December 15, 2022, and early adoption is permitted. We plan to adopt this standard on January 1, 2023, and are currently evaluating the impact of the adoption on our consolidated financial statements.

 

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Note 14. Subsequent Events

Proposed Merger with Contango Oil and Gas and Redetermination Postponement

On October 25, 2020, the Partnership, the general partner, Contango Oil & Gas Company, a Texas corporation (“Contango”) and the Michael Merger Sub LLC, a Delaware limited liability company and a wholly-owned, direct subsidiary of Contango (“Merger Sub”), entered into an Agreement and Plan of Merger (the “Merger Agreement”). Upon the terms and subject to the conditions of the Merger Agreement, Mid-Con will merge with and into Merger Sub (the “Merger”), with Merger Sub surviving the Merger as a limited liability company and a wholly-owned, direct subsidiary of Contango.

At the effective time of the Merger (the “Effective Time”), each common unit issued and outstanding immediately prior to the Effective Time (other than common units held in the Partnership’s treasury or held by the general partner immediately prior to the Effective Time, which shall be canceled and extinguished without any conversion thereof, and no consideration shall be delivered in exchange therefor) will be converted automatically into the right to receive 1.7500 shares of common stock, par value $0.04 per share, of Contango (“Contango common stock”).

The closing of the Merger is expected to occur in the fourth quarter of 2020 or the first quarter of 2021, subject to the satisfaction of certain regulatory approvals and other customary closing conditions. The Merger Agreement provides that, during the periods from the date of the Merger Agreement until the closing of the Merger, the Partnership is subject to certain restrictions.

The Merger Agreement provides certain termination rights for each of the Partnership and Contango, including, among others, if the consummation of the Merger does not occur within 180 days of the date of the Merger Agreement. Should certain unlikely events occur under the specified circumstances outlined in the Merger Agreement, the Partnership will be required to pay Contango a termination fee of $1.5 million.

Contemporaneously with the execution of the Merger Agreement, we entered into a purchase and sale agreement requiring Contango to purchase certain assets for cash consideration of $9.0 million in the event that the Merger fails to close by January 23, 2021, subject to a 30 day extension if the failure of the Merger to close is due to the failure to obtain Contango shareholder approval or our unitholder approval.

In connection with entering into the Merger Agreement, the Partnership entered into a postponement letter with the lenders under its revolving credit facility (the “Postponement Letter”). The Postponement Letter provides, among other things, the Partnership may postpone the payment of the Original Deficiency Balance Amount and the Partnership’s compliance with the Leverage Ratio of Consolidated Funded Indebtedness to Consolidated EBITDAX until December 31, 2020.

Additional information on the proposed Merger is included in the Form 8-K filed with the SEC on October 26, 2020.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes thereto, as well as our Annual Report.

Overview

Mid-Con Energy Partners, LP is a publicly held limited partnership formed in July 2011 that engages in the ownership, acquisition and development of producing oil and natural gas properties in North America, with a focus on EOR. Our properties are located in Oklahoma and Wyoming. Our properties primarily consist of mature, legacy onshore oil reservoirs with long-lived, relatively predictable production profiles and low production decline rates.

Executive Summary

Proposed Merger with Contango Oil and Gas and Redetermination Postponement

On October 25, 2020, the Partnership, the general partner, Contango Oil & Gas Company, a Texas corporation (“Contango”) and the Michael Merger Sub LLC, a Delaware limited liability company and a wholly-owned, direct subsidiary of Contango (“Merger Sub”), entered into an Agreement and Plan of Merger (the “Merger Agreement”). Upon the terms and subject to the conditions of the Merger Agreement, Mid-Con will merge with and into Merger Sub (the “Merger”), with Merger Sub surviving the Merger as a limited liability company and a wholly-owned, direct subsidiary of Contango.

At the effective time of the Merger (the “Effective Time”), each common unit issued and outstanding immediately prior to the Effective Time (other than common units held in the Partnership’s treasury or held by the general partner immediately

24


 

prior to the Effective Time, which shall be canceled and extinguished without any conversion thereof, and no consideration shall be delivered in exchange therefor) will be converted automatically into the right to receive 1.7500 shares of common stock, par value $0.04 per share, of Contango common stock.

The closing of the Merger is expected to occur in the fourth quarter of 2020 or the first quarter of 2021, subject to the satisfaction of certain regulatory approvals and other customary closing conditions. The Merger Agreement provides that, during the periods from the date of the Merger Agreement until the closing of the Merger, the Partnership is subject to certain restrictions.

The Merger Agreement provides certain termination rights for each of the Partnership and Contango, including, among others, if the consummation of the Merger does not occur within 180 days of the date of the Merger Agreement. Should certain unlikely events occur under the specified circumstances outlined in the Merger Agreement, the Partnership will be required to pay Contango a termination fee of $1.5 million.

Contemporaneously with the execution of the Merger Agreement, we entered into a purchase and sale agreement requiring Contango to purchase certain assets for cash consideration of $9.0 million in the event that the Merger fails to close by January 23, 2021, subject to a 30 day extension if the failure of the Merger to close is due to the failure to obtain Contango shareholder approval or our unitholder approval.

In connection with entering into the Merger Agreement, the Partnership entered into a postponement letter with the lenders under its revolving credit facility (the “Postponement Letter”). The Postponement Letter provides, among other things, the Partnership may postpone the payment of the Original Deficiency Balance Amount and the Partnership’s compliance with the Leverage Ratio of Consolidated Funded Indebtedness to Consolidated EBITDAX until December 31, 2020.

Additional information on the proposed Merger is included in the Form 8-K filed with the SEC on October 26, 2020.

Recapitalization Transactions

The Partnership closed the Recapitalization Transactions on June 4, 2020, resulting in significant changes to the Partnership’s capital structure and governance, strengthening the Partnership’s balance sheet, creating alignment across all unitholders, reducing costs, streamlining operations and creating immediate and sustainable value for all unitholders. As part of the Recapitalization Transactions, all of the Partnership’s Class A and B Preferred Units were converted into common units at an average conversion price of $3.12 per Preferred Unit. In addition, ownership of the Partnership’s general partner was transferred to the Partnership, resulting in strengthened corporate governance, and a new Board of Directors which was elected by the written consent of the holders of a majority of the outstanding common units.

In conjunction with the Recapitalization Transactions, the Partnership also announced that Contango Resources became the new operator of the Partnership’s properties, replacing Mid-Con Energy Operating, on July 1, 2020. The move is expected to generate pro forma annual cash savings of approximately $6.5 million compared to 2019.

Financial and Operational Performance

Our financial and operational performance for the three months ended September 30, 2020, included the following:

 

Net loss of $3.5 million, compared to net income of $6.0 million for the three months ended September 30, 2019;

 

Average daily net production was 3,000 Boe/d, compared to 3,543 Boe/d for the three months ended September 30, 2019, a 15% decrease over the comparative period;

 

Oil and natural gas sales were $9.9 million, compared to $15.8 million for the three months ended September 30, 2019, which was primarily the result of a 27% decrease in average oil sales price per barrel (excluding the effects of derivatives); and

 

Loss on derivatives, net was $1.4 million, compared to a gain of $5.7 million for the three months ended September 30, 2019.

Our financial and operational performance for the nine months ended September 30, 2020 included the following:

 

Net loss of $12.7 million, compared to net income of $7.3 million for the nine months ended September 30, 2019;

 

Average daily net production was 3,106 Boe/d, compared to 3,516 Boe/d for the nine months ended September 30, 2019, a 12% decrease over the comparative period;

 

Oil and natural gas sales were $28.9 million, compared to $47.8 million for the nine months ended September 30, 2019, which was primarily the result of a 32% decrease in average oil sales price per barrel (excluding the effects of derivatives);

25


 

 

Gain on derivatives, net was $19.1 million, compared to a loss of $3.1 million for the nine months ended September 30, 2019; and

 

Cash flows from operating activities were $5.9 million, compared to $10.4 million for the nine months ended September 30, 2019.

