Matador Resources Company — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. The filing is an annual report, not a standalone fourth-quarter report; selected Q4 2015 results are included below. Dollar amounts are in U.S. dollars.
Business context
Matador is an independent U.S. oil and natural gas exploration and production company. Its main focus shifted further toward the oil- and liquids-rich Delaware Basin in Southeast New Mexico and West Texas, alongside the Eagle Ford in South Texas and Haynesville/Cotton Valley in Louisiana and East Texas. In 2015, the company completed its HEYCO merger, issued senior notes and equity, and sold its Loving County gas processing and gathering system.
Financial and operating performance
| Metric | 2015 | 2014 |
|---|---|---|
| Oil and natural gas revenue | $278.3 million | $367.7 million |
| Total revenue, including derivative settlements and fair-value changes | $316.2 million | $431.0 million |
| Net income (loss) attributable to Matador shareholders | $(679.8) million | $110.8 million |
| Adjusted EBITDA (non-GAAP) | $223.2 million | $262.9 million |
| Net cash from operating activities | $208.5 million | $251.5 million |
| Net cash used in investing activities | $425.2 million | $570.5 million |
| Oil production | 4.5 million barrels | 3.3 million barrels |
| Natural gas production | 27.7 Bcf | 15.3 Bcf |
| Average daily production | 24,955 BOE/day | 16,082 BOE/day |
Oil revenue fell 30% and natural gas revenue fell 3%, as lower realized prices outweighed higher volumes. Average realized prices, excluding derivative settlements, were $45.27 per barrel of oil and $2.71 per Mcf of natural gas, versus $87.37 and $5.08, respectively, in 2014. Including realized derivatives, prices were $59.13 per barrel and $3.24 per Mcf. Lease operating expense declined to $6.39 per BOE from $8.75; DD&A was $19.63 per BOE versus $22.95.
Q4 2015: Oil and gas revenue was $56.2 million, realized derivative gains were $24.9 million, and unrealized derivative losses were $13.9 million. Net loss attributable to shareholders was $230.4 million, or $2.72 per share; the quarter included a $219.4 million full-cost impairment charge.
Liquidity, debt and reserves
- At year-end, cash was $16.7 million and restricted cash was $44.4 million. The restricted balance included $42.1 million returned in January 2016 for general corporate purposes.
- Matador had no revolver borrowings and approximately $0.6 million of letters of credit outstanding at December 31, 2015. The borrowing base was $375 million and was reaffirmed in October 2015, with facility maturity extended to October 2020.
- The company had $400 million principal amount of 6.875% senior unsecured notes due 2023; their year-end carrying value was $391.3 million, net of issuance costs. Reported interest expense was $21.8 million, excluding capitalized interest.
- At December 31, 2015, proved reserves were 85.1 million BOE, up 24%; proved oil reserves rose 89% to 45.6 million barrels, while proved natural gas reserves fell 11% to 236.9 Bcf. About 40% of proved reserves were developed.
- Reserve PV-10, a non-GAAP measure, declined 48% to $541.6 million from $1.04 billion. The GAAP standardized measure was $529.2 million. Both reserve values used materially lower SEC benchmark prices for 2015.
Material changes, outlook and risks
- Impairment and loss: A $801.2 million non-cash full-cost ceiling impairment, driven primarily by commodity-price declines, was the main cause of the annual net loss. Matador recorded a $154.3 million valuation allowance against deferred tax assets. Management expected further impairment exposure in 2016 if low prices persisted. The impairment reduced reported assets and equity but did not directly reduce operating cash flow.
- Portfolio and funding changes: The HEYCO merger added approximately 58,600 gross (18,200 net) acres in New Mexico. A public offering of 7 million shares generated approximately $187.6 million net. The company issued $400 million of senior notes and used financing proceeds to repay credit-facility borrowings. EnLink paid approximately $143.4 million for the Loving County system; Matador recognized the sale as a sale-leaseback and deferred most of the gain over the 15-year gathering and processing agreement.
- 2016 plan: Management budgeted $325 million of capital expenditures, down from $482.1 million in 2015 (excluding HEYCO-related capital expenditures), with approximately 97% directed to the Delaware Basin. The plan assumed three rigs; if oil remained below $30 per barrel, Matador could reduce to two rigs and cut budgeted spending by approximately $50 million. A 60 MMcf/day Rustler Breaks processing plant was expected to enter service in Q3 2016.
- Hedges and price exposure: As of February 25, 2016, approximately 44% of estimated remaining 2016 oil and gas production was hedged. There were no oil or NGL hedges beyond 2016; some 2017 gas volumes were hedged. Commodity prices, reserve valuations, cash flow and borrowing capacity remain highly sensitive to market prices.
- Other risks: Key exposures include execution and decline-rate risk in the concentrated Delaware Basin program, dependence on third-party gathering and processing, transport-volume deficiency fees, lease expirations, drilling-rig termination obligations, environmental and hydraulic-fracturing regulation, water availability, counterparty credit risk and the possibility of a borrowing-base reduction. Management said ordinary-course lawsuits were not expected to have a material adverse impact.
Most important facts for investors to verify
- Whether Delaware Basin well results, costs and production growth support the 2016 plan and offset natural production declines.
- Current commodity-price assumptions, hedge coverage and realized price differentials, including the effect on cash flow and reserve values.
- Available liquidity after restricted cash movements, revolver redeterminations, debt covenants and the 6.875% note interest burden.
- Progress and costs for the Rustler Breaks processing plant, and exposure to minimum-volume commitments under the 15-year EnLink agreement.
- Whether proved undeveloped reserves can be developed as scheduled, and the sensitivity of future impairment charges to prices, costs and reserve revisions.