Matador Resources Company — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014. Matador is an independent U.S. oil and gas exploration and production company focused mainly on the Eagle Ford and Permian Basin. Financial amounts below are in U.S. dollars; financial-statement amounts are in millions unless noted.
Financial performance and position
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Oil and gas sales | $96.6m | $81.9m | $274.6m | $199.4m |
| Total revenue, including derivative gains/losses | $112.2m | $71.4m | $277.1m | $192.2m |
| Operating income | $46.5m | $24.6m | $103.9m | $37.3m |
| Net income | $29.6m | $20.1m | $64.2m | $29.7m |
| Diluted EPS | $0.40 | $0.35 | $0.92 | $0.53 |
| Adjusted EBITDA (non-GAAP) | $66.8m | $61.5m | $192.6m | $142.9m |
- Q3 production was a company record: 1.481 million BOE, or 16,096 BOE/day; oil was 839,000 barrels (9,123 barrels/day), 57% of production. Nine-month production was 3.956 million BOE, up 24% year over year.
- Q3 oil and gas sales rose 18%, driven mainly by a 36% increase in oil volume. Average realized oil price before derivatives fell to $92.39/barrel from $104.15; natural gas price increased to $4.95/Mcf from $4.71.
- Q3 reported total revenue includes a $16.3m unrealized derivative gain, versus a $9.3m unrealized loss in Q3 2013. The gain is non-cash and reflects lower commodity futures prices. Q3 operating and net margins were approximately 41.5% and 26.4% of reported total revenue, respectively; derivative marks affect these comparisons.
- Nine-month operating cash flow was $180.4m, versus $127.2m. Investing cash outflow was $409.9m, including $407.0m of oil and gas property capital expenditures; financing cash inflow was $231.0m. Cash increased $1.4m to $7.7m. Operating cash flow less property capital expenditures was negative $226.7m.
- At September 30, cash was $7.7m and revolving-credit borrowings were $250.0m. The borrowing base was $450.0m, with $0.6m of letters of credit; borrowings rose to $290.0m by November 5 after an additional $40.0m draw. Q3 borrowing interest rate was approximately 2.9%; facility maturity is December 2016. The company reported compliance with its debt-to-EBITDA covenant of 4.25 or less.
- Total assets were $1.277bn and shareholders’ equity $818.3m at September 30. Current assets of $59.1m were below current liabilities of $152.6m; accrued liabilities included $97.1m of accrued property costs.
- The 2014 effective tax rate was 35.8% for Q3 and 36.4% year to date, versus 11.3% and 8.2% in 2013. The 2014 provision included substantial deferred tax expense; the prior-year rate benefited from reversal of a deferred-tax valuation allowance.
Material changes versus comparable periods
- Oil and gas sales, production, operating income, net income and Adjusted EBITDA increased year over year, chiefly reflecting higher oil production from Eagle Ford drilling and new Permian wells. Oil prices were lower, partly offsetting volume growth.
- Q3 lease operating expense increased to $9.25/BOE from $6.91, partly due to a higher oil mix and initial Permian operating and water-disposal costs. For the nine-month period it declined to $8.78/BOE from $9.30.
- Nine-month G&A increased 66% to $23.4m, in part because of staffing and stock-based compensation. Nine-month interest expense reported in earnings decreased to $3.7m from $4.9m.
- There was no full-cost ceiling impairment in 2014; the comparable 2013 nine-month period included a $21.2m impairment charge. Matador issued 7.5m shares in May 2014, receiving approximately $181.3m net proceeds, and used $180.0m to repay revolver borrowings.
- Estimated proved reserves at September 30 were 61.0 million BOE, up from 51.7 million at year-end 2013; proved developed reserves were 25.2 million BOE, or 41% of total. PV-10 was $952.0m and standardized measure was $835.1m; both are reserve valuation estimates, not market values.
Outlook, risks and contingencies
- The 2014 capital expenditure budget was raised from $440m to $570m; $459.5m, or about 81%, had been incurred by September 30. Budget allocations included $470m for drilling and completion, $80m for leasehold and seismic, and $20m for pipeline and infrastructure. Management expected operating cash flow and borrowing capacity to fund remaining 2014 spending and into 2015, excluding significant acquisitions.
- Management planned to continue Eagle Ford development, expand Permian activity, and add at least one Permian rig at the start of 2015. It noted the sharp oil-price decline—WTI was $78.68/barrel on November 5—and was considering potential adjustments to 2015 plans. No specific production or earnings guidance is provided in the supplied filing text.
- At September 30, 2014, proved reserves were supported by SEC pricing based on the prior 12-month first-of-month averages; those assumptions may differ from current market conditions. Commodity prices, drilling results, reserve estimates, infrastructure, service availability, and access to capital are key uncertainties. Hedging reduces, but does not eliminate, price exposure and can constrain upside.
- Contractual commitments included $57.9m of potential drilling-rig termination obligations, $21.9m for non-operated wells expected within months, and $6.9m of remaining gas processing and transportation commitments. Chesapeake’s Haynesville program could involve up to 45 gross wells; Matador reported a $37.4m estimated commitment for 21 gross wells in progress or proposed as of November 5.
- Management considered ordinary-course lawsuits unlikely to have a material adverse effect. The filing reports no off-balance-sheet arrangements and no material change in internal controls.
Key facts investors should verify
- Whether lower oil prices alter the $570m 2014 spending plan, 2015 drilling plans, operating cash generation, or borrowing-base availability.
- How much of reported earnings and revenue growth depends on non-cash derivative fair-value changes, and the volume and terms of current hedges.
- Liquidity and covenant headroom after the post-quarter revolver draw, including the effect of borrowing-base redeterminations and the facility’s conforming borrowing base.
- Whether Permian and Eagle Ford well results, reserve additions, and proved-developed reserve growth translate into sustainable production and returns after operating and development costs.
- The timing and cash demands of accrued capital costs and drilling commitments, including potential rig termination obligations.