Recent Developments

COVID-19 and Crude Oil Price Declines

The energy landscape changed dramatically in 2020 with simultaneous demand and supply shocks that drove the industry into a severe downturn.  The demand shock was triggered by COVID-19, which was declared a global pandemic and caused unprecedented social and economic consequences. Mitigation efforts to stop the spread of this contagious disease included stay-at-home orders and business closures that caused sharp contractions in economic activity worldwide. The supply shock was triggered by disagreements between OPEC and Russia, beginning in early March 2020, which resulted in significant supply coming onto the market and an oil price war. These dual demand and supply shocks caused oil prices to collapse as we exited the first quarter.  

As we entered the second quarter, predictions of COVID-19 driven global oil demand losses intensified, with forecasts of unprecedented demand declines. Based on these forecasts, OPEC plus nations held an emergency meeting, and in April they announced a coordinated production cut that was unprecedented in both its magnitude and duration. The OPEC agreement spans from May 2020 until April 2022, with the volume of production cuts easing over time. Additionally, non-OPEC plus countries, including the U.S., Canada, Brazil and other G-20 countries, announced organic reductions to production through the release of drilling rigs, frac crews, normal field decline and curtailments. Despite these planned production decreases, the supply cuts were not timely enough to overcome significant demand decline. Futures prices for April West Texas Intermediate crude (“WTI”) closed under $20 a barrel for the first time since 2001, followed by May WTI settling below zero on the day before futures contracts expiry, as holders of May futures contracts struggled to exit positions and avoid taking physical delivery. As storage constraints approached, spot prices in April for certain North American landlocked grades of crude oil were in the single digits or even negative for particularly remote or low-grade crudes, while waterborne priced crudes such as Brent crude sold at a relative advantage. The extreme volatility experienced in the first half of the year stabilized in the third quarter of 2020, with crude oil prices stabilizing around $40 per barrel.

From the beginning of the commodity price downturn in early 2020, we have closely monitored the market and taken proactive steps in response. Beginning in March 2020, the Partnership identified and shut-in approximately 400 wells through the end of April 2020 that were not economically viable at the existing pricing. The Partnership has continued to monitor economic well viability and as of the end of September 2020, the Partnership has returned approximately 58 wells to production compared to the active well count at the end of April 2020. The Partnership continues to be diligent in returning wells to production based on economic viability as commodity prices and expenses change. In addition to shut-in activities, the Partnership has continued to identify and execute strategies for reducing expenditures and lowering its leverage. As discussed above, in June 2020, the Partnership negotiated and executed the Recapitalization Transactions which is expected to generate pro forma annual cash savings of approximately $6.5 million compared to 2019.

Our workforce and operations have also adjusted to mitigate the impacts of the COVID-19 global pandemic. A large portion of our office staff have been successfully working remotely, with offices designing and executing a flexible, phased reentry, following national, state and local guidelines. Workforce health and safety remains the overriding driver for our actions and we have demonstrated our ability to adapt to local conditions as warranted. These mitigation measures have thus far been effective at protecting employees’ health and reducing business operation disruptions.

Departure and Appointment of New Officers

On July 6, 2020, the Partnership announced the resignation of Mr. Chad B. Roller, President and Chief Operating Officer, and Mr. Charles L. McLawhorn, III, Vice President, General Counsel and Corporate Secretary to pursue opportunities with Contango Oil & Gas Company. Messrs. Roller and McLawhorn will continue to provide services to the Partnership pursuant to that Management Services Agreement.

On August 6, 2020, the Partnership announced the resignation of Mr. Philip R. Houchin as Chief Financial Officer. Effective July 31, 2020, Ms. Sherry L. Morgan was appointed as Chief Executive Officer, Mr. Greg Westfall was appointed as Chief Operating Officer and Ms. Jodie L. DiGiacomo was appointed as Chief Accounting Officer.

26


 

Business Environment

The markets for oil and natural gas have been volatile and may continue to be volatile in the future, which means that the price of oil and natural gas may fluctuate widely. Sustained periods of low prices for oil and natural gas could materially and adversely affect our financial position, our results of operations, the quantities of oil and natural gas reserves that we can economically produce and our access to capital. Our average sales price per Bbl, excluding commodity derivative contracts, was $36.13 and $53.43 for the nine months ended September 30, 2020 and 2019, respectively.

Our risk management program is intended to reduce our exposure to commodity price volatility and to assist with stabilizing cash flows. Accordingly, we utilize commodity derivative contracts (swaps, calls, puts and collars) to manage a portion of our exposure to commodity prices. We enter into commodity derivative contracts or modify our portfolio of existing commodity derivative contracts when we believe market conditions or other circumstances suggest that it is prudent or as required by our lenders. We conduct our risk management activities exclusively with participant lenders in our revolving credit facility. We have entered oil commodity derivative contracts covering a portion of our anticipated oil production through December 2021.

Our business faces the challenge of natural production declines. As initial reservoir pressures are depleted, production from a given well or formation decreases. Although our waterflood operations tend to restore reservoir pressure and production, once a waterflood is fully effected, production, once again, begins to decline. Our future growth will depend on our ability to continue to add reserves in excess of our production. Our focus on adding reserves is primarily through improving the economics of producing oil from our existing fields and, secondarily, through acquisitions of additional proved reserves. Our ability to add reserves through development projects and acquisitions is dependent upon many factors, including our ability to raise capital, obtain regulatory approvals, procure contract drilling rigs and personnel and successfully identify and close acquisitions.

We focus our efforts on increasing oil and natural gas reserves and production while controlling costs at a level that is appropriate for long-term operations. Our future cash flows from operations are impacted by our ability to manage our overall cost structure.

How We Evaluate Our Operations

Our primary business objective is to manage our oil and natural gas properties for the purpose of generating stable cash flows, which will provide stability and, over time, growth of distributions to our unitholders. The amount of cash that we may distribute to our unitholders in the future depends principally on the cash we generate from our operations, which will fluctuate from quarter-to-quarter based on, among other factors:

 

the amount of oil and natural gas we produce;

 

the prices at which we sell our oil and natural gas production;

 

our ability to hedge commodity prices; and

 

the level of our operating and administrative costs.

We use a variety of financial and operational metrics to assess the performance of our oil and natural gas properties, including:

 

oil and natural gas production volumes;

 

realized prices on the sale of oil and natural gas, including the effect of our commodity derivative contracts; and

 

LOE.

27


 

Results of Operations

The tables presented in this section summarize certain results of operations and period-to-period comparisons for the three and nine months ended September 30, 2020. Because of normal production declines, changes in drilling activities, fluctuations in commodity prices and the effects of acquisitions and divestitures, the historical data presented below should not be interpreted as being indicative of future results.

Net production volumes, average sales prices and unit costs per Boe

  

 

 

Three Months Ended

September 30,

 

 

 

 

 

 

%

 

 

Nine Months Ended

September 30,

 

 

 

 

 

 

%

 

 

 

2020

 

 

2019

 

 

Change

 

 

Change

 

 

2020

 

 

2019

 

 

Change

 

 

Change

 

Production volumes, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Oil (MBbls)

 

 

252

 

 

 

294

 

 

 

(42

)

 

(14%)

 

 

 

782

 

 

 

877

 

 

 

(95

)

 

(11%)

 

Natural gas (MMcf)

 

 

146

 

 

 

193

 

 

 

(47

)

 

(24%)

 

 

 

416

 

 

 

498

 

 

 

(82

)

 

(16%)

 

Total (MBoe)

 

 

276

 

 

 

326

 

 

 

(50

)

 

(15%)

 

 

 

851

 

 

 

960

 

 

 

(109

)

 

(11%)

 

Average daily net production (Boe/d)

 

 

3,000

 

 

 

3,543

 

 

 

(543

)

 

(15%)

 

 

 

3,106

 

 

 

3,516

 

 

 

(410

)

 

(12%)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average sales prices

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Oil (per Bbl)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales price

 

$

38.22

 

 

$

52.61

 

 

$

(14.39

)

 

(27%)

 

 

$

36.13

 

 

$

53.43

 

 

$

(17.30

)

 

(32%)

 

Effect of net settlements on matured derivative instruments

 

$

3.27

 

 

$

(0.56

)

 

$

3.83

 

 

684%

 

 

$

9.98

 

 

$

(0.86

)

 

$

10.84

 

 

1260%

 

Realized oil price after derivatives

 

$

41.49

 

 

$

52.05

 

 

$

(10.56

)

 

(20%)

 

 

$

46.11

 

 

$

52.57

 

 

$

(6.46

)

 

(12%)

 

Natural gas (per Mcf)

 

$

1.86

 

 

$

1.47

 

 

$

0.39

 

 

27%

 

 

$

1.53

 

 

$

1.87

 

 

$

(0.34

)

 

(18%)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average unit costs per Boe

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lease operating expenses

 

$

18.57

 

 

$

25.44

 

 

$

(6.87

)

 

(27%)

 

 

$

21.90

 

 

$

23.66

 

 

$

(1.76

)

 

(7%)

 

Production and ad valorem taxes

 

$

1.93

 

 

$

4.09

 

 

$

(2.16

)

 

(53%)

 

 

$

2.09

 

 

$

4.25

 

 

$

(2.16

)

 

(51%)

 

Depreciation, depletion and amortization

 

$

7.62

 

 

$

7.85

 

 

$

(0.23

)

 

(3%)

 

 

$

7.94

 

 

$

8.36

 

 

$

(0.42

)

 

(5%)

 

General and administrative expenses

 

$

7.88

 

 

$

4.31

 

 

$

3.57

 

 

83%

 

 

$

9.35

 

 

$

6.68

 

 

$

2.67

 

 

40%

 

Oil and natural gas sales

 

 

 

Three Months Ended

September 30,

 

 

 

 

 

 

%

 

 

Nine Months Ended

September 30,

 

 

 

 

 

 

%

 

(in thousands)

 

2020

 

 

2019

 

 

Change

 

 

Change

 

 

2020

 

 

2019

 

 

Change

 

 

Change

 

Oil sales

 

$

9,632

 

 

$

15,468

 

 

$

(5,836

)

 

(38%)

 

 

$

28,253

 

 

$

46,854

 

 

$

(18,601

)

 

(40%)

 

Natural gas sales

 

 

271

 

 

 

283

 

 

 

(12

)

 

(4%)

 

 

 

635

 

 

 

930

 

 

 

(295

)

 

(32%)

 

Total oil and natural gas sales

 

$

9,903

 

 

$

15,751

 

 

$

(5,848

)

 

(37%)

 

 

$

28,888

 

 

$

47,784

 

 

$

(18,896

)

 

(40%)

 

28


 

Oil and natural gas sales price and volume variances

 

 

 

Three Months Ended

September 30, 2020 and 2019

 

 

Nine Months Ended

September 30, 2020 and 2019

 

(in thousands, except prices)

 

Change in prices

 

 

Production Volumes

 

 

Total Net Dollar Effect of Change

 

 

Change in prices

 

 

Production Volumes

 

 

Total Net Dollar Effect of Change

 

Effects of changes in sales price

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Oil (Bbls)

 

$

(14.39

)

 

 

252

 

 

$

(3,626

)

 

$

(17.30

)

 

 

782

 

 

$

(13,528

)

Natural gas (Mcf)

 

$

0.39

 

 

 

146

 

 

 

57

 

 

$

(0.34

)

 

 

416

 

 

 

(140

)

Total oil and natural gas sales due to change in price

 

 

 

 

 

 

 

 

 

$

(3,569

)

 

 

 

 

 

 

 

 

 

$

(13,668

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in Production Volumes

 

 

Prior Period Average Prices

 

 

Total Net Dollar Effect of Change

 

 

Change in Production Volumes

 

 

Prior Period Average Prices

 

 

Total Net Dollar Effect of Change

 

Effects of changes in production volumes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Oil (Bbls)

 

 

(42

)

 

$

52.61

 

 

$

(2,209

)

 

 

(95

)

 

$

53.43

 

 

$

(5,075

)

Natural gas (Mcf)

 

 

(47

)

 

$

1.47

 

 

 

(70

)

 

 

(82

)

 

$

1.87

 

 

 

(153

)

Total oil and natural gas sales due to change in production volumes

 

 

 

 

 

 

 

 

 

 

(2,279

)

 

 

 

 

 

 

 

 

 

 

(5,228

)

Total change in oil and natural gas sales

 

 

 

 

 

 

 

 

 

$

(5,848

)

 

 

 

 

 

 

 

 

 

$

(18,896

)

The change in oil and natural gas sales was primarily due to:

 

decreased oil sales prices; and

 

decreased production due to shut-in wells.

(Loss) gain on derivatives, net

 

 

 

Three Months Ended

September 30,

 

 

 

 

 

 

%

 

 

Nine Months Ended

September 30,

 

 

 

 

 

 

%

 

(in thousands)

 

2020

 

 

2019

 

 

Change

 

 

Change

 

 

2020

 

 

2019

 

 

Change

 

 

Change

 

Cash settlements on matured derivatives, net

 

$

2,267

 

 

$

(164

)

 

$

2,431

 

 

1482%

 

 

$

9,251

 

 

$

(750

)

 

$

10,001

 

 

1333%

 

Non-cash change in fair value of derivatives

 

 

(3,646

)

 

 

5,894

 

 

 

(9,540

)

 

(162%)

 

 

 

9,811

 

 

 

(2,322

)

 

 

12,133

 

 

523%

 

Total (loss) gain on derivatives, net

 

$

(1,379

)

 

$

5,730

 

 

$

(7,109

)

 

(124%)

 

 

$

19,062

 

 

$

(3,072

)

 

$

22,134

 

 

721%

 

See Note 4 and Note 5 to the unaudited condensed consolidated financial statements for additional information regarding our commodity derivative contracts.

Lease operating expenses

 

 

 

Three Months Ended

September 30,

 

 

 

 

 

 

%

 

 

Nine Months Ended

September 30,

 

 

 

 

 

 

%

 

(in thousands)

 

2020

 

 

2019

 

 

Change

 

 

Change

 

 

2020

 

 

2019

 

 

Change

 

 

Change

 

Lease operating expenses

 

$

5,124

 

 

$

8,213

 

 

$

(3,089

)

 

(38%)

 

 

$

18,481

 

 

$

22,109

 

 

$

(3,628

)

 

(16%)

 

Workover expenses

 

 

 

 

 

80

 

 

 

(80

)

 

(100%)

 

 

 

159

 

 

 

601

 

 

 

(442

)

 

(74%)

 

Total lease operating expenses

 

$

5,124

 

 

$

8,293

 

 

$

(3,169

)

 

(38%)

 

 

$

18,640

 

 

$

22,710

 

 

$

(4,070

)

 

(18%)

 

The change in LOE in total and per Boe for the three months ended September 30, 2020, compared to the three months ended September 30, 2019, was primarily due to:

 

decreased activity due to the unprecedented decline in oil and natural gas prices, and resulting shut-in wells;

 

decreased administrative overhead; and

 

decreased workover expenses.

29


 

The change in LOE in total and per Boe for the nine months ended September 30, 2020, compared to the nine months ended September 30, 2019, was primarily due to:

 

decreased activity due to the unprecedented decline in oil and natural gas prices, and resulting shut-in wells;

 

decreased administrative overhead;

 

divestitures of our Texas properties; and

 

decreased workover expenses; offset by

 

incremental costs associated with properties acquired in Oklahoma and Wyoming.

Production and ad valorem taxes

 

 

 

Three Months Ended

September 30,

 

 

 

 

 

 

%

 

 

Nine Months Ended

September 30,

 

 

 

 

 

 

%

 

(in thousands)

 

2020

 

 

2019

 

 

Change

 

 

Change

 

 

2020

 

 

2019

 

 

Change

 

 

Change

 

Production taxes

 

$

382

 

 

$

1,095

 

 

$

(713

)

 

(65%)

 

 

$

1,672

 

 

$

3,204

 

 

$

(1,532

)

 

(48%)

 

Ad valorem taxes

 

 

151

 

 

 

238

 

 

 

(87

)

 

(37%)

 

 

 

109

 

 

 

880

 

 

 

(771

)

 

(88%)

 

Total production and ad valorem taxes

 

$

533

 

 

$

1,333

 

 

$

(800

)

 

(60%)

 

 

$

1,781

 

 

$

4,084

 

 

$

(2,303

)

 

(56%)

 

The change in production and ad valorem taxes in total and per Boe was primarily due to:

 

decreased oil and natural gas revenue; and

 

ad valorem tax refund for over-withheld taxes in Wyoming.

Depreciation, depletion, amortization and impairment expenses (“DD&A”)

 

 

 

Three Months Ended

September 30,

 

 

 

 

 

 

%

 

 

Nine Months Ended

September 30,

 

 

 

 

 

 

%

 

(in thousands)

 

2020

 

 

2019

 

 

Change

 

 

Change

 

 

2020

 

 

2019

 

 

Change

 

 

Change

 

Depreciation, depletion and amortization

 

$

2,104

 

 

$

2,559

 

 

$

(455

)

 

(18%)

 

 

$

6,759

 

 

$

8,026

 

 

$

(1,267

)

 

(16%)

 

Impairment

 

 

 

 

 

180

 

 

 

(180

)

 

(100%)

 

 

 

19,547

 

 

 

384

 

 

 

19,163

 

 

4990%

 

Total DD&A and impairment expense

 

$

2,104

 

 

$

2,739

 

 

$

(635

)

 

(23%)

 

 

$

26,306

 

 

$

8,410

 

 

$

17,896

 

 

213%

 

The change in DD&A in total and per Boe was primarily due to the net impact of the Texas divestitures and the properties acquired in Oklahoma and Wyoming.

Impairment of proved oil and natural gas properties for the nine months ended September 30, 2020, was primarily due to an unprecedented decline in oil prices. Impairment of proved oil and natural gas properties for the three and nine months ended September 30, 2019, was primarily due to wellbore issues on a certain Texas project.

General and administrative expenses

 

 

 

Three Months Ended

September 30,

 

 

 

 

 

 

%

 

 

Nine Months Ended

September 30,

 

 

 

 

 

 

%

 

(in thousands)

 

2020

 

 

2019

 

 

Change

 

 

Change

 

 

2020

 

 

2019

 

 

Change

 

 

Change

 

General and administrative expenses

 

$

2,176

 

 

$

1,283

 

 

$

893

 

 

70%

 

 

$

7,685

 

 

$

5,837

 

 

$

1,848

 

 

32%

 

Non-cash compensation

 

 

 

 

 

121

 

 

 

(121

)

 

(100%)

 

 

 

271

 

 

 

577

 

 

 

(306

)

 

(53%)

 

Total general and administrative expenses

 

$

2,176

 

 

$

1,404

 

 

$

772

 

 

55%

 

 

$

7,956

 

 

$

6,414

 

 

$

1,542

 

 

24%

 

30


 

The change in G&A in total and per Boe for the three months ended September 30, 2020, compared to the three months ended September 30, 2019, was primarily due to:

 

increased professional and other fees related to recapitalization and merger activities; partially offset by

 

decreased non-cash compensation expense.

The change in G&A in total and per Boe for the nine months ended September 30, 2020, compared to the nine months ended September 30, 2019, was primarily due to:

 

increased professional and other fees related to recapitalization and merger activities; partially offset by

 

decreased non-cash compensation expense.

Gain on sales of oil and natural gas properties, net

During the months ended September 30, 2019, there was a gain on sales of oil and natural gas properties, net of $9.7 million, which was primarily due to the divestiture of substantially all of our Texas properties as part of the Strategic Transaction.

Interest expense

 

 

 

Three Months Ended

September 30,

 

 

 

 

 

 

%

 

 

Nine Months Ended

September 30,

 

 

 

 

 

 

%

 

(in thousands)

 

2020

 

 

2019

 

 

Change

 

 

Change

 

 

2020

 

 

2019

 

 

Change

 

 

Change

 

Interest expense

 

$

1,630

 

 

$

1,175

 

 

$

455

 

 

39%

 

 

$

3,998

 

 

$

4,019

 

 

$

(21

)

 

(1%)

 

Average effective interest rate

 

 

6.77

%

 

 

5.51

%

 

 

1.26

%

 

23%

 

 

 

6.07

%

 

 

5.68

%

 

 

0.39

%

 

7%

 

The change in interest expense for the three months ended September 30, 2020, was primarily related to paid-in-kind interest on the revolving credit facility.

Liquidity and Capital Resources

Our ability to finance our operations, fund our capital expenditures and acquisitions, meet or refinance our debt obligations and meet our collateral requirements will depend on our future cash flows, our ability to borrow and our ability to raise equity or debt capital. Our ability to generate cash is subject to a number of factors, some of which are beyond our control, including weather, oil and natural gas prices (including regional price differentials), operating costs and maintenance capital expenditures, as well as general economic, financial, competitive, legislative, regulatory and other factors. Historically, our primary use of cash has been for debt reduction, capital spending (including acquisitions) and distributions.

Our liquidity position at November 6, 2020, consisted of approximately $0.9 million of available cash. We currently have no availability under our revolving credit facility. At March 31, 2020, the Partnership was not in compliance with the leverage ratio covenant of our credit agreement. Amendment 15 to the credit agreement was effective as of June 1, 2020. Amendment 15 to the credit agreement, among other changes, decreased the borrowing base from $95.0 million to $64.0 million and established a monthly repayment schedule beginning June 1, 2020, through November 1, 2020, for the $11.0 million borrowing base deficiency; permitted the Recapitalization Transactions; introduced anti-cash hoarding provisions and restrictive covenants on capital and general and administrative spending; provided for all loans to bear payment-in-kind interest, capitalized on a quarterly basis; excluded certain assumed liabilities from the Current Ratio calculation for the quarters ending June 30, 2020, September 30, 2020, and December 31, 2020; and required the Partnership’s Leverage Ratio of Consolidated Funded Indebtedness to Consolidated EBITDAX not to exceed:

 

5.75 to 1.00 for the quarter ending June 30, 2020,

 

5.00 to 1.00 for the quarter ending September 30, 2020,

 

4.50 to 1.00 for the quarter ending December 31, 2020, and

 

4.25 to 1.00 for the quarter ending March 31, 2021, and thereafter.

In connection with entering into the Merger Agreement, the Partnership entered into a postponement letter with the lenders under the revolving credit facility (the “Postponement Letter”). The Postponement Letter provided, among other things, that the Partnership may postpone the payment of the Original Deficiency Balance Amount and the Partnership’s compliance with the Leverage Ratio of Consolidated Funded Indebtedness to Consolidated EBITDAX until December 31, 2020.

At September 30, 2020, we were in compliance with the financial covenants required by the credit agreement. Our ability to continue as a going concern is dependent on the re-negotiation of our revolving credit facility that matures May 1, 2021, or

31


 

other measures such as the sale of assets or raising additional capital. These factors raise substantial doubt over the Partnership’s ability to continue as a going concern, and therefore, whether we will realize our assets and extinguish our liabilities in the normal course of business and at the amounts stated in the financial statements.

