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Mid-Con Energy Partners First Quarter 2020 Results

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   |    Tuesday,June 16,2020

Mid-Con Energy Partners, LP reported its operating and financial results for first quarter 2020 and details of the recently announced strategic recapitalization transactions.

Recent Updates

As announced on June 5, 2020, the Partnership completed strategic recapitalization transactions, resulting in significant changes to its capital structure and governance to strengthen its balance sheet, create alignment across all unitholders, reduce costs and streamline operations, thereby creating immediate and sustainable value for all unitholders. Highlights of the transaction include:

• The holders of all of the Partnership's Class A and B preferred units (collectively, the "Preferred Units"), led by Goff Capital, Inc., ("Goff Capital") converted their Preferred Units to common units at an average conversion price of $3.12/unit.
• The equity holders of the general partner contributed the ownership of the general partner to the Partnership in exchange for common units.
• In connection with these transactions, the limited partnership agreement of the Partnership was amended, the directors of the general partner have resigned, and a new Board of Directors was elected by written consent of affiliates of Goff Capital that now hold a majority of the outstanding common units.
• Charles R. Olmstead, Chief Executive Officer, and Jeffrey R. Olmstead, most recently Chief Executive Officer and President prior to taking a sabbatical beginning February 1, 2020, resigned from their positions as officers of the general partner.
• Following these transactions, the Partnership had 14,311,522 common units outstanding.
• Completed the spring redetermination of the borrowing base under its senior secured revolving credit facility. 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 establishes a repayment schedule for the 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.
• Contango Resources, Inc. ("Contango Resources"), a subsidiary of Contango Oil & Gas Company ("Contango") will be the new operator of the Partnership's properties, replacing Mid-Con Energy Operating, LLC. The transition is expected to be effective July 1, 2020 and the move is expected to generate pro-forma annual cash savings of approximately $6.5 million compared to 2019.
• The Partnership and Mid-Con Energy Operating, LLC, the existing services provider, entered into an Assignment and Assumption Agreement (the "Assignment and Assumption Agreement"), effective June 1, 2020. Under the Assignment and Assumption Agreement, the Partnership agreed to assume and release the existing services provider from certain liabilities arising out of the existing services provider's performance of its obligations as operator of the Partnership's properties under the existing services agreement.

Q1 Financials

• Net income was $2.8 million for the first quarter 2020.
• Reported negative cash flows from operating activities for the first quarter 2020 of $0.8 million.
• Increased outstanding borrowings on our revolving credit facility by $6.0 million during first quarter 2020 to $74 million.
• Capital expenditures of $4.8 million across the portfolio during the first quarter 2020. Remainder of 2020 developmental capital is currently delayed due to commodity pricing.
• In Wyoming, at our Pine Tree Shannon Unit, completed chemical treatments and initiated injection on two wells, converted two wells to injection (awaiting treatments), and continued installation of injection facilities and pipelines. At our House Creek Unit, we completed one re-stimulation.
• In Oklahoma, completed 2 producing wells and 1 injection well which were initiated during the fourth quarter 2019 and recompleted four wells.
• Conducted 14 capital workovers across the Partnership.
• Shut-in approximately 250 wells during March 2020 as a result of the drop in oil price.

Oil Price & Operations Update

During the first quarter of 2020, the oil and natural gas industry witnessed a significant decline in oil prices from $63 per Bbl in early January to just above $20 per Bbl in late March. The declines continued into April and as a result of the low oil prices, the Partnership has modified its 2020 operational plan. We remain focused on cost reductions, including periodic economic review of each well within our portfolio along with ongoing scrutiny of lease operating expenses and general and administrative expenses. Wells that are not economically viable, at prevailing prices, are shut-in provided there are no contractual, operating or reservoir constraints precluding the suspension of operations. We shut-in approximately 250 uneconomic wells during March 2020, and an additional 150 uneconomical wells in April 2020. We continue to monitor pricing and expenses to determine when to return these wells to production.

Financial Summary

Production for first quarter 2020 averaged 3,538 Boe/d, compared to 3,609 Boe/d in the fourth quarter 2019 as shutting in wells in March 2020 began to affect output. Commodity pricing decreased during the first quarter 2020 as the average realized oil price after derivatives was $49.88 versus $53.34 per barrel in fourth quarter 2019.

Lease operating expenses ("LOE") for the first quarter 2020 were $8.1 million ($25.27 per Boe) compared to $9.2 million ($27.59 per Boe) for the fourth quarter 2019. The majority of the decrease was due to decreased activity and approximately 250 uneconomic wells that were shut-in during March 2020.

General and administrative expenses ("G&A") for the first quarter 2020 were $3.0 million compared to $2.2 million for the fourth quarter 2019. The majority of the increase was due to increased allocated salaries for technical services and $0.3 million in expenses related to the strategic recapitalization transactions, partially offset by a decrease in non-cash compensation expense.

The Partnership spent $4.8 million on capital expenditures during the first quarter 2020, compared to capital expenditures of $4.5 million during the fourth quarter of 2019.

The decrease in revenue, primarily caused by a decrease in commodity prices, and increased G&A, slightly offset by a decrease in LOE and increased cash settlements received for matured derivatives, lowered first quarter Adjusted EBITDA⁽¹⁾ to $2.5 million from $3.5 million in the fourth quarter of 2019. During the first quarter, the Partnership increased debt by $6.0 million to $74.0 million outstanding as of March 31, 2020. As of June 12, 2020, debt outstanding was $73.3 million.

⁽¹⁾ Non-GAAP financial measure. Please refer to the related disclosure and reconciliation of net income (loss) to Adjusted EBITDA included in this press release.

Hedging

Mid-Con Energy enters into various commodity derivative contracts intended to achieve more predictable cash flows by reducing the Partnership's exposure to short-term fluctuations in oil prices. We believe this risk management strategy will serve to secure a portion of our revenues and, by retaining some opportunity to participate in upward price movements, may also enable us to realize higher revenues during periods when prices rise.

As of March 31, 2020, the following table reflects volumes of Mid-Con Energy's production hedged by commodity derivative contracts, with the corresponding prices at which the production is hedged: