Matador Resources Company — FY 2013 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2013; it is not a standalone fourth-quarter filing. Matador is an independent U.S. oil and natural gas exploration and production company, focused primarily on the Eagle Ford in South Texas and expanding into the Permian Basin. It also has operations in the Haynesville and Cotton Valley and exploratory acreage in the Meade Peak.
Financial and operating performance
| Metric | FY 2013 | FY 2012 |
|---|---|---|
| Oil and natural gas revenue | $269.0 million | $156.0 million |
| Total revenue, including derivative results | $260.9 million | $165.2 million |
| Operating income (loss) | $60.4 million | $(33.4) million |
| Net income (loss) | $45.1 million | $(33.3) million |
| Diluted earnings per share | $0.77 | $(0.62) |
| Adjusted EBITDA (non-GAAP) | $191.8 million | $115.9 million |
| Net cash from operating activities | $179.5 million | $124.2 million |
| Net cash used in investing activities | $(366.9) million | $(306.9) million |
| Cash at year-end | $6.3 million | $2.1 million |
| Credit Agreement borrowings at year-end | $200.0 million | $150.0 million |
Oil and gas revenue rose 72%, while total production increased 30% to 4.285 million BOE. Oil production climbed 76% to 2.133 million barrels; average daily production was 11,740 BOE, including 5,843 barrels of oil per day. Oil supplied about 50% of production. Realized oil price excluding derivatives was $99.79 per barrel, down from $101.86; realized natural gas price was $4.35 per Mcf, up from $2.59.
Operating expenses were $200.4 million, including $98.4 million of depletion, depreciation and amortization and a $21.2 million full-cost ceiling impairment. Operating income was $60.4 million on $260.9 million of total revenue. The filing does not present a gross margin measure.
Capital expenditures for oil and gas properties were $363.2 million. Operating cash flow did not cover investing outflows; financing provided $191.7 million, including net proceeds from a September equity offering. Shareholders’ equity was $568.9 million at year-end. No cash dividends were paid on common stock.
Changes versus the prior comparable period
- Matador moved from a $33.3 million net loss in 2012 to $45.1 million net income in 2013. The improvement included higher production and prices, as well as lower impairment expense: $21.2 million in 2013 versus $63.5 million in 2012.
- Proved reserves increased 117% to 51.7 million BOE. The increase reflected Eagle Ford drilling and the addition of Haynesville proved undeveloped gas reserves as reserve-price assumptions improved. Proved developed reserves were 33% of total, so most reported reserves remained undeveloped.
- Permian acreage expanded substantially: year-end holdings reached approximately 70,800 gross (44,800 net) acres, from approximately 15,900 gross (7,600 net) acres at year-end 2012.
- Debt rose from $150 million to $200 million at year-end, despite a $130 million repayment in September funded from the equity offering. Year-end borrowing base was $350 million.
- Derivative results shifted: realized derivative results were a $0.9 million loss in 2013 versus a $14.0 million gain in 2012; unrealized losses were $7.2 million and $4.8 million, respectively.
For the fourth quarter of 2013, oil and gas revenue was $69.7 million and net income was $15.4 million, compared with revenue of $52.7 million and a net loss of $21.2 million in Q4 2012.
Outlook, commentary, and risks
- Management budgeted $440 million of 2014 capital expenditures: approximately $318 million for South Texas, $109 million for the Permian, and $12 million for non-operated Haynesville activity. About 97% was expected to target oil and liquids-rich opportunities. Management expected to fund the program through operating cash flow and credit-facility borrowings, while noting spending could change with results, costs, prices, and financing availability.
- The 2014 plan called for two Eagle Ford rigs and one Permian rig. Management cited improved Eagle Ford batch-drilling efficiency and anticipated well-cost savings; these are expectations, not guaranteed outcomes.
- Management reported encouraging early results from a Permian Second Bone Spring well and a Wolfcamp A well, but emphasized that Permian development was still exploratory and aimed at delineating acreage for a potential larger program in 2015 and beyond.
- On March 12, 2014, after year-end, the borrowing base was raised to $385 million and the conforming borrowing base to $310 million. At March 13, borrowings were $250 million, with $0.3 million of letters of credit. The credit amendment also removed the current-ratio covenant, increased the debt-to-EBITDA limit to 4.25, and reduced the interest-rate grid by 0.25 percentage points.
- Key exposures include volatile oil and gas prices, reserve-estimation uncertainty, reliance on third-party gathering and processing capacity, concentrated production and reserves, drilling and service-cost inflation, capital needs and borrowing-base redeterminations, and environmental and hydraulic-fracturing regulation. Five purchasers represented about 87% of 2013 oil, gas, and NGL revenue.
- The company disclosed no material environmental remediation liabilities and considered ordinary-course litigation unlikely to materially affect results. A Louisiana mineral-rights dispute was resolved in Matador’s favor in 2013; an Eagle Ford dispute with Orca was settled, with Matador initially funding specified well costs in exchange for revenues until recovery.
- The 2013 impairment was non-cash and arose in the first quarter, primarily from the natural-gas price used in the ceiling test. The filing also notes that reserve values and PV-10 are estimates, not market valuations. PV-10 was $655.2 million; the GAAP standardized measure was $578.7 million.
Grant Thornton issued an unqualified audit opinion on the financial statements and internal control over financial reporting. Management also reported effective disclosure controls and internal controls as of December 31, 2013.
Important facts for investors to verify
- Whether Eagle Ford production growth, drilling efficiencies, and anticipated well-cost reductions persist in 2014.
- Permian well performance, acreage quality, and the capital required to convert exploratory results into proved reserves and production.
- How much of the 51.7 million BOE reserve base—particularly the 34.6 million BOE of proved undeveloped reserves—can be developed economically and on schedule.
- Whether operating cash flow, commodity prices, and borrowing-base capacity are sufficient to fund the $440 million 2014 program without additional equity, debt, asset sales, or spending reductions.
- The effect of derivative positions, production differentials, and gathering, processing, and transportation constraints on realized prices and cash flows.