Based on our cash balance and forecasted cash flows from operating activities we expect to be able to meet our debt service requirements and fund our other commitments and obligations in the near term. Although we currently expect our sources of cash to be sufficient to meet our near-term liquidity needs, there can be no assurance that our liquidity requirements will continue to be satisfied. Our lenders have the discretion to further decrease the borrowing base of our revolving credit facility. Any further reduction in the borrowing base under the revolving credit facility would negatively impact our ability to meet our debt service requirements and fund our other commitments and obligations. Due to the volatility of commodity prices, we may not be able to obtain funding in the equity or debt capital markets on terms we find acceptable. The cost of obtaining debt capital from the credit markets generally has increased as many lenders and institutional investors have increased interest rates, enacted tighter lending standards, and reduced and, in some cases, ceased to provide any new funding.

Revolving Credit Facility

At March 31, 2020, we were not in compliance with our leverage calculation ratio. Amendment 15 to the credit agreement was effective as of June 1, 2020. Amendment 15 to the credit agreement, among other changes decreased the borrowing base from $95.0 million to $64.0 million and established a monthly repayment schedule beginning June 1, 2020, through November 1, 2020, for the $11.0 million borrowing base deficiency; permitted the Recapitalization Transactions; introduced anti-cash hoarding provisions and restrictive covenants on capital and general and administrative spending; provided for all loans to bear payment-in-kind interest, capitalized on a quarterly basis; excluded certain assumed liabilities from the Current Ratio calculation for the quarters ending June 30, 2020, September 30, 2020, and December 31, 2020; and required the Partnership’s Leverage Ratio of Consolidated Funded Indebtedness to Consolidated EBITDAX not to exceed:

 

5.75 to 1.0 for the quarter ending June 30, 2020,

 

5.00 to 1.0 for the quarter ending September 30, 2020,

 

4.50 to 1.0 for the quarter ending December 31, 2020,

 

4.25 to 1.0 for the quarter ending March 31, 2021, and thereafter.

In connection with entering into the Merger Agreement, the Partnership entered into a postponement letter with the lenders under the revolving credit facility (the “Postponement Letter”). The Postponement Letter provided, among other things, that the Partnership may postpone the payment of the Original Deficiency Balance Amount and the Partnership’s compliance with the Leverage Ratio of Consolidated Funded Indebtedness to Consolidated EBITDAX until December 31, 2020.

At September 30, 2020, the Partnership was in compliance with the financial covenants required by the credit agreement. At November 6, 2020, the outstanding balances of our revolving credit facility and standby letter of credit were $68.5 million and $1.0 million, respectively. See Note 7 to the unaudited condensed consolidated financial statements for additional information on Amendment 15 to the credit agreement.

Capital Requirements

Our business requires continual investment to upgrade or enhance existing operations in order to increase and maintain our production and the size of our asset base. The primary purpose of growth capital is to acquire and develop producing assets that allow us to increase our production and asset base. To date, we have funded acquisition transactions through a combination of cash, available borrowing capacity under our revolving credit facility and through the issuance of equity, including the Preferred Units.

In connection with the proposed Merger, the Merger Agreement provides certain termination rights under which we may exercise and effectively terminate the Merger Agreement. Should certain unlikely events occur under the specified circumstances outlined in the Merger Agreement, we will be required to pay Contango a termination fee of $1.5 million. Contemporaneously with the execution of the Merger Agreement, we entered into a purchase and sale agreement requiring Contango to purchase certain assets for cash consideration of $9.0 million in the event that the Merger fails to close by January 23, 2021, subject to a 30 day extension if the failure of the Merger to close is due to the failure to obtain Contango shareholder approval or our unitholder approval.

 

32


 

Due to the current oil and natural gas environment, Amendment 15 to our credit agreement restricted our capital spending for the remainder of 2020.

Commodity Derivative Contracts

Our risk management program is intended to reduce our exposure to commodity price volatility and to assist with stabilizing cash flows. Accordingly, we utilize commodity derivative contracts (swaps, calls, puts and collars) to manage a portion of our exposure to commodity prices. The commodity derivative contracts that we have entered into generally have the effect of providing us with a fixed price or a floor for a portion of our expected future oil production over a fixed period of time. We enter into commodity derivative contracts or modify our portfolio of existing commodity derivative contracts when we believe market conditions or other circumstances suggest that it is prudent or as required by our lenders. At September 30, 2020, we had commodity derivative contracts covering 66% and 50%, respectively, of our estimated 2020 and 2021 average daily production (estimate calculated based on September 2020 net daily oil production volumes). See Note 4 to the unaudited condensed consolidated financial statements for additional information regarding our commodity derivative contracts.

Sources and Uses of Cash

The following table summarizes the net change in cash and cash equivalents for the nine months ended September 30, 2020 and 2019:

 

 

 

Nine Months Ended

September 30,

 

 

 

 

 

 

%

 

(in thousands)

 

2020

 

 

2019

 

 

Change

 

 

Change

 

Operating activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net used in operating activities

 

$

5,850

 

 

$

10,422

 

 

$

(4,572

)

 

(44%)

 

Investing activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquisitions of oil and natural gas properties

 

 

(111

)

 

 

(3,296

)

 

 

3,185

 

 

97%

 

Additions to oil and natural gas properties

 

 

(5,905

)

 

 

(9,363

)

 

 

3,458

 

 

37%

 

Additions to other property and equipment

 

 

(84

)

 

 

 

 

 

(84

)

 

(100%)

 

Proceeds from sales of oil and natural gas properties

 

 

 

 

 

32,514

 

 

 

(32,514

)

 

(100%)

 

Proceeds from sale of other assets

 

 

365

 

 

 

123

 

 

 

242

 

 

197%

 

Net cash (used in) provided by investing activities

 

 

(5,735

)

 

 

19,978

 

 

 

(25,713

)

 

(129%)

 

Financing activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Proceeds from line of credit

 

 

6,000

 

 

 

8,000

 

 

 

(2,000

)

 

(25%)

 

Payments on line of credit

 

 

(4,750

)

 

 

(36,000

)

 

 

31,250

 

 

87%

 

Distributions to preferred unitholders

 

 

(800

)

 

 

(2,400

)

 

 

1,600

 

 

67%

 

Debt issuance costs

 

 

(396

)

 

 

 

 

 

(396

)

 

(100%)

 

Net cash provided by (used in) financing activities

 

 

54

 

 

 

(30,400

)

 

 

30,454

 

 

100%

 

Change in cash and cash equivalents

 

$

169

 

 

$

 

 

$

169

 

 

100%

 

 

Operating activities. The change in operating cash flows for the periods compared was primarily attributable to:

 

decreased oil and natural gas sales of $18.9 million; offset by

 

increased net settlements received on derivatives of $10.0 million; and

 

decreased LOE of $4.1 million.

See Results of Operations in Item 2 for further discussion of the items listed above.

Investing and financing activities. The change in investing and financing cash flows for the periods compared was primarily attributable to net proceeds from the Strategic Transaction in March 2019 and the resulting payment on the revolving credit facility. See Note 2 to the unaudited condensed consolidated financial statements for further discussion of the Strategic Transaction.

Off–Balance Sheet Arrangements

As of September 30, 2020, we had no off-balance sheet arrangements.

33


 

Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations are based upon our unaudited condensed consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of our financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. Certain accounting policies involve judgments and uncertainties to such an extent that there is reasonable likelihood that materially different amounts could have been reported under different conditions or if different assumptions had been used. We evaluate our estimates and assumptions on a regular basis. We base our estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates and assumptions used in preparation of our unaudited consolidated financial statements.

 

There have been no material changes in our critical accounting policies and procedures during the nine months ended September 30, 2020. See our critical accounting policies in "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" of our 2019 10-K.

Recently Issued Accounting Pronouncements

See Note 13 to the unaudited condensed consolidated financial statements for additional information regarding recently issued accounting pronouncements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As a smaller reporting company, we are not required to provide the information otherwise required by this Item.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As required by Rule 13a-15(b) of the Exchange Act, we have evaluated, under the supervision and with the participation of our chief executive officer (principal executive officer) and chief accounting officer (principal financial officer), the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of September 30, 2020. Our disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed by us in reports that we file under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure and is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. Based on this evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Form 10-Q.

Changes in Internal Controls Over Financial Reporting

There were no changes in our system of internal control over financial reporting (as defined in Rule 13a-15(f) and Rule 15d-15(f) under the Exchange Act) that occurred during the quarterly period ended September 30, 2020, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

In the course of our ongoing preparations for making management’s report on internal control over financial reporting as required by Section 404 of the Sarbanes-Oxley Act of 2002, from time to time we have identified areas in need of improvement and have taken remedial actions to strengthen the affected controls as appropriate. We make these and other changes to enhance the effectiveness of our internal controls over financial reporting, which do not have a material effect on our overall internal control over financial reporting.

34


 

PART II

OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Although we may, from time to time, be involved in litigation and claims arising out of our operations in the normal course of business, we are not currently a party to any material legal proceedings. In addition, we are not aware of any material legal or governmental proceedings against us under the various environmental protection statutes to which we are subject.

ITEM 1A. RISK FACTORS

Our significant business risks are described in Part I, Item 1A in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, to which reference is made herein. Other than as set forth below, there have been no material changes to the risk factors disclosed in such Annual Report.

Our business has been, and will continue to be, affected by the coronavirus (COVID-19) pandemic.

The COVID-19 outbreak and the measures put in place to address it have negatively impacted the global economy, disrupted global supply chains, reduced global demand for oil and gas, and created significant volatility and disruption of financial and commodity markets. Public health officials have recommended or mandated certain precautions to mitigate the spread of COVID-19, including limiting non-essential gatherings of people, ceasing all non-essential travel and issuing “social or physical distancing” guidelines, “shelter-in-place” orders and mandatory closures or reductions in capacity for non-essential businesses. The full impact of the COVID-19 pandemic remains uncertain and will depend on the severity, location and duration of the effects and spread of the disease, the effectiveness and duration of actions taken by authorities to contain the virus or treat its effect, and how quickly and to what extent economic conditions improve. According to the National Bureau of Economic Research, as a result of the pandemic and its broad reach across the entire economy, the U.S. entered a recession in early 2020.

We have already been impacted by the COVID-19 pandemic. See Management’s Discussion and Analysis of Financial Condition and Results of Operations, for additional information on how we have been impacted and the steps we have taken in response. Our business is likely to be further negatively impacted by the COVID-19 pandemic. These impacts could include but are not limited to:

 

Continued reduced demand for our products as a result of reductions in travel and commerce;

 

Disruptions in our supply chain due in part to scrutiny or embargoing of shipments from infected areas or invocation of force majeure clauses in commercial contracts due to restrictions imposed as a result of the global response to the pandemic;

 

Failure of third-parties on which we rely, including our suppliers, contractors, joint venture partners and external business partners, to meet their obligations to the Partnership, or significant disruptions in their ability to do so, which may be caused by their own financial or operational difficulties or restrictions imposed in response to the disease outbreak;

 

Reduced workforce productivity caused by, but not limited to, illness, travel restrictions, quarantine, or government mandates;

 

Business interruptions resulting from a significant amount of our employees telecommuting in compliance with social distancing guidelines and shelter-in-place orders, as well as the implementation of protections for employees continuing to commute for work, such as personnel screenings and self-quarantines before or after travel; and

 

Voluntary or involuntary well shut-ins to support oil prices or alleviate storage shortages for our products.

35


 

Any of these factors, or other cascading effects of the COVID-19 pandemic that are not currently foreseeable, could materially increase our costs, negatively impact our revenues and damage our financial condition, results of operations, cash flows and liquidity position. The pandemic continues to progress and evolve, and the full extent and duration of any such impacts cannot be predicted at this time because of the sweeping impact of the COVID-19 pandemic on daily life around the world.

We have been negatively affected and are likely to continue to be negatively affected by the recent swift and sharp drop in commodity prices.

The oil and gas business is fundamentally a commodity business and prices for crude oil, bitumen, natural gas, and NGLs can fluctuate widely depending upon global events or conditions that affect supply and demand. Recently, there has been a precipitous decrease in demand for oil globally, largely caused by the dramatic decrease in travel and commerce resulting from the COVID-19 pandemic. See Management’s Discussion and Analysis of Financial Condition and Results of Operations, for additional information on commodity prices and how we have been impacted. There is no assurance of when or if commodity prices will return to pre-COVID-19 levels. The speed and extent of any recovery remains uncertain and is subject to various risks, including the duration, impact and actions taken to stem the proliferation of the COVID-19 pandemic, the extent to which those nations party to the OPEC plus production agreement decide to increase production of crude oil, natural gas, and NGLs, and other risks described in this Quarterly Report on Form 10-Q or in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

Even after a recovery, our industry will continue to be exposed to the effects of changing commodity prices given the volatility in commodity price drivers and the worldwide political and economic environment generally, as well as continued uncertainty caused by armed hostilities in various oil-producing regions around the globe. Our revenues, operating results and future rate of growth are highly dependent on the prices we receive for our crude oil, natural gas and NGLs. Many of the factors influencing these prices are beyond our control.

Lower crude oil, natural gas and NGL prices may have a material adverse effect on our revenues, operating income, cash flows and liquidity. As a result of the recent market downturn, we have entered into an amendment to our revolving credit facility which temporarily prohibits us from declaring a dividend on our common units. Lower prices may also limit the amount of reserves we can produce economically, thus adversely affecting our proved reserves, reserve replacement ratio and accelerating the reduction in our existing reserve levels as we continue production from upstream fields. Prolonged lower crude oil prices may affect certain decisions related to our operations, including decisions to reduce capital investments or decisions to shut-in production.

Significant reductions in crude oil, natural gas and NGLs prices could also require us to reduce our capital expenditures, impair the carrying value of our assets or discontinue the classification of certain assets as proved reserves. In the first six-month period of 2020, we recognized several impairments, which are described in Note 5 to the unaudited condensed consolidated financial statements. If the outlook for commodity prices remain low relative to their historic levels, and as we continue to optimize our investments and exercise capital flexibility, it is reasonably likely we will incur future impairments to long-lived assets. Although it is not reasonably practicable to quantify the impact of any future impairments or estimated change to our unit-of-production at this time, our results of operations could be adversely affected as a result.

Risks Related to the Business of the Partnership as a Result of the Recapitalization Transactions

As described in the notes to our unaudited condensed consolidated financial statements, there is substantial doubt about our ability to continue as a going concern and we are dependent on restructuring of our existing capital to fund our obligations and to continue in operation.

As a result of the sustained commodity price decline and our substantial debt burden, the Partnership believes that forecasted cash and available credit capacity may not be sufficient to meet commitments as they come due over the next twelve months. The Partnership will not be able to comply with the covenants unless we are able to successfully increase liquidity or deleverage. The unaudited condensed consolidated financial statements do not reflect any adjustments that might result if we are unable to continue as a going concern. The Partnership's borrowings under the revolving credit facility come due in less than one year.

Our ability to continue as a going concern is dependent on the re-negotiation of our revolving credit facility, or other measures such as the sale of assets or raising additional capital. These factors raise substantial doubt over the Partnership’s ability to continue as a going concern, and therefore, whether we will realize our assets and extinguish our liabilities in the

36


 

normal course of business and at the amounts stated in the unaudited condensed consolidated balance sheet. If the Partnership were unable to refinance its indebtedness, the Partnership would need to engage financial and legal advisors to assist with analyzing various strategic alternatives to address our liquidity and capital structure, among other things. There can be no assurance the Partnership will be able to restructure our capital structure on terms acceptable to the Partnership and our creditors, or at all.

