Yesterday, Turnaround Letter-recommended Midstates Petroleum (MPO) launched a tender offer for up to 5 million shares at $10/share. MPO shares rose about 12%, to $9.25.
The tender offer would retire as much as 19.7% of MPO’s shares, at a cost of up to $50 million. The company will fund the repurchases through cash on hand and new borrowings under their line of credit.
Last November, the company’s lenders amended their credit agreement, allowing a total indebtedness of no more than 1.5x EBITDA for the most recent four quarters. Midstates should have little trouble in meeting this requirement: it will likely produce $120 million in full-year 2018 EBITDA, allowing it to have as much as $180 million in debt. This provides flexibility to fund the repurchase, carry its existing $28 million in debt and still have about $100 million in additional debt capacity to fund its operations and possible acquisitions. Midstates is expecting significant free cash flow in upcoming quarters, which will bolster their ability to fund the tender offer and other initiatives.
Midstates is making a smart move by repurchasing the shares at $10. The shares traded in the $12-$15 range as recently as mid-August before their sharp descent to as low as $6.45 in the closing months of 2018.
The tender offer expires on February 12, 2019. However, we recommended that shareholders retain their shares.
We continue to rate Midstates Petroleum (MPO) shares a Buy up to 30.
Disclosure: An employee of the Publisher owns MPO shares.