Matador Resources Company — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. Matador explores, develops and produces oil and natural gas, principally in the Permian Basin, Eagle Ford, Haynesville and Cotton Valley plays. Financial statements are unaudited.
Financial and operating results
- Production: Record 2.116 million BOE, or 23,513 BOE/day, up 98% year over year. Oil production rose 53% to 1.009 million barrels; natural gas production rose 170% to 6.6 Bcf.
- Revenue and prices: Oil and gas sales declined 21% to $62.5 million, while total revenue, including derivative results, declined 2% to $72.4 million. Realized oil prices before derivatives fell to $43.37/barrel from $96.34; natural gas prices fell to $2.82/Mcf from $6.20. Realized derivative gains were $18.5 million, partly offset by an $8.6 million unrealized loss.
- Earnings: Net loss attributable to Matador shareholders was $50.2 million, versus net income of $16.4 million a year earlier; diluted loss per share was $0.68. Operating loss was $74.8 million. The $67.1 million non-cash full-cost ceiling impairment was the main unusual charge; no impairment was recorded in Q1 2014. The impairment followed lower SEC pricing assumptions and reduced property carrying value.
- Costs and margins: DD&A was $46.5 million, up 93%, but declined slightly per BOE to $21.96 from $22.43. Lease operating expense rose 40% in total but fell to $6.16/BOE from $8.73. G&A rose 86% to $13.4 million, including $2.2 million of HEYCO transaction costs. Operating margin was approximately negative 103% of total revenue, reflecting the impairment and higher DD&A.
- Cash flow: Operating cash flow was $93.3 million, compared with $31.9 million; management said it would have declined absent a favorable $67.0 million year-over-year change in operating assets and liabilities. Investing cash outflow was $166.1 million, including $127.4 million of oil and gas property capital expenditures and $24.0 million for the business combination. Financing inflow was $70.4 million. Cash ended at $6.1 million.
- Liquidity and debt at March 31: Current assets of $105.2 million versus current liabilities of $232.2 million (current ratio approximately 0.45). Revolver borrowings were $410 million, plus a $12.0 million assumed current note; the credit facility also had $0.6 million of letters of credit. Revolver interest averaged 2.9% during the quarter. Shareholders’ equity was $922.8 million.
- Reserves: Estimated proved reserves were 79.3 million BOE, up from 68.7 million at year-end 2014. PV-10 was $1.07 billion and standardized measure $949.2 million; both are reserve-value measures, not estimates of fair market value.
Material changes and developments
- The HEYCO merger closed February 27. Matador acquired approximately 58,600 gross (18,200 net) acres in New Mexico, issuing 3.3 million common shares and 150,000 preferred shares, paying cash and assuming debt. The preferred shares converted into 1.5 million common shares on April 6. Preliminary purchase accounting included approximately $76 million of deferred tax liabilities.
- After quarter-end, Matador issued $400 million of 6.875% senior notes due 2023 and completed a 7 million-share offering that generated approximately $187.1 million net. The proceeds repaid revolver borrowings and the HEYCO note; as of May 6, revolver borrowings were zero, with approximately $0.6 million of letters of credit outstanding. The notes increase fixed interest costs.
- After the share offering and preferred conversion, the company reported 85,370,330 common shares outstanding as of May 6.
- Operating activity shifted toward the Permian: operated rigs declined from five at the start of the year to two by quarter-end. Permian production more than tripled year over year. Eagle Ford wells benefited from lower well costs and improved completion practices; Haynesville production also rose substantially.
Outlook, risks and commitments
- 2015 capital expenditure budget was $350 million, excluding HEYCO-related expenditures, down from $610.4 million spent in 2014. Matador had incurred $159 million, about 45% of that budget, by March 31. It planned to maintain at least two Permian rigs and was considering a third as early as late summer, dependent on commodity prices and well economics. Planned operated Eagle Ford drilling and completions for 2015 were complete.
- Management expected to fund remaining 2015 spending through cash, operating cash flow, available revolver capacity, debt and equity proceeds, and potentially joint ventures or asset sales. It reported approximately 80% of anticipated oil production and 70% of anticipated natural gas production hedged for the rest of 2015 as of May 6.
- Commodity prices, production declines, drilling results, reserve estimates, access to capital and borrowing-base redeterminations are key risks. The credit agreement requires a debt-to-EBITDA ratio of 4.25 or less and is secured by substantially all proved properties. The conforming borrowing base was reduced to $375 million in connection with the notes issuance.
- Material commitments included approximately $45.0 million of potential drilling-rig contract termination obligations, $18.6 million for non-operated wells, and $5.3 million of remaining gas processing and transportation commitments. The Loving County gas plant contract totaled $17 million; $5.2 million was paid in the quarter, and completion was expected in Q3 2015.
- Management considered ordinary-course lawsuits unlikely to have a material adverse effect. The filing identifies no other material change to market-risk disclosures and states disclosure controls were effective at quarter-end.
Important facts for investors to verify
- Whether the steep decline in realized commodity prices and the full-cost ceiling impairment recur, and how reserve values respond to future pricing assumptions.
- Actual production, well economics and capital spending versus the $350 million budget, including any decision to add a third Permian rig.
- Hedge volumes, settlement effects and coverage as 2015 contracts expire; derivatives are not accounted for as hedges, so fair-value changes affect reported earnings.
- Post-quarter debt and equity transactions, resulting share count, interest expense and remaining liquidity under the $375 million conforming borrowing base.
- Cash-flow quality: Q1 operating cash flow benefited materially from working-capital changes, while investing outflows exceeded operating cash flow.