We recently competed the Recapitalization Transactions which resulted in the composition of our Board and management changing.

Upon consummation of the Recapitalization Transactions, the composition of the Board and management of our general partner was changed. The Board now consists of four directors, all of whom are new to the Partnership. Our new directors and management have different backgrounds, experiences and perspectives from those individuals who previously served on the board and as management and, thus, may have different views on the issues that will determine the future of the Partnership. As a result, the future strategy and plans of the Partnership may differ materially from those of the past.

Since the majority of our common units are owned by one significant unitholder, our other unitholders may not be able to influence control of our Partnership or decision making by our management.

One significant unitholder beneficially owns approximately 56% of our outstanding common units. The interests of this unitholder may not be, at all times, the same as that of our other unitholders. This significant unitholder will have the ability to significantly influence the outcome of most corporate actions requiring shareholder approval, including our merger with or into another company, the sale of all or substantially all of our assets and amendments to our articles of incorporation. This concentration of ownership may also have the effect of delaying, deferring or preventing a change of control of our company, which may be disadvantageous to minority unitholders.

Our Partnership Agreement continues to replace our general partner’s fiduciary duties to holders of our common units with contractual standards governing its duties.

Our Partnership Agreement was amended and restated in connection with the Recapitalization Transactions and continues to contain provisions that eliminate the fiduciary standards to which our general partner and its officers and directors would otherwise be held by state fiduciary law and replaces those duties with several different contractual standards. For example, our Partnership Agreement permits our general partner to make a number of decisions in its sole discretion, free of any duties to us and holders of our common units other than the implied contractual covenant of good faith and fair dealing. This provision entitles our general partner to consider only the interests and factors that it desires and relieves it of any duty or obligation to give any consideration to any interest of, or factors affecting, us or our unitholders. In addition, our Partnership Agreement grants broad rights of indemnification to our general partner and its officers and directors. By owning a common unit, a holder is treated as having consented to the provisions in our Partnership Agreement.

Our Partnership Agreement continues to restrict the remedies available to holders of our common units for actions taken by our general partner that might otherwise constitute breaches of fiduciary duty.

Our Partnership Agreement was amended and restated in connection with the Recapitalization Transactions and continues to contain provisions that restrict the remedies available to holders of our common units for actions taken by our general partner that might otherwise constitute breaches of fiduciary duty under state fiduciary duty law. For example, our Partnership Agreement:

 

provides that whenever our general partner is permitted or required to make a decision, in its capacity as our general partner, our general partner is permitted or required to make such a decision in good faith and will not be subject to any other or different standard imposed by our Partnership Agreement, Delaware law, or any other law, rule or regulation;

 

provides that our general partner and its officers and directors will not be liable for monetary damages to us or our unitholders resulting from any act or omission of our general partner or its officers and directors, as the case may be, unless our general partner or its officers and directors acted in bad faith or engaged in fraud or willful misconduct or, in the case of a criminal matter, acted with the knowledge that the conduct was criminal; and

 

provides that, in the absence of bad faith, our general partner will not be in breach of its obligations under our Partnership Agreement or its fiduciary duties to us or our unitholders if a transaction with an affiliate or the resolution of a conflict of interest is approved in accordance with, or otherwise meets the standards set forth in, our Partnership Agreement.

37


 

Beginning on July 1, 2020, we rely primarily on a subsidiary of Contango to manage and operate our business. The individuals who Contango uses to manage us may also provide substantially similar services to the affiliates of Contango, and thus may not be solely focused on our business.

Beginning on July 1, 2020, we rely primarily on Contango to manage us and operate our assets. Upon the consummation of the Recapitalization Transactions, we entered into a services agreement with Contango Resources effective on July 1, 2020, pursuant to which Contango Resources provides management, administrative and operational services to us after the termination of a transition service agreement with Mid-Con Energy Operating.

Contango Resources continues to provide substantially similar services and personnel to the affiliates of Contango Resources and, as a result, may not have sufficient human, technical and other resources to provide those services at a level that it would be able to provide to us if it did not provide similar services to these other entities. Additionally, Contango may make internal decisions on how to allocate its available resources and expertise that may not always be in our best interest compared to those of the affiliates of Contango or other affiliates of our general partner. There is no requirement that Contango Resources favor us over these other entities in providing its services. If the employees of Contango Resources do not devote sufficient attention to the management and operation of our business, our financial results may suffer and our ability to make distributions to our unitholders may be reduced.

We may fail to realize all of the anticipated benefits of the Recapitalization Transactions or those benefits may take longer to realize than expected.

Our ability to realize the anticipated benefits of the Recapitalization Transactions will depend, to a large extent, on our ability to take action in a manner that facilitates growth opportunities, and achieves the projected stand-alone cost savings and revenue growth trends identified as part of the Recapitalization Transactions. It is expected that we will benefit from operational and general and administrative cost improvements. If we are not able to successfully achieve these objectives, the anticipated benefits of the Recapitalization Transactions may not be realized fully or at all or may take longer to realize than expected.

In addition, the recapitalization of a business is a complex, costly and time-consuming process. As a result, the general partner will be required to devote significant management attention and resources to our business practices and operations. This process may disrupt the business. The failure to realize the anticipated benefits of the transactions contemplated by the Recapitalization Transactions could cause an interruption of, or a loss of momentum in, our activities and could adversely affect our results of operations. The Recapitalization Transactions may also result in material unanticipated problems, expenses, liabilities, competitive responses, loss of customer and other business relationships and diversion of management attention.

Many of these factors are outside of our control, and any one of them could result in increased costs, decreased expected revenues and diversion of management time and energy, which could materially impact the business, financial condition and results of operations of the Partnership. In addition, even if our operations are restructured successfully, the full benefits of the Recapitalization Transactions may not be realized, including the cost savings, increased sales or growth opportunities that are anticipated. These benefits may not be achieved within the anticipated time frame, or at all. Further, additional unanticipated costs may be incurred in the Recapitalization Transactions. All of these factors could cause dilution to our earnings per unit and negatively impact the price of our common units.

Completion of the Recapitalization Transactions may trigger change in control or other provisions in certain agreements to which we are a party.

The completion of the Recapitalization Transactions may trigger change in control or other provisions in certain agreements to which we are a party. If we are unable to negotiate waivers of those provisions, the counterparties may exercise their rights and remedies under the agreements, potentially terminating the agreements or seek monetary damages from us. Even if we are able to negotiate waivers, the counterparties may require a fee for such waivers or seek to renegotiate the agreements.

Risks Related to the Merger Agreement

We will be subject to business uncertainties while the Merger is pending, which could adversely affect our businesses.

Uncertainty about the effect of the Merger on employees and those that do business with us may have an adverse effect on the Partnership. These uncertainties may impair our ability to attract, retain and motivate key personnel until the Merger is completed and for a period of time thereafter, and could cause those that transact with us to seek to change their existing

38


 

business relationships with us. Current and prospective employees of the Partnership may experience uncertainty about their roles within the combined company following the Merger, which may have an adverse effect on our current ability to attract or retain key management and other key personnel regardless of whether the Merger is completed.

In addition, the Merger Agreement restricts us from entering into certain corporate transactions, entering into certain material contracts, making certain changes to our capital budget, incurring certain indebtedness and taking other specified actions without the consent of Contango, and generally requires us to continue our operations in the ordinary course of business during the pendency of the Merger. These restrictions may prevent us from pursuing attractive business opportunities or adjusting our capital plan prior to the completion of the Merger.

We may be subject to lawsuits relating to the Merger, which could adversely affect our business, financial condition and operating results.

Securities class action lawsuits and derivative lawsuits are often brought against public companies that have entered into acquisition agreements. Even if the lawsuits are without merit, defending against these claims can result in substantial costs and divert management time and resources. An adverse judgment could result in monetary damages, which could have a negative impact on our and Contango’s respective liquidity and financial condition. Additionally, if a plaintiff is successful in obtaining an injunction prohibiting completion of the Merger, then that injunction may delay or prevent the Merger from being completed, which may adversely affect our and Contango’s respective business, financial position and results of operations.

