Matador Resources Company — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing also reports selected unaudited quarterly results, including fourth-quarter 2018. Matador is an independent U.S. oil and gas producer with midstream operations, focused primarily on the Delaware Basin; it also operates in the Eagle Ford, Haynesville and Cotton Valley areas.
Financial and operating results
| Metric | 2018 | 2017 |
|---|---|---|
| Oil and natural gas revenue | $800.7 million | $528.7 million |
| Total reported revenue | $899.6 million | $544.3 million |
| Operating income | $363.3 million | $160.8 million |
| Net income attributable to Matador shareholders | $274.2 million; $2.41 per diluted share | $125.9 million; $1.23 per diluted share |
| Adjusted EBITDA attributable to Matador shareholders | $553.2 million | $336.1 million |
| Cash provided by operating activities | $608.5 million | $299.1 million |
| Cash used in investing activities | $1.515 billion | $819.3 million |
| Oil-equivalent production | 19.0 million BOE; 52,128 BOE/day | 14.2 million BOE; 38,936 BOE/day |
| Year-end cash and restricted cash | $84.0 million | $102.5 million |
| Year-end debt, approximate principal | $1.31 billion | $575 million |
Production was 11.1 million barrels of oil and 47.3 Bcf of natural gas. Average realized prices before derivative settlements were $57.04 per barrel of oil and $3.49 per Mcf of gas. Per-BOE costs included lease operating expense of $4.89, production taxes/transportation/processing of $4.00, and DD&A of $13.94.
Fourth-quarter 2018 results included $193.4 million in oil and gas revenue, $74.6 million in unrealized derivative gains and $136.7 million of net income attributable to Matador shareholders, or $1.17 per diluted share. The quarter’s reported earnings were materially affected by derivative valuation and should not be read as operating earnings alone.
Material changes versus prior year
- Oil-equivalent production rose 34%; oil production increased 42% and gas production 24%, primarily from Delaware Basin drilling. Delaware Basin production accounted for 87% of total production.
- Oil and gas revenue increased 51%, reflecting higher volumes and higher realized oil prices; realized gas prices declined year over year.
- Proved reserves increased 41% to 215.3 million BOE. Standardized Measure rose to $2.25 billion from $1.26 billion; non-GAAP PV-10 rose to $2.58 billion from $1.33 billion. Reserve-value gains reflected drilling and higher SEC pricing assumptions.
- Operating cash flow more than doubled, but capital spending also increased sharply: oil and gas property expenditures were $1.358 billion, with an additional $165.8 million for midstream and other property and equipment.
- Matador issued $1.05 billion of 5.875% senior notes due 2026 and redeemed $575 million of 6.875% notes due 2023, recording a $31.2 million prepayment premium. It also completed a $226.4 million net common-stock offering. San Mateo borrowed $220 million under its new $250 million facility.
Liquidity, outlook and risks
- At December 31, 2018, Matador had $64.5 million cash, $40 million drawn under its credit agreement and $220 million drawn by San Mateo. The credit agreement had $457 million of undrawn capacity after letters of credit; San Mateo’s facility is non-recourse to Matador and its wholly owned subsidiaries.
- Management budgeted 2019 capital expenditures of $640–$680 million for drilling, completing and equipping wells and $55–$75 million for midstream. The plan prioritizes the Delaware Basin, with six rigs expected to operate there through most of 2019. Funding was expected from operating cash flow, cash, available borrowing capacity, San Mateo incentives and partner capital; asset sales or additional financing could also be considered.
- In February 2019, Matador announced San Mateo II, a 51%/49% joint venture with Five Point. Five Point committed to fund $125 million of the first $150 million of specified development capital. The new venture’s agreements carry approximately $363.8 million of minimum contractual obligations beginning in 2020, alongside potential performance incentives for Matador.
- Commodity-price and regional basis risk are significant. Oil prices fell more than 40% from their early-October 2018 high to a late-December low. Waha gas and Midland oil differentials widened substantially; Matador said it had no 2019 basis hedges for these exposures. At February 26, 2019, about 50% of estimated remaining 2019 oil production and 15% of gas production was hedged.
- Other principal risks include Delaware Basin concentration, takeaway and processing constraints, service-cost inflation, reserve-estimation uncertainty, and regulatory/environmental changes. New Mexico proposals disclosed in the filing included a hydraulic-fracturing moratorium and a natural-gas processor surtax; neither was described as enacted.
- Long-term minimum-volume and service commitments are material. The filing reports approximately $641.2 million of obligations under agreements with minimum-volume commitments at year-end, in addition to the subsequently announced San Mateo II commitments. Several ordinary-course lawsuits were disclosed; management considered a material adverse outcome remote.
Auditors issued an unqualified opinion on the consolidated financial statements and internal controls; management also concluded controls were effective at year-end. No full-cost ceiling impairment was recorded in 2018. A $7.7 million income tax benefit included valuation-allowance reversals, and $65.1 million of unrealized derivative gains increased reported revenue without providing operating cash flow.
Investor verification points
- Reconcile the $274.2 million of shareholder net income and fourth-quarter earnings to derivative gains, the debt-refinancing premium and tax valuation-allowance changes.
- Check the 2019 capital plan against operating cash flow, actual production, oil/gas prices and available borrowing capacity; distinguish Matador debt from San Mateo’s non-recourse debt.
- Review realized well performance and the pace and cost of converting the 121.1 million BOE of proved undeveloped reserves into producing reserves.
- Assess exposure to Waha and Midland basis differentials, pipeline capacity, minimum-volume commitments and the expected completion and utilization of midstream projects.
- Track the San Mateo II capital carry, incentive terms, new contractual commitments and third-party volumes, as well as developments in New Mexico regulation.