Amplify Energy And Midstates Petroleum: No Longer A Marriage Of Equals

Recent developments from both Amplify and Midstates have been depressing, especially on the side of Midstates.Shares have tanked due to energy price volatility but also because of poor first quarter performance from the firms.This looks like Amplify, especially after getting an extra $90 million in cash, is worth more than its share in the deal.Value opportunities exist here, but this transaction is now lopsided and investors should tread carefully.Nearly two months ago, the management teams atAmplify Energy(OTCQX:AMPY) andMidstates Petroleum(MPO)announced plansto merge the two companies into a 50/50 ownership structure whereby the firms could operate together, generate at least $20 million in run-rate synergies, and benefit from a relatively low-leverage capital structure. This move was, at first, met with significant enthusiasm, but as time wore on, both firms have taken a beating, leaving investors to question if the deal still makes sense and whether or not either of these players are reasonable investment prospects. Recent developments do, unfortunately, cast a negative light on matters, but at this point it’s difficult to say that either of these entities are bad prospects moving forward.Initially, when news broke that Amplify and Midstates were merging, shares of the former surged while shares of the latter took a beating. Since then (May 6), the trajectory for both companies has been undeniably down. After hitting $9.70 per unit shortly after news of the merger, shares of Amplify have since declined to $5.95, a drop of 38.7%, while shares of Midstates continued their descent, falling 43.3% from $10.78 apiece to $6.11 as I type this.Some of this decline for both companies, undoubtedly, has to do with volatility in the price of oil and natural gas. Oil, in particular, has seen a bumpy ride. On the day of the merger announcement, WTI crude was at $62.30 per barrel. In the weeks that followed, it declined more than $11 per barrel, but has since recovered some to $58.85. Natural gas was, at that time, $2.54 per Mcf, and today it stands down 10.6% at $2.27. Unlike oil, there hasn’t really been a recovery in natural gas.While energy prices can be blamed on some of the drop, worries over performance also appear. You see, in itsfirst quarterearnings release, the management team at Midstates revealed that during the quarter its production came in at 1.191 million boe (barrels of oil equivalent). This represents a decrease of 20.9% compared to the 1.505 million boe seen just one quarter earlier. EBITDA, meanwhile, was only $14.3 million compared to the $27.8 million seen a year ago. On an annualized basis, this translates to $57.2 million, which is around half the $111 million the company used in its merger presentation stemming from fourth quarter results.It's worth mentioning that while Midstates was the poorest performer of the two during the quarter, it wasn’t alone. Amplify also offered investorsless-than-stellar results. Output for it came in at only 1.93 million boe, down 11.7% compared to the 2.19 million boe seen a year earlier. The company reported EBITDA of $19 million vs. the $32.4 million seen in the fourth quarter of its 2018 fiscal year. This, too, implies an annualized EBITDA figure ($76 million) that falls short of the $130 million offered in the merger presentation. That said, unlike Midstates, which does not offer as much in the way of detailed guidance as Amplify does, Amplify did say that they don’t believe their poor first quarter performance will affect their EBITDA guidance for 2019, which they said should fall between $90 million and $102 million with a mid point of $96 million. Assuming management is correct, and if Midstates can follow suit, then shares deserve to bounce back.Judging solely based on first quarter figures, it looks to me like Amplify might end up deserving more of the combined firm than it's set to receive. Not only did clearer guidance and a smaller production drop make it look better than Midstates, you also have another development that recently occurred that will help to reduce leverage for both firms moving forward.On June 24, the management team at Amplifyannouncedthat they had been given $90 million in cash proceeds back from the Beta Decommissioning Trust account. In short, more than 15% of the firm’s total estimated reserves come from the Beta Field, which is an offshore production area located in US federal waters. To cover decommissioning costs associated with the field, the company had to set into place cash funds, plus surety bonds. Last year, through two separate payments, Amplify received proceeds of $62.5 million total associated with paying excess funds out. This year, the firm received a further $90 million, exhausting the cash from the Trust and leaving it only covered with surety bonds.While it’s unlikely that Amplify will receive any further proceeds from the Trust, investors should be happy about this development. According to management, this will allow the firm’s net debt to drop from $239 million to $149 million, giving its a net debt / TTM EBITDA of 1.1. Adjusted for the merger with Midstates, net debt will increase some to $207 million, but even in that case the leverage picture looks more favorable. This is because, according to Amplify’s management team, the net leverage ratio for the combined firm, as things stand today, will drop to just 0.9. Long term, this could be an asset to the business because it gives shareholders the ability to benefit from management borrowing capital for various profitable and/or growth-oriented purposes.Right now, my feeling on this situation is that the market might be overreacting some, but I'm disturbed to a degree by the drop in output seen by both firms. Management’s commentary surrounding Amplify makes me feel a bit better about this, but Midstates has a long way to go to recover from a bad quarter at a time when pessimism already is rampant in the energy space. On the whole, I believe that instead of the deal being mostly even, it’s starting to look a lot like Amplify is the party walking away with a less-than-great arrangement.I am/we are long AMPY.I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.