The Merger may not be completed, and the Merger Agreement may be terminated in accordance with its terms. Failure to complete the Merger could negatively impact the price of shares of the Partnership’s common units, as well as the Partnership’s future business and financial results.

The Merger is subject to a number of conditions that must be satisfied, including the approval by the Partnership’s unitholders of the Merger Agreement and approval by Contango’s stockholders of the issuance of Contango shares in connection with the Merger, or waived, in each case prior to the completion of the Merger. These conditions to the completion of the Merger, some of which are beyond the control of the Partnership and Contango, may not be satisfied or waived in a timely manner or at all, and, accordingly, the Merger may be delayed or may not be completed. The Merger Agreement may also be terminated under certain circumstances. If the transactions contemplated by the Merger Agreement are not completed for any reason, the Partnership’s ongoing businesses and financial results may be adversely affected. In addition, if the Merger Agreement is terminated and the Partnership’s Board seeks another merger or business combination, the Partnership may not be able to find a party willing to offer equivalent or more attractive consideration than the consideration Contango has agreed to provide in the Merger.

The Merger Agreement contains provisions that limit our ability to pursue alternatives to the Merger, could discourage a potential competing acquiror of us from making a favorable alternative transaction proposal and, in specified circumstances, could require us to pay Contango a termination fee of $1.5 million.

The Merger Agreement contains a general prohibition on us and Contango from soliciting or, subject to certain exceptions relating to the exercise of fiduciary duties by our boards of directors, entering into discussions with any third-party regarding any competing proposal or offer for a competing transaction. In addition, each party generally has an opportunity to offer to modify the terms of Merger in response to any third-party alternative transaction proposal before a party’s board of directors may withhold, withdraw, qualify or modify its recommendation with respect to the Merger Agreement proposal or the share issuance proposal, as applicable. In some circumstances, upon termination of the Merger Agreement, we will be required to pay a termination fee of $1.5 million to Contango.

These provisions could discourage a potential third-party acquiror or merger partner that might have an interest in acquiring all or a significant portion of us or pursuing an alternative transaction with us either from considering or proposing such a transaction, even if a third-party acquiror were prepared to pay consideration with a higher per unit price than the per unit price proposed to be received in the merger or might result in a potential third-party acquiror or merger partner proposing to pay a lower price to our stockholders than it might otherwise have proposed to pay because of the added expense of the $1.5 million termination fee that may become payable in certain circumstances.

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Because the exchange ratio in the Merger Agreement is fixed and because the market price of the Partnership’s common units will fluctuate prior to the completion of the Merger, our unitholders cannot be sure of the market value of the Partnership’s common units they will receive as consideration in the Merger.

Under the terms of the Merger Agreement, our stockholders will receive consideration consisting of 1.7500 shares of Contango common stock for each of the Partnership’s common units. The exchange ratio is fixed, and there will be no adjustment to the merger consideration for changes in the market price of Contango common stock or our common units prior to the completion of the Merger.

If the Merger is completed, there will be a time lapse between the date of signing of the Merger Agreement and the date on which our unitholders who are entitled to receive the merger consideration actually receive the merger consideration. The respective market values of Contango’s common stock and the Partnership’s common units have fluctuated and may continue to fluctuate during this period as a result of a variety of factors, including general market and economic conditions, changes in each company’s business, operations and prospects, commodity prices, regulatory considerations and the market’s assessment of Contango’s business and the Merger. Such factors are difficult to predict and, in many cases, may be beyond the control of Contango and us. The actual value of the merger consideration received by our unitholders at the completion of the Merger will depend on the market value of Contango common stock at that time. This market value may differ, possibly materially, from the market value of Contango common stock at the time the Merger Agreement was entered into or at any other time.

Our unitholders will have a reduced ownership and voting interest in Contango after the Merger compared to their current ownership in the Partnership on a standalone basis and will exercise less influence over management.

Currently, the Partnership’s unitholders have the right to vote in the election of the Partnership’s Board and on other matters requiring unitholder approval under Delaware law and the Partnership’s certificate of limited partnership and limited partnership agreement. As a result of the Merger, the Partnership’s current unitholders will own a smaller percentage of the combined company than they currently own of the Partnership, and as a result will have less influence on the management and policies of Contango post-Merger than they now have on the management and policies of the Partnership.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The private placement of common units in connection with the Recapitalization Transactions relied upon an exemption from the registration requirements of the Securities Act of 1933, as amended, pursuant to Section 4(a)(2) thereunder.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

At March 31, 2020, we were in default of the Consolidated Funded Indebtedness to Consolidated EBITDAX covenant under our existing credit agreement. On June 4, 2020, we entered into Amendment 15 to our credit agreement in conjunction with the closing of the Recapitalization Transactions, which included a waiver of this default. At September 30, 2020, we were in compliance with financial covenants required by our credit agreement.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

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ITEM 6. EXHIBITS

The exhibits listed below are filed as part of this Quarterly Report:

 

Exhibit No.

 

Exhibit Description

 

 

 

  2.1

 

Agreement and Plan of Merger, dated as of October 25, 2020, by and among Contango Oil & Gas Company, Michael Merger Sub LLC, Mid-Con Energy Partners, LP, and Mid-Con Energy GP, LLC.*

 

 

 

  10.1

 

 

 

 

 

  10.2

 

Postponement of Fall 2020 Scheduled Redetermination and Certain Payments under the Credit Agreement, dated as of December 20, 2011, among Mid-Con Energy Properties, LLC, a Delaware limited liability company (the “Borrower”), Wells Fargo Bank, National Association, as administrative agent (in such capacity, the “Administrative Agent”), and the lenders party thereto (the “Lenders”, and such agreement, as heretofore amended and restated, modified or supplemented, the “Credit Agreement”).

 

Purchase and Sale Agreement, dated October 25, 2020, among Mid-con Energy Properties, LLC, as seller and Contango Oil & Gas Company, as Purchaser.*

 

 

 

  31.1+

 

Rule 13a-14(a)/ 15(d)- 14(a) Certification of Chief Executive Officer

 

 

 

  31.2+

 

Rule 13a-14(a)/ 15(d)- 14(a) Certification of Principal Financial Officer

 

 

 

  32.1+

 

Section 1350 Certificate of Chief Executive Officer

 

 

 

  32.2+

 

Section 1350 Certificate of Principal Financial Officer

 

 

 

101.INS+

 

XBRL Instance Document

 

 

 

101.SCH+

 

XBRL Taxonomy Extension Schema Document

 

 

 

101.CAL+

 

XBRL Taxonomy Extension Calculation Linkbase Document

 

 

 

101.DEF+

 

XBRL Taxonomy Extension Definition Linkbase Document

 

 

 

101.LAB+

 

XBRL Taxonomy Extension Label Linkbase Document

 

 

 

101.PRE+

 

XBRL Taxonomy Extension Presentation Linkbase Document

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

+

Filed herewith

* This filing excludes schedules pursuant to Item 601(b)(2) of Regulation S-K, which the registrant agrees to furnish supplementally to the Securities and Exchange Commission upon its request.

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

MID-CON ENERGY PARTNERS, LP

 

 

 

 

 

By: Mid-Con Energy GP, LLC, its general partner

 

 

 

 

 

November 16, 2020

 

By:

 

/s/ Sherry L. Morgan

 

 

 

 

Sherry L. Morgan

 

 

 

 

Chief Executive Officer

 

 

 

 

 

 

November 16, 2020

 

By:

 

/s/ Jodie L. DiGiacomo

 

 

 

 

Jodie L. DiGiacomo

 

 

 

 

Chief Accounting Officer

 

 

 

 

as Principal Financial Officer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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